Right of first refusal – a common concern in Berlin, Hamburg and Munich

It was only in November that Germany’s Federal Administrative Court instructed state authorities to stop exercising their right of first refusal as an instrument against potential speculation – a success for property owners. Now the mayors of Germany’s largest cities are following suit: In response to the Federal Administrative Court’s ruling, Berlin, Hamburg and Munich have launched an initiative to strengthen municipalities’ rights of first refusal. The mayors say they want to safeguard the supply of affordable rental housing and protect social preservation areas from speculative real estate companies. Together, the three mayors have called for an expeditious solution and a new regulation governing their rights of first refusal from the federal government. According to the IVD, such a reaction was to be expected. But the efforts to secure new legislation comes at the expense of urgently needed new construction.

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Geisel calls for rent freeze in Berlin

Berlin’s housing market remains tense. Affordable housing is in short supply. In response, the “Alliance for New Housing Construction and Affordable Housing” met for the first time in late January. The Berlin Senate wants to create more affordable housing and boost new construction in cooperation with the district authorities and the housing and construction industries. Andreas Geisel, Senator for Urban Development, Construction and Housing, has called for a voluntary, five-year rent “freeze” on the part of the housing companies. However, he wants rent increases to be linked to the rate of inflation, rather than a complete freeze. In return, he will make it easier for developers to get new construction projects up and running by guaranteeing faster building permits. The IVD Berlin-Brandenburg is keeping a close eye on the proposals and has already warned against embarking on the wrong path of too much regulation, especially in the wake of the failed rent cap.

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Pre-emptive purchase rights ruled illegal

In a sensational ruling, the Federal Administrative Court has quashed Berlin’s policy of pre-emptive purchase. According to the Court, the assumption that the sale of an multi-family property in a designated neighbourhood protection area after the stipulated seven-year period could lead to the displacement of tenants does not provide sufficient justification for Berlin’s building authorities to exercise their pre-emptive purchase rights. The new judgement is a clear victory for many property owners in Berlin. In addition, many of the Abwendungsvereinbarungen (“aversion agreements”) concluded between district authorities and property owners will now also be subject to scrutiny. The ruling will have two consequences: In the short term, authorities will make less frequent use of their pre-emptive purchase rights. In the long term, federal lawmakers are likely to revise the existing legislation and will probably even strengthen municipalities’ rights of first refusal.

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Tax on inhabited housing under discussion

The debate surrounding proposals to levy a tax on inhabited housing is intensifying. The tax, levied on rental income, would be payable on capital gains from rental real estate. The tax has history and was previously in force between 1923 and 1944. Now, Berlin’s politicians are calling for it the tax to be reinstated as an alternative to the expropriation of housing companies owning more than 3,000 rental units in the city. A tax on inhabited housing would impact all owners and landlords, irrespective of the number of housing units they own, and would also have a significant impact on loan-to-value ratios and current mortgage financing practices.

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Berlin aims to build more

The three potential coalition partners in Berlin are still haggling over the political details of the new Senate, but they are already sending out clear signals about residential construction and look likely to introduce a percentage cap on the construction of new condominiums. Accordingly, at least two-thirds of all new apartments will have to be built for the rental market. The Green Party and left-wing Die Linke have even called for a rental housing quota of 80 percent. In addition, they want 50 percent of all new apartments to be rent-controlled and subsidized. Combined with ongoing discussions about new construction in Tegel, Tempelhofer Feld and at other urban sites, it now looks as if the city’s rental housing market could ease over the next few years.

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De facto ban on condominium conversions

With the adoption of the Building Land Mobilisation Act into law, Germany’s 16 federal states can now introduce further measures to restrict the conversion of rental apartments into condominiums in tight housing markets. In particular, the subdivision of houses with more than five residential units will now be subject to a municipal approval. In practice, this requirement for municipal approval is tantamount to a ban on condominium conversions, as there are very few, and very narrow, exceptions. These include, for example, a requirement to approve conversions if two-thirds of a building’s tenants want to buy their apartment. In reality, this will very rarely be the case. Experts predict that the tightening will further reduce the supply of apartments on the real estate market over the next few years and that, as a result, prices for new apartments and apartments that have already been approved for conversion will continue to rise.

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The rise of the ’burbs

The suburban and exurban areas of Germany’s major metropolises are becoming ever more attractive. As a result of the coronavirus pandemic and rising prices for condominiums in more central areas, a growing number of families are opting to move to more peripheral neighbourhoods. This trend has not only boosted demand for residential properties for sale in the suburbs, but increasingly also townhouses and single-family homes for rent. Property owners in the suburbs can, as a result, expect increased demand, with not only property developers and end consumers but also investors increasingly interested in such properties.

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Landlords need to be more sustainable

It is already clear that sustainability and climate change mitigation in the residential real estate sector are set to become increasingly important across Europe over the next few years. In particular, owners and landlords will increasingly need to replace aging heating systems, insulate the facades of their buildings and even generate their own building energy. Although subsidy programmes are being launched to support the necessary retrofitting measures, implementation will be cost- and time-intensive, particularly for smaller landlords. In France, for example, owners of low energy-efficiency apartments – levels F and G on the energy certificate – will no longer be allowed to rent them out from 2028. Based on developments in other European countries, landlords in Germany should be prepared to expect mandatory energy refurbishments in the near future.

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