Berlin rent freeze gives real estate stock investors cold feet

London

BERLIN'S plan to freeze rents in the city for five years has spooked investors facing leaner returns amid a public backlash against big apartment owners, once among the best-performing stocks.

The combined market value of Germany's 60 publicly traded landlords fell by about US$8 billion in the second quarter, according to data compiled by the European Public Real Estate Association.

The 7 per cent decline from the previous three months was by far the worst performance among European countries.

One of the biggest losers was Deutsche Wohnen, Berlin's largest apartment owner and the focus of protests about rising rents and the shrinking supply of housing in Germany's capital.

Its shares have dropped by almost a quarter since the city government announced its intention to rein in landlords.

Berlin, a city where renters are by far in the majority, was previously known for its ultra-low living costs. However, a property boom drove up rents by more than 50 per cent since 2011 and turned landlords like Deutsche Wohnen and Vonovia into top performers on the stock exchange.

The prospect of a clampdown on rents threatens to sully the market's reputation as a reliable source of returns.

Cities around the world are grappling with an affordable housing crisis after a decade of loose monetary policy sent asset values soaring even as incomes stagnated.

That is leading to a raft of new policy propositions from taxing overseas buyers to capping rents in cities from Vancouver to Sydney.

Berlin announced the rent-cap plan in June. The likely effect of the measure will remain unclear until the city's senate finalises the details in October.

To add to the uncertainty, the legislation may face a legal challenge after it is introduced in January 2020, Bloomberg Intelligence analysts Iwona Hovenko and Sue Munden said in a note.

"We are moving in a fatal direction," said Jakob Maehren, a German real estate investor whose closely held company owns 2,000 apartments.

"Berlin is our home market but we have decided to reduce our investments here because of these measures, which won't help the average renter at all."

About a third of Mr Maehren's properties are in the capital. The rest are in German cities including Leipzig, Dresden and Magdeburg.

In response to the rent-freeze plan, Germany's biggest landlord urged the Social Democratic-led government to use the measure as an opportunity to find long-term solutions to its housing crisis.

"We don't want cities like London,'' where only the super-rich can afford to live in downtown neighbourhoods, Vonovia chief executive officer Rolf Buch said. Less than 10 per cent of the company's apartments are in Berlin.

For its part, Deutsche Wohnen said it would make a greater effort to protect renters.

"We want to improve the situation on the German residential market and will take our tenants' individual capacities more into account in future," CEO Michael Zahn said.

Rogier Quirijns, a portfolio manager at Cohen & Steers, said he's long been an advocate of Berlin residential-property stocks.

"Berlin rents are still relatively cheap and should be able to grow, but we wouldn't recommend" investing in Berlin real estate companies in light of the political climate, he said in an interview. Landlords with properties across Germany are a better bet, he added.

Peter Papadakos, a senior analyst at Green Street Advisors, is more upbeat about the Berlin market's long-term prospects.

The fact that other European cities, including Barcelona and Helsinki, are also taking steps to control rents should ensure that German cities continue to lure investors, he said.

"Good luck trying to find large, liquid residential real estate companies outside of Germany," he said.

"The reversal of this knee-jerk reaction will take time, but I think the country's attractiveness as a destination for residential real estate is not likely to be questioned." BLOOMBERG