Aerial view of apartment buildings in Bremen, Germany
More data is coming in showing just how more expensive housing is becoming in Germany, with rising rents and energy costs putting more and more tenants under severe pressure.
As we report elsewhere in this issue of REFIRE, even in high-price regions such as Munich, rents have risen more sharply than ever before in the past two years, even for existing contracts. Lukas Siebenkotten, the president of the national Tenant's Association (Deutscher Mieterbund) told the Augsburger Allgemeine newspaper, "The current rent index for Munich showed average rent increases of a horrendous 21% compared to the previous rent index, a shock for all tenants affected."
Siebenkotten said his organisation was receiving more and more requests for advice due to massive rent increases. "Tenants are increasingly worried about how they will be able to afford their rent and the ever-increasing energy costs," he said. The Mieterbund is demanding a rent freeze for existing properties, a strict rent freeze for new lettings, penalisation of extortionate rents and a ban on index-linked rents. The creation of affordable housing must now be put at the top of the government's agenda, he said.
Rents are continuing to rise in most cities across the country, despite the fall in property prices. According to Roman Heidrich, residential property valuation expert at JLL Deutschland. "We're assuming that rents will continue to rise in the medium and long term, as demand will continue to significantly exceed the shrinking supply of new apartment units in most regions of Germany over the next few years," he said. Excess demand on the rental market is only going to intensify, he added.
High construction costs at the heart of the problem
Germany's high construction costs are now a real part of the problem, said Dr. Andreas Mattner, president of the German Property Federation ZIA, talking to the FAZ newspaper. "Rents are bound to rise because the cost of providing housing is exploding," he said. "This is becoming an increasingly serious social problem." The ZIA is calling for a state subsidy programme with an interest rate of no more than 2%, to encourage builders back into construction.
Since 2020, both actual construction costs and interest rates on loans have risen sharply. Added to this are the back-and-forth of recent years regarding the federal government's subsidy programmes and the current budget cuts by Olaf Scholz's 'traffic light' coalition. Construction companies and other industry insiders also repeatedly cite excessive bureaucracy and the constant tightening of building regulations.
Reducing costs of housebuilding
To counter this, The German Economic Institute (IW Cologne) also has its own package of proposals as to how to reduce the cost of housing construction, but which it says will require a much higher degree of consensus in politics, administration and business in makig housing a priority.
The IW's proposals include cost savings in terms of fixtures and fittings, especially as simple fixtures and fittings in new builds often exceed the typical standards in existing properties. According to the IW's report, dispensing with underground car parks or basements could also help. Smaller flats could also reduce the cost of new builds. The public sector could also do something, for example by making public land more favourable. Another lever would be tax relief. "Suspending the real estate transfer tax (Grunderwerbsteuer) for new builds would be compatible with EU law and appropriate to boost new housing construction."
LEG boss sees rents in Germany only heading upwards
ir.leg-se.com
Lars von Lackum, CEO, LEG Immobilien
In a lengthy interview with business daily Handelsblatt, Lars von Lackum, the CEO of Germany's second-biggest housing company LEG Immobilien, warned of an impending standstill in Germany's rental housing market. The ever-stricter regulation to protect existing tenants was leading to a 'growing gap' between prices for new lettings and existing lease contracts.
He also described the energy targets of the governing coalition as"total rubbish". In his view, the Building Energy Act, (GEG - Gebäudeenergiegesetz) puts the cart before the horse and sets the wrong priorities. "There is simply a lack of predictability," accuses von Lackum. "If things go on like this, we will certainly miss the climate target."
The Düsseldorf-based LEG owns and manages 167,000 apartments, mostly in its home state of North Rhine Westphalia. Von Lackum says quite bluntly, "Rents will continue to rise in 2024", and he anticipates an average rent increase for all his LEG tenants of 3.2%-3.4% for the coming year. "This is moderate rather than harsh compared to the forecasts of competitors and market observers. This means that our overall portfolio is roughly in line with the expected inflation rate for the coming year, and even lower for our existing tenants, who are protected from significant rent increases by numerous regulations."
"Entire housing market is freezing up"
"However, it is precisely this disproportionate protection of existing tenants, regardless of whether they are rich or poor, compared to new tenants that is causing a growing gap between the two throughout Germany. While the average existing rent in Germany is €6.55 per square metre, the rent for new tenants is sometimes twice as much. As a result, those who have an apartment will not give it up - even if it is now far too big. The entire housing market is freezing up, which worries me.
"Without new supply, the rental apartment product will remain in short supply. My prediction is therefore simple: rental prices in Germany will continue to rise in 2024."
Justifying his own company's rent increases last year, von Lackum said: For 2023, the average increase in rents at LEG was 3.8 to four per cent. If you compare this with the expected average inflation rate for 2023 of 6.1% or the increase in material costs of more than 30% over the last three years, this puts the rent increases into perspective. It is important that we exploit existing rental potential, as this is the only way we can maintain or improve housing and climate standards in existing buildings. We have to be clear in telling our tenants in Germany how things really are."
But it's not all bad news for tenants. Von Lackum says the opposite is the case. "If interest costs multiply, buying a property will become significantly more expensive. This is why many people who could previously afford to buy a property are returning to the rental market. This shows just how strong the position of tenants in Germany is. They are much better protected from the effects of the sudden rise in interest rates than owners, who now have to pay significantly more for mortgage loans."
Rise in energy costs is biggest problem for tenants
In von Lackum's view, the big bugbear for most people is the rise in energy costs. "Here at LEG, we assume an average rent of €6.55 per square metre for an average size of 64 square metres. That means we are talking about a basic rent of €425 euros. If you put that in relation to the average income in Germany, you can see that this is a level that is affordable for many people. It is above all the rise in energy costs that tenants have recently felt. It is not the increase in net rents that is making housing unaffordable, but the high additional payments for energy."
LEG announced last year that it was discontinuing its own project development business, and is currently just wrapping up three projects which it had already started. Von Lackum said: The reason for this is that we are currently unable to build affordable new housing in Germany. One of the problems is the high energy efficiency requirements, including the sustainability label. This results in pure construction costs, i.e. excluding land costs, of more than 4,000 euros and therefore new-build rents of at least 18 to 20 euros per square metre. Our customers can't afford that."
Building Energy Act (GEG)
Von Lackum reserved his main vitriol for the government politicians who have completely messed up the whole heating transition issue with their Building Energy Act, or GEG.
"According to the law, the individual is supposed to replace a heating system without knowing what the municipal heating plan will look like in two or three years' time. So he buys a heat pump and then perhaps has to learn that the grid operator will tell him that the grid connection capacity is not sufficient if several of his neighbours have already installed an e-car wallbox. And if he has managed to do all this anyway, he may be obliged to connect to a new district heating network in 2026 and the European Buildings Directive will also mean that he will have to invest thousands of euros in the building envelope again in 2030. People who do not manage property professionally are losing confidence in politics and even the professionals feel overwhelmed. We are running into a wall."
On a positive note, Von Lackum expects the downturn in property prices to reach its low point in 2024, assuming no further interest rate rises. And on residential property as an investment, he remains nonetheless optimistic. “I am convinced that residential property in Germany is still an attractive asset class. I continue to believe in the appeal of concrete gold!”
