Since the beginning of 2020, the Berlin Senate has established the so-called rent cap as a further instrument that is intended to regulate the rental market. This new law exerts a direct influence on apartment owners and tenants.
The new rent cap law of the Berlin Senate, which was passed on 30.01.2020, will be implemented in two separate stages and apply measurements such as freezing, capping and lowering rents. The first stage, which has been in force since 23.02.2020, freezes the rents that landlords in Berlin have been demanding so far to the level of 18.06.2019. From this date on, no further rent increases were allowed or even more rent could be collected than was previously estimated in June 2019.
The second stage of the rent cap law came into force on 23.11.2020 and requires the reduction of the rent collected, if it is 20% above the upper limits set by the Senate. The permitted rent caps are clearly defined in the maximum value table of the Senate Department for Urban Development and are variable according to the year of construction, location and equipment of the apartment.
The rent cap currently does not apply to apartments that were built since 2014 or were available for residential purposes for the first time after that year. Accordingly, the new law affects a number of approx. 1.5 million rented apartments, and the Senate expects that rental contracts of approx. 340,000 apartments will be affected, where the rent will have to be reduced. Owners and managers must expect heavy fines (according to the Senate information, approx. 1,000€ to 2,000€ and in individual cases even up to 500,000€) if they do not comply with the regulations of the rent cap. Starting 2022, rents may increase by up to 1.3 percent per year to compensate for inflation, provided that the rent caps are not exceeded. In principle, the rent cap law is currently in force, but the Federal Constitutional Court is eagerly awaiting a final decision by the third quarter of 2021 at the latest.
What consequences and effects the rent cap will have is currently very controversial and is already causing a sharp drop in investment rates. In first sight it seems that the law came to protect the interests of the tenants and the low-income population groups in Berlin. On the other hand, it severely affecting homeowners and creates an imbalance between investment and returns. Private homeowners might get concerned about the affordability of their loans after a reduction in rental income, a scenario which can bring them to a risk of loosing their properties. Furthermore, the law allows only a minor rent increase due to modernization, which make investment in the apartment mostly unprofitable and hence could lead to a modernisation backlog in the short or long term. Due to the sharply reduced rent income, many landlords consider stopping renting their property, use it themselves or even sell it. This behaviour, however, would likely result in a decline in affordable rented housing, as vacant apartments are usually purchased by owner-occupiers and can therefore no longer be rented out to third parties. In turn, since demand to apartments to rent continue to raise, this is expected to create further pressure as the supply in the market decreases.
The expected scenario described above can already be observed. Large real estate companies holding many apartments already started to react accordingly and even stop new construction or modernization measures altogether, which further aggravates the shortage of living space in Berlin. Thus in the long run the question arises, if the rent cap results in even more strained conditions on the Berlin housing market and even cause a price increase of the empty apartments that are for sale. We as consultants to many investors from Germany and abroad clearly feel the concerns and considerations of our customers and clearly feel the tendency to sell the existing capital investment. Should this trend intensify in the next few years, we might see another implication: due to the sharp drop in investment Berlin might see a drop of income from investment and holding tax. This reduced income might be ultimately compensated by increased tax burden on the citizens.
Is selling the most reasonable response in the face the new law? We believe it is not necessarily so, and that each case should be assessed individually. If you yourself are the owner of one or more apartments, please feel free to contact us. Together we can show you the possibilities according to all legal regulations and work out a secure and success-oriented strategy with you.
We are looking forward to hearing from you and will consult you with every question you might have regarding your investment: email@example.com.
Nils Ellerkamp, CEO TRUST-AGN Holding GmbH