Composite: Depositphotos.com, REFIRE
Erbbaurechte are enjoying a comeback
A year on from REFIRE's report on the tentative revival of Erbbaurecht, or leasehold rights, three developments suggest the model is moving further into the property mainstream. Banks have new guidance intended to make leasehold financing easier to underwrite. Industry data suggests the central fear associated with the model — what happens to the building when the right expires — rarely results in compensation actually being paid. And in Lower Saxony, politicians are grappling with a problem created by the extraordinary longevity of the contracts themselves: land values that have risen by as much as 1,500% in some sought-after regions, threatening sharp increases in ground rents when ageing agreements are renewed.
Start with the apparently reassuring news. The German Leasehold Rights Association's latest Leasehold Monitor, covering 138 grantors — predominantly local authorities, churches and church foundations — found that 70% recorded no building-compensation cases last year, while a further 20% reported between one and five. Only 3% paid compensation on more than ten buildings. Association president Ingo Strugalla says neither side normally has an interest in allowing a contract simply to expire; extensions or new agreements are usually negotiated beforehand.
There is an important catch. The Monitor does not disclose how many contracts actually expired, how many were renewed or how many ended with the building owner purchasing the underlying land. Seventy per cent of grantors paying no compensation tells us considerably less if few of them had contracts reaching maturity in the first place. Much of Germany's leasehold stock stems from the post-war building boom of the 1950s and 1960s, commonly with terms of 75 to 99 years. The real test of the model's stability is therefore still approaching.
The statutory default on expiry is compensation for the building, although contracts can determine the amount and method of payment or exclude compensation altogether. There is an important exception: where an Erbbaurecht was created to meet the housing needs of lower-income groups, compensation must amount to at least two-thirds of the building's market value. The association's survey nevertheless suggests that two-thirds has become a much broader contractual benchmark, used by 74% of respondents, while 11% provide for full market value. Strugalla says the association is seeing a trend towards 100% compensation.
Financing catches up
For institutional investors, the more consequential development may have come from the Association of German Pfandbrief Banks (VdP), which has issued a checklist intended to reduce uncertainty around financing Erbbaurechte. It addresses the issues that have historically made lenders wary: remaining term, landowner consent, ground-rent adjustment clauses, collateral valuation, rights of first refusal and reversion.
One requirement illustrates why expiry matters long before year 99 arrives. Scheduled repayment of a qualifying loan must finish no later than ten years before the Erbbaurecht itself expires. A long leasehold may therefore encounter a financing constraint well before it encounters a legal expiry problem.
"The importance of leasehold rights has increased significantly in the context of bank financing," says Moritz Leo, deputy head of collateral valuation at the VdP, pointing to the growing number of municipalities choosing to grant long-term land rights rather than sell the land outright. Strugalla welcomes the attempt at standardisation but acknowledges that some lenders still have reservations.
The political fault line
Lower Saxony shows why those reservations cannot be solved by financing rules alone. Around half of the state's existing Erbbaurechte are expected to expire and require renewal during the next two decades. Meanwhile, standard land values have increased dramatically since 2010, in some sought-after locations by more than 1,500%. Applying today's values mechanically when old agreements are renewed risks turning what was originally an affordable route into property ownership into a substantial new financial burden.
The state parliament responded in June by adopting an SPD-Green resolution calling on the government to develop a more socially sustainable approach. Among the proposals are using a rolling ten-year median of official land values rather than the latest annual figure, capping ground-rent increases during individual adjustment periods and allowing rates in tight housing markets to be reduced to 1.25%. The resolution does not itself change the rules — one Green politician described it candidly as little more than a "polite request" to the responsible minister — but it demonstrates how politically sensitive renewal economics have become.
A separate legal problem is approaching for thousands of residential owners' associations built on leasehold land. Extending an expiring Erbbaurecht can require unanimous owner consent, meaning a single dissenting owner can block an extension and potentially leave the whole association exposed to the consequences of expiry. State justice ministers have asked the federal government to examine changes that could lower the hurdle or provide a mechanism for overcoming individual objections.
REFIRE: Our report last year (Leasehold models regain appeal among Germany’s municipalities), drawing on research from Berlin Hyp and bulwiengesa, described a tentative revival driven by municipalities wanting to retain control of public land and developers seeking to reduce upfront acquisition costs. Valuation complexity and lender hesitancy were among the principal constraints. The VdP checklist now addresses one of those obstacles directly.
But the developments in Lower Saxony and ageing residential contracts expose another. Germany is trying to make a new generation of Erbbaurechte easier to create and finance just as an older generation begins to demonstrate how difficult the economics of renewal can become. That does not undermine the model; it makes the original contract — its duration, extension mechanism, ground-rent reset, compensation provisions and future financeability — all the more important.
Bulwiengesa's André Adami noted last year that only around 0.5% of eligible land held by municipalities, churches and foundations enters new Erbbaurecht arrangements annually, leaving considerable scope for growth. Whether that potential is realised may depend partly on how well Germany handles the approaching wave of old agreements. A 99-year term can make a risk appear very distant. It does not make the risk disappear — it merely postpones the day on which somebody has to price it.