The new air of Berlin.

  • 10/01/2019
  • Created by Thomas Wührer
Das ist die Berliner Luft

Change of the investment climate in real estate.

The free market economy, in which suppliers and buyers agree on a price for a good, is probably one of the most important foundations of a democratically oriented society. Anyone who intervenes politically with regulations in this sensitive market structure should also be aware of the consequences and their responsibilities. This is the case with the rental price brake planned in Berlin and the property expropriations also discussed at the federal level. Certainly: A free market formation is more difficult for real estate, because the change of the place of residence and work depends on many other factors. And for a reasonable and long-term urban planning, state and municipal interventions – such as e.g. in the designation of residential areas - are necessary.

But with the measures planned in Berlin, one tries indirectly to receive electoral gifts in the form of continuing low rents by simply prohibiting rent increases. This populist policy is a dangerous game not only economically, but also socially. The first major investors are already withdrawing from Berlin real estate business; only a supposed victory for those threatened by rent increases in Berlin.

Because the consequences are obvious:

  1. Residences are no longer renovated by the owners. The standard of living is sinking.
  2. When public agencies buy and remodel these apartments, financing through banks is unlikely to be realized as the decline in market value can only be compensated with massive support from tax money.
  3. In retrospect, the example of the DDR can be used to assess how well socialist planned economy works in real estate: prefabricated buildings of wretched living quality and an old building stock that was doomed to destruction. Favelas for all - is that really the goal?
  4. How well the Berlin bureaucracy works in public buildings can once again be seen in the grandiose failed major project, the new Berlin Airport.

Now politicians like to talk about "market failure" in the German real estate market. That's nonsense, of course. With a limited supply and high demand, the price of course increases for real estate, which in turn must affect the rental rates. So the "market" works like textbook. An effective policy response would be to increase supply by identifying more construction areas. But politics and administration are clearly incapable of doing that. The fact that politically and economically viable measures have not been initiated in advance, or at least anticipated at the beginning of migration, indicates a multiple political failure.

If one really wanted to do something useful against the increasing burden of the tenants, one could easily tackle the maintenance costs: Because costs of electricity and heating are in Germany – due to high taxes - as expensive as hardly anywhere in Europe. It is also clear that owners will ultimately transfer ancillary costs such as the sometimes very high land transfer tax or the now soon higher property tax on the tenants. However, there are now signs that the market is self-regulating. Rents for residential real estate are currently not rising as fast as the purchase prices, and in some cases are actually declining. That reduces the returns. So anyone who does not rely solely on safety will think twice in the future whether they are investing in a residential property in Germany.

Or one tries to gain the upper hand in the grey market of "private hotels" (Example: AirBnB) in a populistic way. The "source of business tax: Hotel" will probably only fade away in dictatorial circumstances. Here then, the hope resides with the voters to stand up against these conditions, which are unacceptable in Germany.

So on notices: The wind is changing and "location, location, location" gets an unpleasant taste, if you are interested in real estate in German cities. In this sense, hotel properties are an "island of the blessed". And they will remain so in my opinion. On the one hand, with a guaranteed ROI of 5.3% (Frankfurt) up to a guaranteed 6.1% return (Stuttgart) or even a safe 7% (Ravensburg), they offer a very high return on investment - also in comparison with other assets - and maximum security at the same time.  

 

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