In an important piece of new legislation, the German government passed a new law designed to relieve the ongoing tense situation across the country's housing market.
After two years of debate between the CDU, SPD and other parliamentary factions, the Building Land Mobilisation Act (Baulandmobilisierungsgesetz) was finally passed by a majority decision in the face of opposition from the remaining parties. Assuming the state governments approve the bill, the law will come into force on 1st July.
The purpose of the new law is to create more living space in order to combat the national housing shortage and make affordable rental apartments available to tenants. A further intention is to enable authorities to grant increased numbers of building permits. The act will give municipalities access to land and buildings ahead of investors, in order to promote the construction of much-needed housing.
The changes will include measures aimed at defusing the fraught housing market: firstly, for a period of 5 years, the state governments may determine areas where the situation is particularly tight - and in those areas, the transformation of rental apartments and multi-family apartment buildings into freehold condominium apartments will now require a permit from the local authorities, which was not the case previously. This is primarily to prevent displacement of tenants.
Secondly, local authorities will be given additional pre-emptive rights to purchase land for residential development at market value, rather than at the price agreed between buyer and seller. The proposal is intended to prevent speculative land banking. The notice period in which an authority must exercise the pre-emptive right will be extended from two to three months.
The changes will involve amendments to the German Building Code and German Land Use Ordinance. The latter will now feature a new planning zone in the form of the “village residential area” making it easier to grant waivers to local development plans in order to promote construction, in particular the development of residential in combination with other uses, primarily agricultural. It will also make it easier to zone urban fringe areas for development.
The new law provides for a “building requirement”, by which communities can oblige property owners to construct residential units on vacant land within a certain period of time in areas where there is an urgent need for housing.
There are exceptions - for example, if the owner of a multi-family building is selling at least two thirds of the apartments to the existing tenants, or if a smaller landlord currently lets up to 5 apartments (but this can be amended to 3 to 15 apartments by the individual states). There are also exceptions relating to inherited properties - for example, if the apartment will thereafter be owner-occupied or used by a family member or in cases of financial hardship and also if the land was intended to provide the owners' pension pot.
Opinions are divided on the new act with some strong criticism in terms of the bill’s potential to put matters right: on the one hand the SPD parliamentary group is satisfied with the solution: “In places where housing is particularly scarce, we are stopping the business model of converting rental flats into owner-occupied apartments” says SPD parliamentary vice-chairman Sören Bartol.
But there are critics who see the act as a way to restrict the acquisition of freehold property, thus dashing the hopes and dreams of large sections of the population. The CSU faction of the Bavarian state parliament sees the proposal as effectively a “residential ownership prohibition act”, and had been looking to petition the Bundesrat upper house to prevent the bill. Associations within the German housing sector believe peace within the coalition has been achieved at the expense of private freeholders.
Some commentators are agreed that the pre-emptive rights to purchase land at market value will effectively result in a price limit and subdue pricing on the market. Jürgen Michael Schick, President of the Immobilienverband Deutschland (IVD), says that the new set of rules will “prevent more than it mobilises” and that not all approaches that could have facilitated and accelerated housing construction were pursued.
Instead, interventions are now made possible that are neither conducive to new housing development nor to the acquisition of freehold property. Bartol says “We are putting a stop to speculative land holding”. He says it is now possible to agree price limits for exercising the pre-emptive rights, such that authorities would not be caught out by speculative price increases.
In practice, there is a good chance the new law could result in significant slowdowns in activity on the housing market. There is potentially a huge bottleneck in terms of projects requiring a permit. The law may subdue transaction activity on the residential market, thus driving prices up, while the proposed pre-emptive right to purchase for authorities will potentially hinder deals involving entire multi-family apartment buildings.
Uwe Bottermann, Partner at Berlin law firm Bottermann Khorrami, fears that the extension of the notice period in which authorities must decide whether to exercise pre-emptive rights to purchase will have negative effects on real estate transactions, as many deals could remain in limbo for months whilst decisions are made - a situation also likely to subdue the market. He says the pre-emptive rights are no longer a measure to combat speculative land holdings, but rather serve to reduce the prices for the authorities, and are thus effectively a price control mechanism. There is considerable potential for disputes regarding market pricing. He says this is not a good starting point from which to deliver the urgently needed housing.
Andreas Mattner, President of the Zentraler Immobilien Ausschuss (ZIA), says that the enhanced pre-emptive rights to purchase whereby the authority’s own surveyor sets the price will mean authorities will be more inclined to initiate proceedings going forward. The rights inhibit private investment, which currently accounts for 95% of all new residential units in Germany: “Why would you make high upfront investments if the land can be taken away from you in the middle of the process?” His view is that the government never truly gets a grip on the tense housing market, which is little help to those desperate to find a place to live. He calls for a complete restart for residential building policy over the coming parliamentary session.
As a general point, market participants are currently not yet confident to make concrete forecasts on the effect the new law will have on transaction activity. It is simply too early to make predictions at present. If and whether the new act will deliver on its promises to provide additional affordable housing, without a negative effect on market dynamics, remains to be seen.
