Berlin

GERMANY'S top court struck down Berlin's controversial five-year rent freeze and restrictions forcing landlords to reduce prices, saying the city lacked the power to impose the rules.

Berlin isn't free to set its own restrictions because national legislation already covers rent regulation, the Federal Constitutional Court said in a statement on Thursday. Germany's civil code has extensively regulated the relationship between landlords and tenants, including pricing, so there was no room for Berlin to step in, it said.

The German capital's aggressive move to clamp down on rent increases has sparked interest in cities from Amsterdam to New York. Other German cities have been holding back on similar efforts to see how the case played out and amid concerns that the action could complicate the development of new homes.

Shares in some of Berlin's biggest private landlords jumped on the news. Deutsche Wohnen SE climbed as much as 6.8 per cent, to trade firmly above the level prior to the rent cap's introduction in 2019. Shares of peer Adler Group SA gained 5.2 per cent.

Vonovia SE, one of Germany's largest landlords, said the court's decision was logical, but said it wouldn't claw back up to 10 million euros (S$16 million) in foregone rents. Its stock was up 1.6 per cent.

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Responding to the court's decision, Sebastian Scheel, Berlin's top housing official, defended the rent cap and said it had helped stop rising rents from causing social hardship. He called on Chancellor Angela Merkel's ruling coalition to step in.

"It is now the task of the federal government either to create an effective rental-price law that ensures the appropriate social mix in the cities, or to transfer the competence for it to the federal states," Mr Scheel said in an emailed statement. The Berlin government will discuss the consequences of the verdict on Tuesday, he added.

Under the rules that took effect in February 2020, rents in Berlin were frozen for five years at the level they had in June 2019. In November, additional rules took effect that forced landlords to cut rents if they were higher than limits set by the city government.

City officials have said the freeze was intended to give renters "breathing room" while Berlin seeks to increase construction to at least 20,000 new homes annually, more than four times the level in 2010.

Finding a home in Germany's trendy capital has gotten steadily more difficult over the past two decades as new residents, investors, startups, and companies have moved in. Rental prices in many neighbourhoods have more than doubled since 2009 as construction has lagged demand.

While the rent cap forced landlords to reduce some prices by as much as 40 per cent, it's harder to find a new rental and some prospective tenants are being asked to sign shady side contracts to circumvent the rules. There has been fierce debate whether the rules helped at all or only increased the problems on the Berlin real-estate market.

The legislation has spooked landlords. Some have been selling apartments rather than renting them at reduced rates. Traditionally, Berlin has been a city of tenants, with more than 80 per cent of the population renting.

In February 2020, Berlin's left-leaning government introduced the rent cap to keep the city from going the way of London and New York - where the lower and middle classes are being priced out of the centre.

A group of lawmakers from Dr Merkel's conservative bloc and from the pro-business Free Democratic Party challenged the law. Two Berlin courts had also asked the top judges for a ruling. Landlords have filed individual complaints but these cases weren't part of Thursday's ruling.

The lack of affordable housing is set to remain a tense issue in Berlin. Activists are gathering signatures in an effort to call a referendum on a plan to force the city to buy out the largest landlords. BLOOMBERG