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15 06 2017
Rent Index Forecast for 2019

Criticism of the rent freeze, new legislative proposals, and the inconclusive discussion concerning rental growth in the German capital are some of the issues at the centre of an ongoing debate. Berlin’s 2017 Rent Index, which was recently published, raised a number of questions, and indeed occasioned protest. In a statement released in response to the Berlin Rent index, the Berlin-Brandenburg chapter of the BFW Federal Association of Independent Housing Companies criticised the latest calculations of the average residential rents.

Controversy over Rent Index Structure

The interest group blames the rental growth not on the rents for first-time occupancy, but on the passing rents of existing units as the price driver of the rent index. It cites stats from Berlin’s housing market as evidence. According to the figures, roughly 1.9 million flats are at issue, of which only 13,800 represent new flats that came on-stream last year. Quite obviously, existing flats have a far greater influence on the rent index. Since the rent freeze severely limits the margin by which rents may be raised when re-letting existing flats, on the one hand, while Berlin’s housing market is characterised by serious pent-up demand, on the other hand, many landlords have prematurely raised the rents on unexpired leases as high as the legal constraints permit. Moreover, this year’s survey was the first that involved changes to the structure of the rent index. One of them is the elimination of the “special features” category that permitted adjustment of the rent index for particularly high-spec apartments. The association believes that the change will result in a distortion of the entire rent index.

Ramifications of Political Decisions

The association assumes that the rent index will retain its high level through 2019, arguing that two opposing trends are mutually reinforcing each other. The long-term investment horizon of real estate investors is at odds with the short-term decisions made by the body politic. The more laws are enacted that hamper the construction of new housing or change the landlord-tenant law, the less appealing real estate becomes as an investment. Thus, the interest to invest in this previously attractive asset class is eroding in proportion to the degree to which its formerly stable and low-risk parameters are dismantled. This in turn exacerbates the demand backlog, while the growing housing shortage is sure to keep driving up rent rates as predictable consequence. The first quarter of 2017 already saw the number of planning applications in multi-family residential construction dip by 8.5 percent in Berlin. Planning permits granted in the state of Brandenburg, which surrounds Berlin on all sides, went up by 132 percent during the same period of time, suggesting that developers are bypassing the city proper in favour of its suburbs. With these figures and parameters in mind, the BFW association predicts an even higher rent index for 2019 than the one diagnosed for the ongoing year. For the time being, however, it remains to be seen just how the decisions by Berlin’s policymakers will ultimately impact the market dynamic.