“Rent controls are legitimate but ineffective”
5 questions for the real estate sector expert Frank Monien
Ever since rent restrictions in highly sought-after locations were introduced in Germany in 2015, the topic has sparked lively debate. Some people talk of expropriation fantasies, others of necessary control measures. After returning from the summer recess, Germany’s grand coalition passed a five-year extension to the rent control provisions – which has prompted us to take stock of the situation.
In this interview, Frank Monien, Special Division Manager Real Estate at CP Corporate Planning AG, comments on the effectiveness of the rent controls and on how the problems in the housing market might actually be solved.
The rent control provisions are now entering their fifth year. Has living in towns and cities where there is high demand become any more affordable?
Frank Monien: Opinions on the effect are divided. The government’s intention in rent capping and rent control is to compensate for the social injustice of living in desirable locations. While perfectly legitimate, this doesn’t seem to be doing the trick. Just try house-hunting in Hamburg, Munich or Berlin… In my eyes, these rent control provisions take the wrong approach. I see the problem’s origin in the scarcity of new-build housing.
New-build housing and extensively modernised properties are exempt from the rent control provisions. Shouldn’t this provide a boost to housebuilding?
Frank Monien: That would certainly be the case if land were available on which to build. In dense urban areas, though, space for new housing, let alone new districts, is scarce.
Can you see a way out of this dilemma?
Frank Monien: Greater transparency, i.e. the identification of empty sites and other areas available for development, would be a good place to start. But that alone would not be enough to boost the building of new homes.
We need to cut back on red tape in general so that property developers are granted planning permission more quickly. The real estate sector needs a sound basis on which to plan.
In August 2019, the grand coalition extended the rent control provisions until 2025 while tightening the restrictions even further. What influence will this have on the real estate sector’s ability to plan?
Frank Monien: There will never be absolute certainty when it comes to planning. But these revised rent control provisions didn’t come out of the blue: they had been on the cards for some time. As soon as policymakers start discussing new laws or provisions, the real estate sector needs to start thinking about what the consequences might be. It cannot wait until the law has come into effect.
What is your advice for businesses in the real estate sector?
Frank Monien: In dense urban areas, housing providers already plan mostly in terms of individual homes, or rather by management or contract units. However, their planning should go beyond standard plans for the existing stock and make greater use of business games. This would enable them to run through scenarios depicting the introduction of new regulations and the tightening of existing ones and to see how their balance sheet, P&L and cash flow would be affected.
Let’s take the example of Berlin, where a rent cap is under discussion. To prevent miscalculations in the long term, housing providers should integrate that scenario in their planning as soon as possible. What would be the consequences of the proposed five-year rent freeze? How might stagnating income be compensated? What would be the effect of providing supplementary services? And what about the sale of selected new-build homes?
If they do their homework properly, they won’t have to pin their hopes on the politicians.