Rent Index Manipulation Act:
A Threat to Berlin‘s Investors

A majority of the investors involved in Berlin‘s housing market have so far almost completely failed to recognise the serious risks posed by the proposed Rent Index Manipulation Act. And this is despite the fact that no other housing market stands to be so strongly affected as Berlin. After all, Justice Minister Maas‘ planned legislation will have the greatest impact on markets that have seen the biggest rental increases over the last eight years. Which makes Berlin one of the markets set to be most affected.

Until now, local benchmark rents have been determined on the basis of all lease agreements concluded during the previous four years. Maas now plans to extend this reference period to eight years. Rental prices in Berlin were much lower in 2008 and the following few years, which means that if these prices are included in the calculations, local benchmark rents will fall. As rental increases for re-lettings are restricted to a maximum of ten percent above the local benchmark, this means the rental price brake “Mietpreisbremse” will effectively stop any rental increases for years to come. This will create a negative spiral: Local benchmark rents will sink even further and prevent rents from being increased. This will in turn influence and restrict local benchmark rents. This feedback loop will effectively lead to a block on all rental increases. Of course, many will object and point to the fact that the Mietpreisbremse has so far been ineffective. It has even been described as a “paper tiger”. Yet this proposed Rent Index Manipulation Act will transform the paper tiger into an extremely hungry and dangerous real tiger. Dangerous at least to investors who have bought at high price-to-rent multipliers in the belief that they would be able to increase the rents they charge over the next few years.

Most private landlords couldn‘t care less about the Mietpreisbremse right now. But large-scale housing companies have no other option than to stick to the rules. And sooner or later private landlords will also be unable to ignore legal restrictions. Tenants‘ Unions and the media will make sure of that (“How to defend yourself against illegal rental increases”).

The risks created by this new legislation are being ignored by too many investors. This is a symptom of an extremely unhealthy development – dangerous over-optimism. According to Savills the volume of transactions involving residential portfolios rose by 673 (!!) percent between 2010 and 2015. Two-thirds of the transactions in Germany‘s top 7 cities were in Berlin. But the investment and rental markets have drifted further and further apart. And people are only paying attention to positive stories, such as forecasts of rising demand for housing because of the influx of refugees. Negative developments, such as the Rend Index Manipulation Act, are either ignored or downplayed. The current situation is only good for those investors who recognise and seize the opportunity to sell their Berlin apartments, before the masses wake up.