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Germany's federal government has taken the unprecedented step of trying to remove one of the biggest sources of political uncertainty hanging over Germany's residential investment market. On 2 July, the CDU/CSU and SPD coalition committee agreed to introduce a federal law prohibiting Germany's states from using socialisation legislation to transfer private rental housing into public ownership. Chancellor Friedrich Merz presented the move as a necessary signal of reassurance. "People all over the world are asking what is going on in Germany, and whether we should expect expropriations here," he said. The answer, in his view, was now a clear no — whether it proves that simple is another matter entirely.
The proposal is aimed squarely at Berlin, where a 2021 referendum produced a 57.6% majority in favour of expropriating housing companies owning more than 3,000 apartments in the city — around 220,000 homes held by companies including Vonovia, Deutsche Wohnen and Covivio. After five years of political delays, legal commissions and Senate manoeuvring, the initiative behind the referendum has now filed draft legislation for a new, this time binding, referendum.
The timing suggests that Berlin's political arithmetic has become part of the federal government's calculation. The Left Party, which has made expropriation its flagship housing policy, currently leads opinion polls ahead of Berlin's House of Representatives election on 20 September. Rather than allowing the debate to gather further momentum, the coalition has attempted to remove it altogether. The difficulty lies in the legal mechanism it has chosen.
A ban that may itself be unconstitutional
Article 15 of Germany's Basic Law explicitly permits the socialisation of land and means of production, subject to compensation. Attempting to prevent the federal states from exercising that constitutional provision through ordinary federal legislation, rather than through the two-thirds majority required for a constitutional amendment, strikes many legal observers as constitutionally questionable.
Anna Katharina Mangold, a member of Berlin's expert commission on socialisation, was unequivocal. "The federal government cannot simply enact a law solely to block the federal states," she said. The 'Deutsche Wohnen & Co enteignen' initiative argues the proposed legislation "would require a constitutional amendment" and predicts it would ultimately be struck down by the Federal Constitutional Court in Karlsruhe. Perhaps most strikingly, even the AfD's legal affairs spokesperson, Marc Vallendar — an opponent of expropriation — described the proposal to prevent states exercising constitutional rights through a simple federal law as "legally questionable and almost certainly doomed to failure."
The coalition appears to be betting that the prospect of a federal prohibition alone will deter any state from testing the issue. Whether that assumption proves correct may depend entirely on the outcome of Berlin's September election. Left Party lead candidate Elif Eralp has already made clear that, if given the opportunity, her party intends to proceed.
Property rights, politics and collateral
If constitutional lawyers remain divided, the property industry is not. Iris Schöberl, President of the German Property Federation (ZIA), welcomed the proposal as "a strong signal for legal certainty, growth and housing construction in Germany." Jens Tolckmitt, chief executive of the Association of German Pfandbrief Banks (VdP), argued that expropriation would not create a single additional home while deterring investment far beyond Berlin's borders and imposing potentially enormous compensation costs on the state.
For lenders, however, the issue extends beyond investor sentiment. The 'Deutsche Wohnen & Co enteignen' initiative's draft legislation proposes cancelling the land charges securing bank loans against nationalised properties. That would effectively remove lenders' collateral, potentially forcing the recall of loans worth billions of euros.
That prospect prompted Berliner Volksbank, Berliner Sparkasse, DKB and the state-owned IBB to commission legal and economic reports warning of capital flight, rising financing costs and higher risk premiums. One report even raised the prospect of US sanctions if American pension funds with exposure to Berlin property were affected — a claim that attracted considerable scepticism, including from historians close to the expropriation movement who noted similarities with arguments once deployed against Salvador Allende's government in Chile. Interestingly, the banks themselves adopted a more measured tone when discussing their own balance sheets, acknowledging that any direct impact would be "manageable, but unpleasant."
Politically, however, the proposal has also exposed divisions within the SPD itself. Several Berlin SPD Bundestag members criticised the coalition agreement almost immediately. Raed Saleh, parliamentary leader of the SPD in Berlin's House of Representatives, complained that he recognised "the Federal Minister of Finance, but not my party leader," accusing Lars Klingbeil of conceding the issue to the CDU without securing greater flexibility for Berlin on rent regulation.
MP Hakan Demir went further, describing the proposed prohibition as "an election gift to Die Linke." The irony is difficult to ignore. By attempting to close down the expropriation debate before September's election, the coalition may have handed the Left Party precisely the constitutional confrontation it wanted to campaign on.
One uncertainty replaces another
Alongside the proposed ban, the coalition announced plans to establish a new federal Housing Association for Affordable Living (WBG), intended to build affordable housing where private investment is falling short. Vice-Chancellor Klingbeil summarised the approach succinctly: "We want to build, not expropriate." Critics on the left remain unconvinced.
The WBG addresses tomorrow's housing supply. It does nothing to reduce rents for tenants facing sharp increases today. That distinction matters politically because the expropriation debate is driven less by abstract housing economics than by the lived experience of renters in a city where advertised rents in some districts have roughly doubled over the past decade.
The coming months therefore seem less likely to produce resolution than escalation. The federal legislation has yet to be drafted and passed. Berlin's September election could still produce a coalition committed to socialisation. If that government proceeded with its own legislation, the dispute would almost certainly end before the Federal Constitutional Court.
Paradoxically, the coalition's attempt to reduce political uncertainty may simply have relocated it. The question is no longer whether Berlin wants to nationalise large housing companies, but whether the federal government has the constitutional authority to prevent it. For institutional investors, that constitutional question may now be just as significant as the expropriation debate itself.