Composite: Depositphotos.com, REFIRE
In more than 20 years publishing REFIRE, from Frankfurt during our first decade and from Berlin since 2016, we have learnt to be suspicious of predictions that Germany has reached some final moment of crisis. The country tends to change slowly, complain extensively and prove considerably more resilient than either its admirers or critics expect.
September’s three state elections in eastern Germany may nevertheless test whether political resilience is being confused with political direction. In fact, two different tests are arriving at once. Saxony-Anhalt votes on 6 September, followed by Berlin and Mecklenburg-Western Pomerania on 20 September. The AfD could come close to governing Saxony-Anhalt alone and is likely to finish first in Mecklenburg-Western Pomerania. In Berlin, where the Left may emerge as the largest party, the question is whether government can solve a problem it agrees exists. In the other two states, it is whether keeping extremists from office is being mistaken for effective government. Both are really the same question, asked in different registers: can Germany’s political centre still deliver, or only defend?
We should start at home. It is difficult to live in Berlin and miss the intensity of its housing problem. Apartments are scarce, asking rents have risen beyond the means of many households and tenants increasingly cannot afford to surrender an old lease by moving. Housing influences where people work, whether families remain in the city and how easily employers can recruit. It is the issue through which many Berliners judge whether any government can still make the city work.
The political response has become correspondingly radical. The Left wants to implement the socialisation of large housing portfolios endorsed by voters in the 2021 referendum, strengthen rent controls and expand municipal construction. The CDU and SPD reject socialisation. Yet no party can avoid the uncomfortable arithmetic: Berlin does not have enough homes, and transferring existing apartments between owners does not create another one.
Reports in this issue describe the contradiction. Vonovia and LEG have almost full buildings and rising rents, while their shares trade at substantial discounts to reported net asset value. Advertised supply is shrinking, tenants are staying put and building completions are still falling.
Investors can be criticised for caution, and landlords for defending their returns. But capital cannot be ordered to accept risks that policy has made difficult to calculate. Equally, the property industry cannot expect Berliners to remain patient while presenting every intervention as an attack on investment. If the market does not deliver enough homes and government cannot enable it to do so, demands for greater state control should surprise nobody.
A firewall is not a programme
Saxony-Anhalt presents the political centre’s predicament in a starker form. The AfD is polling at around 40%, almost twice the CDU’s support, and could approach a parliamentary majority depending on which smaller parties cross the 5% threshold. Friedrich Merz has warned that an AfD-led administration would discourage foreign investment. We believe he is probably right.
International investors do not assess a location only through taxes, land prices and subsidies. They ask whether skilled employees will move there, whether international staff and their families will feel welcome, whether public services function and whether government remains a dependable partner. A party hostile to immigration and much of the European settlement creates risks even where the most important powers remain in Berlin or Brussels.
But warning voters that their choices may frighten investors is not an economic strategy. Nor can the Brandmauer, the refusal of the established parties to cooperate with the AfD, produce a functioning government by itself. If the AfD falls short in Saxony-Anhalt, the remaining parties may face a choice between arrangements they have ruled out and a minority administration unable to rely on stable support.
Mecklenburg-Western Pomerania may produce a less dramatic version of the problem. An SPD-led coalition may keep the AfD from office, but a coalition united by whom it excludes must still agree what it intends to build, reform and finance.
There is a cautious analogy elsewhere in this issue. Pandion initially emphasised that its project companies stood outside insolvency applications affecting the parent and five operating subsidiaries. Seventeen days later, 11 project companies had themselves become insolvent after the earlier proceedings impaired their liquidity. Corporate insolvency and political extremism are plainly not equivalent, but the structural lesson is worth retaining: a boundary may contain a risk without repairing the weakness behind it. Ring-fencing the AfD does not provide housing, skilled labour, functioning infrastructure or an economic future for places whose voters believe the established parties have failed them.
Investors are accustomed to governments of the left and right. They can price higher taxes, tighter rental regulation and additional construction requirements. What they find harder to price is a government that cannot explain which rules will endure, how long approvals will take or whether agreements reached today will survive tomorrow’s coalition dispute.
The financing evidence in this issue points in the same direction. Germany’s property banks are lending more, and private-debt funds have capital available, but neither group is reopening the market indiscriminately. Strong sponsors and viable assets can obtain finance; weaker structures face harder terms or no capital at all. Political uncertainty will encourage the same discrimination between states, cities and municipalities.
Germany nevertheless remains one of Europe’s strongest long-term prospects. It retains deep industrial and engineering expertise, functioning institutions and courts, substantial private capital and an impressive capacity to adapt once delay is no longer possible. It needs housing, energy infrastructure, modernised buildings and investment in the industries supporting its next economic model. Those are formidable challenges, but also substantial opportunities.
The September elections will not cause investors to abandon Germany. Capital is more discriminating than that, and eastern Germany is not a single market. But investors will distinguish more sharply between administrations that can deliver and those relying upon the country’s underlying strengths to compensate indefinitely for political indecision. Merz and the CDU cannot sustain confidence merely by describing the alternatives as worse. Coalitions of the centre or left cannot expect exclusion of the AfD to substitute for a programme capable of persuading voters and investors that the future is being competently managed.
The firewall does matter. But what Germany builds behind it matters more.