On 26 September, the eyes of investors in Europe’s growing residential property market will turn to Berlin, and a contentious bill that seeks to radically change the calculus of real estate ownership
The so-called ‘Expropriate Deutsche Wohnen & Co’ referendum, which is supported by several housing groups, trade unions and the Left and Green political parties, asks Berlin citizens to decide on a proposal to forcibly purchase 240,000 properties owned by the city’s largest landlords.
As the largest landlord in the German capital with more than 150,000 homes, Deutsche Wohnen (Ger:DWNI) is the most visible target of the bill. The €19bn (£16.3bn) member of the DAX 30 Index has also been a hugely successful investment. Over the past decade, its shares have posted an average total return of 21 per cent a year, compared to 11 per cent for its benchmark.
Its critics accuse the company, and other large corporate landlords including Vonovia (Ger:VNA), of running down their apartments into unliveable states, or using renovations to raise rents.
One pro-referendum slogan – “keine Profite mit unserer Miete” (no profiting from our rent) – points to the movement’s broader opposition to private landlord ownership. Even if the ballot is defeated, industry sources expect efforts to socialise or nationalise the city’s private rental market to continue.
This politically charged housing market is not new. Last year, Berlin’s government passed the so-called Mietendeckel law, which mandated a five-year period of rent control. In April, it was declared unconstitutional, and tenants were ordered to back pay rent savings to their landlords.
Pro-expropriation campaigners cite opinions from constitutional lawyers who claim compensation need not reflect market values. Others point out that the law on which the initiative is founded has never been tested in court and would need to be applied uniformly or not at all, if it succeeded.
If it were passed, the referendum could have significant impacts on company valuations. Analysts at RBC said Deutsche Wohnen’s net tangible asset value could slide to €43 per share if its portfolio was priced at 2018 valuations. Against 2014 prices this could fall to €17, 68 per cent below the current share price. The effect on Vonovia, which is trying to acquire Deutsche Wohnen, would be smaller.
Landlords argue the solution to Berlin’s lack of vacant housing is more housing. High costs and complex planning rules mean developers lack incentives to build properties targeting lower income brackets, thereby exacerbating the problem.
Opposition to the bill is less equivocal. “We do not think that expropriation is possible in legal terms,” said a DW spokesperson. “Even it was, the costs for that endeavour would mean a collapse for the budget of the state of Berlin.”
UK investors’ exposure to Berlin property is most likely concentrated in Phoenix Spree Deutschland (PHNX). At last count, Phoenix owned around 2,700 units in the city, just short of the 3,000-strong threshold targeted by campaigners for expropriation.
“It is important that private capital takes into account the needs of tenants and treats them responsibly,” the company told us. “But it is equally important we encourage and incentivise the role of private capital in helping to deliver new homes and to modernise existing homes to be more energy efficient.”
The TR Property Investment Trust (TRY), an investor in both Deutsche Wohnen and Phoenix, noted in its latest annual report that Berlin “remains the cheapest capital city in Western Europe in which to rent an apartment (if you can find one)”. The trust argues that the city’s anti-landlord sentiment risks “shutting out new migrants through the consequential collapse in the supply of new homes”.
One property source estimated that at current rental levels and costs, Berlin authorities would struggle to break even if they took on the job of developing and managing new housing.
On one level, the referendum is inseparable from the idiosyncrasies of Berlin’s history, rental-dominated market, and left-leaning politics. But it is also a reminder of the social realities and risks confronting the huge amounts of capital keen for a slice of Europe’s rental market.
Since the pandemic hit, low vacancies and reliable cash flows have revived yield-hungry investor appetite for residential property, which is a more ubiquitous asset class in the US. The prospect of annual rent reviews also offers inflation protection at a time of weak bond returns.
In the UK, this interest extends to Lloyds Banking Group (LLOY), which has reportedly sketched out plans to purchase 50,000 homes over the next decade. Goodstone Living, backed by Australian bank Macquarie (Au:MQG), is raising £1bn to invest in the purpose-built rental housing sector, which it called a "global mega-trend in real estate".
Options for retail investors looking for direct exposure include PRS Reit (PRSR). A new launch, UK Residential Reit, was pulled last month after the group failed to hit a minimum fundraising target.
This may reflect some nerves among institutional investors. In Scotland, a government advisory body has called on the devolved administration to move from a “housing land market driven by private profit to one that is driven by the public interest”.
As return-focused private capital surges into residential property, the political temperature looks set to rise, too.
