What can the real estate industry expect from the next German government?

Hogan Lovells

Hogan Lovells

The new coalition government is to take office today. It has published its “coalition agreement” setting out the basis for its actions in the next four years and in its “Building and Living” section, it describes its agenda in greater detail. We provide a short overview of the “must-knows” for the real estate industry and in particular, for foreign investors, lenders and service providers.

400,000 new flats per annum

The government has set a goal of building 400,000 flats per annum, with 100,000 flats being built through publicly subsidized affordable housing schemes. This represents a 30% increase against 2020 and more than 80% above the annual average over the last fifteen years. It intends to achieve its overall goal by working together with the private housing sector. It also intends to encourage the non-profit making housing sector and enable the government’s agency for real estate projects (the “BIMA”) to act as a developer. The coalition`s particular focus will be on student accommodation and accommodation for the younger generation and for apprentices who are particularly disadvantaged when starting on the housing ladder. It will also make more funds available for senior living. Private long-term investors are incentivized with an increase in the annual linear depreciation rate from 2% to 3% which results in a significant tax benefit for landlords in the current low interest and low-yield environment.

Land banking

To increase the production of additional, affordable flats the government wants to streamline and digitalize administrative processes for zoning, granting and monitoring of building permits and modular building (serielles Bauen). Indirectly, it says that it intends to make wider use of public preemption rights and increase their scope. It wants to mobilize additional sites for residential use which suggests that it wants to increase the administrative pressure on land owners to build (and not just bank) on land which is zoned for residential use.

Climate change and energy efficiency

The coalition is increasing the pressure on building owners to make buildings more energy efficient and to reduce CO2 emissions. From 1 January 2024 certain standards have to be met if buildings are altered or if the heating system is replaced or modified. At the same time tenants will be shielded from any rent increases resulting from such measures. Additional KfW funding (which ultimately means state backed and often subsidized financing) will be available to cushion the significant investment required by land owners.

Share deals

The outgoing government enacted a law effective from 1 July 2021 to make share deals less attractive. The coalition wants to go one step further and take additional legislative steps to increase the thresholds for RETT (real estate transfer tax) savings. The intention is to increase  of RETT to be able to offer tax breaks for first time buyers.

Ownership rate 

Germany has one of the lowest home ownership rates in Europe. Particularly in large cities where the vast majority of homes are rented (in Berlin for example 83% of all flats). The coalition wants to boost home ownership by making subsidized loans available for young families and first time buyers and by reducing the RETT rate for this category (or granting tax allowances).

Blockchain based land register?

The coalition wants to investigate if the land register can be digitalized further by making its entries blockchain based. 

Foreign buyers

Foreign buyers continue to have free access to the German real estate market and do not require specific permits to acquire land. Nevertheless, the coalition wants to be more stringent in monitoring tax and money laundering compliance. The agreement suggests that the government will take steps to ensure that real property is bought by non-German residents with pre-taxed funds.

Residential leases

Rent increases will be capped further and effectively limited to 3.67% per annum. Rent increases arising from projects designed to achieve higher energy efficiency will be “restructured”. CO2 costs will be shared “fairly” between landlords and tenants. Currently they can be recovered from  tenants. Official rent indices (Mietspiegel) will have a higher importance and ultimately lead to lower rent increases in existing leases and renewals.

Noise protection

The rules on noise protection will be revisited and sources of noise will be considered less in isolation and more against its joint and overall impact.

Rural areas and smaller cities

The government is committed to support smaller cities in more rural areas.

Who are the likely winners and losers in the medium term?

The German real estate industry as a whole welcomes the coalition agreement with relief. There was a significant concern that the coalition would continue the confrontational style of the local Berlin government at federal level and the social democratic campaign was clearly designed to attract the votes of renters. There are no hints at drastic actions like expropriation of big housing companies (which were on the campaign agenda of left-wing parties). The coalition agreement shows a real willingness to partner with the private sector. The fact that a Building and Housing Ministry will be created ensures that building and living will keep a high priority on the political agenda.

Despite the initial relief, the private residential sector will remain wary about further implementation of the program. There will be a growing trend for consolidation as individual landlords and smaller housing companies will be pushed into investing further to increase energy efficiency without seeing any immediate returns. It remains to be seen to what extent KfW funding will be available. The potential to increase rents will be limited further. On the other hand, increased minimum wages, heating subsidy payments and childcare subsidies will boost purchasing power particularly of lower-income families and enable them to pay higher rents in the medium term. Further programs to support families will hopefully have a positive effect on demographics in the long term.

The construction industry and its suppliers will be the main beneficiaries as all these measures, if and when properly implemented, will boost the demand for construction services, particularly in the residential sector and particularly for enhanced energy efficiency. Indirectly, the federal government and the state governments will benefit from additional VAT income for these construction services as it cannot be recovered as input tax.

The wind power sector could get an incentive  with new developments allowed closer to cities and  higher density developments are likely to be approved.

It remains to be seen if urban logistics can be realized in mixed neighborhoods. The greens will insist on higher barriers to the use  of greenfield sites for logistics.

The senior living and nursing home sector will benefit from the additional funding which will be made available to this sector.

The high street retail sector will continue to feel disadvantaged against  online retailers. 

Private student accommodation will face increased competition from non-profit players which will have more financial muscle going forward.

In conclusion, we will be monitoring this space. Inevitably, the housing sector will receive a lot more attention from the incoming government  than its predecessor but the ultimate result will depend on strong collaboration between the coalition parties.

[View source.]

Written by:

Hogan Lovells

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