Regulation on the Housing Market – An Overview

20th Live Event | Meet the Expert

Regulation on the Housing Market – An Overview

The attractiveness of the Berlin housing market has risen steadily in recent years. As a result, however, the regulations have also become more and more stringent. What this means and which regulations you currently have to observe will be answered live on 16.03.21 via zoom.

Our expert is the lawyer Mr. Uwe Bottermann.

His main areas of interest are legal asset management and the resolution of complex conflicts. In particular, he advises on regulatory and public law issues.
More information: → BOTTERMANN::KHORRAMI

Summery of the interview:

What has changed in recent years in terms of regulations on the housing market?

What hasn’t changed is the demand for real estate. The transactions are still happening, people want to buy, people want to sell. What has changed in the residential real estate sector are the restrictions. In the area of rental real estate, this has been the rent brake for about five years now and now the rent cap in Berlin, which has led to an overall decline in demand or people having to reorient themselves. Incidentally, Germany, or Berlin in particular, remains an attractive market, also for foreign investors who are used to different prices in their home countries. So far we can be reasonably positive about the future.

What does the Building Land Mobilisation Act mean?

The Building Land Mobilisation Act attempts to include issues such as planning options for the municipalities and, in Berlin, for the districts. These allow urban development, especially in inner-city areas, to be more flexible and thus create modern living conditions. This is not bad at first, but at the same time it is also the case that this law creates certain hurdles for the real estate industry. One example is the newly planned §250 of the Building Code, which provides that in the case of existing properties such as rented houses, it will be almost impossible to divide them up into residential property. This applies to locations where the respective state government determines that there is a tight housing market situation. The second issue is now more relevant for those who are interested in quick transactions and also in rental houses. There I see two issues in the area of municipal pre-emption as problematic. On the one hand, the scope of application of the right of first refusal is considerably extended. From a current application of the right of first refusal only in the so-called protected areas to the fact that a right of first refusal would have to be examined every time in the entire inner-city area. In addition, there is the expansion or extension of the exercise period for the right of first refusal from two to three months, which therefore means that a delay of about three months can be expected for every transaction, because the district will examine a right of first refusal every time and will most likely exhaust this period.

What does the right of first refusal mean?

Usually, in the case of a transaction, the notary public, on behalf of the parties, gives the purchase contract to the respective district office in Berlin or, in other federal states, to the municipalities. This is done with the request to issue the so-called negative certificate, which means that either the municipality / district says that there is no pre-emptive right at all or there is and we do not want to exercise it. The district / municipality has two months to do this. If, however, it is decided, for example in the milieu protection area, that the district/municipality would prefer to either manage these housing units themselves or have them managed by a municipal housing association for whose benefit they can exercise the right of first refusal, then the district can either acquire the units for the same purchase price or even for a reduced purchase price if the agreed purchase price is considerably higher than the market value.

What do you think of the Green Party’s proposal to ban the construction of single-family houses?

To be honest, I think it’s hype, if you look at what they wanted to do. That was to give preference in an existing development plan to projects that are not owner-occupied single-family houses, but multi-family houses. I don’t think you can actually prohibit the building of single-family houses, at least in the area covered by development plans. But you can certainly guide the decisions of the administration accordingly. Whether it makes sense to build single-family houses in urban areas is a moot point, but neither this project of the Greens, which in my view at least has clearly fizzled out in the meantime, nor any other project will lead to the death of the single-family house as an object.

How do you assess the chances that the issue of expropriating Deutsche Wohnen & Co. will have consequences?

Politically, the colleagues are on the rise. The polls clearly show that there seems to be some form of support. If all the hurdles are cleared and a referendum is held, one has to realize that this cannot be economically desirable, not even for Berlin’s state politicians. If you look at the criticism of the exercise of pre-emptive rights alone, a lot of money is being spent to ensure that no new housing is created. In the case of expropriation, this becomes even worse, because expropriation does not mean that we take away Deutsche Wohnen’s flats and they get nothing in return. No, they have to be compensated at the market value of the flats. The money has to be collected first and could be used for much more sensible things. I hope that the political will and the political power of persuasion of those who are responsible for this will clearly go in the direction of taking other measures.

Why are more and more real estate companies currently selling off entire apartment buildings?

The way I see it, the sales we are seeing here are not related to the rent cap, but to the cycle. Our clients for multi-family houses are primarily partnerships, family offices that have gone through the holding cycle of ten years and now want to take the profits tax-free. This can also be a trend-like development, that clients bought well ten to twelve years ago and now want to sell again.

Achim Amann: Well, I see it the same way as Mr Bottermann, I even see that fewer properties are being sold because many owners are sitting out the issue of the rent cap. I can see that the rent cap has a negative impact on apartment buildings, i.e. on their usability. However, I see this mainly in combination with the Building Land Mobilisation Act and also with the milieu protection areas.

What are the new legal regulations for buying or selling a home?

I don’t know much there, except for the framework conditions, which now clearly indicate that the product is becoming scarce. With the various bans on subdivision, especially in Berlin, if we look at the rate of new construction. Building permits are becoming fewer and fewer, and at the same time it is forbidden to subdivide existing stock into condominiums. If I want to buy a flat, at some point I won’t have a chance because there is simply no product on the market.

What is the rent cap and how does it differ from the rent index, rent brake, etc.?

In the case of the rent index, we are in the area of the Civil Code. There, §535 regulates tenancy law and also residential tenancy law.

However, the Berlin Senate has decided that this is not sufficient, even in the version that has now been in force for a relatively short time, in the form of the rent brake. For the longest time, the social tenancy law in the German Civil Code (BGB) protected the tenant to the extent that rent increases were only possible if either a graduated rent agreement was made, a so-called index clause was agreed, or a rent increase to the local comparative rent, i.e. the rent index value, could be demanded on a regular basis.  Then came the situation, at least in Berlin or in one of the other larger cities in Germany, that no rules applied to new rental agreements. So, a flat that had previously been rented for perhaps €3.50 per square metre could be rented for €15 when it was re-let, because the market allowed it. This is a situation that the Mietpreisbremse wants to prevent or curb by creating regulations for the re-letting of empty flats.

To this end, the Mietpreisbremse limits the permissible rent to the local comparative rent according to the rent index plus 10% or to the rent previously paid, if this was higher.

There are various exceptions; this does not apply to new buildings or to extensive modernisation.  Apparently, this was not enough for the Berlin Senate, so it invented the rent cap. This is a set of rules that applies outside the rental contract and puts a cap, as the name suggests, on the rents that can be charged in Berlin. On the one hand, in the form of a rent freeze on the cut-off date of 18 June 2019 and, on the other, by setting objective upper limits on the basis of a table that is oriented towards the 2013 rent index.

How do you see the chances of a revision of the rent cap by the Federal Constitutional Court?

There are two questions here. On the one hand, is the state of Berlin, as a state law, allowed to pass such a law at all, because it might encroach on the regulatory area of the Civil Code and thus on federal law, and the state might not have any legislative competence at all?

We do not know what the Federal Constitutional Court’s position will be. I myself published a press release on the announcement of the rent cap and said “It’s not possible, it’s not legal”. I would have to revise that a little in the meantime.

With this new public rent law, the question of competence is perhaps not so easy to answer with “can’t.” That will be decided by the Federal Constitutional Court.

Question number two is, was it permissible to pass the law in the form in which it was passed, or does the law possibly interfere with higher-ranking law, with constitutional law, with the fundamental rights of landlords and possibly also of tenants? In any case, I hope that the Federal Constitutional Court will follow its own case law, namely that on the Mietpreisbremse.

The Federal Constitutional Court has ruled that the regulation on the rent brake in the Civil Code is constitutional. Why? First and foremost because they are based on the current market situation by saying “When a flat is re-let, the current local comparable rent plus 10% or the previous rent applies”. This means that if you apply this criterion and look at the rent cap regulation, on the one hand you have the freezing of rents to 18.06.2019, here you can say that even in 2021 2019 is still reasonably up-to-date.  At the same time, however, you also have a table with objective rent ceilings that is based on the 2013 rent index. That is now eight years ago and correspondingly far away from anything that could somehow be described as current here.

My purely legal opinion is that if the Federal Constitutional Court manages to jump over the hurdle that the state of Berlin has legislative competence, which is questionable, then it will apply its criteria from the rent cap decision and, so I hope, come to the conclusion that this rent table with the objective upper limits violates the constitution, explicitly Article 14 of the property guarantee, and that possibly the freezing of rents at the level of 18 June 2019 will stand.

Can the rent cap be circumvented?

Achim Amann: You cannot circumvent it. Everything they are told by companies that rent them furniture, it usually always goes to shit. On top of that, there are tax problems because they then enter the commercial sector. You will always be in this situation if you rent out furnished apartments, if you rent out the kitchen separately and if you want to make a down payment. Please don’t trust windy start-ups or people who promise you something. There is nothing substantial.

Should I wait for the final decision on the rent cap before making a purchase decision?

 Achim Amann: I can recommend that you do not wait with your purchase decision.  Because regardless of the outcome of the rent cap issue, we will have the same regulation afterwards as we have now. Prices are still rising and will continue to do so in the future, but the question is in what proportion. Much more important in terms of price development is the issue of access to capital and interest rate development.  They should pay attention to that and these are issues that are not anchored in politics but are happening in the capital market.

I would pay more attention to the question of how you can refinance.

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