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Vonovia's Assessment of the Latest Changes to the Draft Bill for a Berlin-specific Rent Freeze Legislation

Background

In a meeting between the State of Berlin’s Urban Development Committee and legal experts on Jan 22, 2020, the wording of the draft bill to be presented and put to vote before Berlin’s State Parliament on January 30 was changed compared to the version agreed on by Berlin’s government coalition on Oct 22, 2019.

Compared to the previous draft bill, for which Vonovia had presented a comprehensive assessment in the context of our 9M 2019 earnings release, we consider the following changes as relevant for our business:

Relevant Changes

Retroactive rent reduction

Draft bill Oct 22, 2019: Once the law is enacted, reversal ofallrent increases implemented since June 18, 2019, back to the rent levels legally agreed as of that date.

Amendment based on draft bill Jan 22, 2020: The rent reductions to June 18, 2019, levels do not apply to new lettings agreed since June 18, 2019.

This is a marginal improvement from which we expect that much of the ca €6m rent reduction in 2020, which we had originally anticipated, probably will not materialize. At the same time, we feel reassured in our conscious decision not to implement the 2019 Mietspiegel because it is our understanding that Mietspiegel rent increases (i.e. for sitting tenants) will still need to be rolled back.

Rent reduction down to 120% of rent ceiling

Draft bill Oct 22, 2019: Excessive rents (“Wuchermieten”) of more than 120% of the rent ceilings (“Mietobergrenzen”) shall be reduced to the rent ceiling level (premiums/discounts are applied based on location: simple -28 cents/sqm, average -9 cents/sqm, above average +74 cents/sqm). The reduction of excessive rents shall start nine months after the law is enacted and on the order of the Berlin administration after reviewing a tenant’s request.

Amendment based on draft bill Jan 22, 2020: Tenants will not need to file a request with the city administration. Instead, landlords shall be required to automatically reduce the rent to 120% of the rent ceiling (incl. the location-based premium/discount).
 
This appears to be a much stricter regulation that now places the burden directly on landlords and no longer on Berlin’s administration. The financial impact on Vonovia remains unchanged as we had calculated the original impact already for 100% of all rents above the rent ceilings. For a professional landlord like Vonovia this amendment does not make a big difference and the notification of tenants does not represent a challenge; however, non-professional landlords are now exposed to a much higher risk.

Adjustment of in-place rents and rent ceilings

Draft bill Oct 22, 2019: Starting 2022, in-place rents can be increased by 1.3% per annum but only up to the rent ceilings. The Berlin Senate is authorized to increase the rent ceilings in line with the development of real wages two years after the law is enacted.

Amendment based on draft bill Jan 22, 2020: Starting 2022, in-place rents can be increased in line with inflation (as published by the Statistics Office but no more than 1.3%) but only up to the rent ceilings. In addition to the original regulation, the Berlin Senate must increase the rent ceilings in line with the development of real wages two years after the law is enacted.

This is a marginal improvement, as we now expect the rent ceilings to no longer be rigid but rather to be adjusted in line with the development of real wages. However, given the often substantial gap between in-place rents and rent ceiling values, the economic impact of this marginal improvement is expected to be limited.

Financial Impact

As to the financial impact on our business we had estimated €6m for the reversal of rent reductions to June 18, 2019, levels plus €10m for reductions down to 120% of the rent ceilings. Based on the new draft bill we expect the overall rent reduction impact to be less than €16m and in any case not material in the context of our group-wide rental income well above €2bn.

Revision but in no Way a Solution

In summary, the wording of the new draft bill appears to be more precise, plus changes have been made thatrepresent a marginal improvement as well as changes that result in an even more restrictive regulation. This revised version of the draft bill appears to be an attempt to make the legislation less unconstitutional but none of the amendments change our view of the rent freeze regulation overall: We continue to consider the proposed law to be a large step in the wrong direction. It will not help to solve the housing shortage. Instead it will disincentivize homeowners and investors in Berlin to make much needed investments in new construction and the energy-efficient modernization of Berlin’s housing stock.
 
Furthermore, we continue to believe that this legislation is largely unconstitutional based on our conviction that (a) Berlin does not have the legal authority to pass its own rental legislation on a state level; and (b) the legislation represents a severe and unconstitutional infringement on property owners’ rights to make adequate use of their property and it interferes with the right of two independent parties to freely enter into a contractual agreement.

What’s next?

We expect the draft bill to be approved by the Berlin State Parliament on Jan 30, 2020, and to be enacted shortly thereafter. As we have made clear in the past, while we disagree with the legislation we seek to be fully compliant.

Finally, our view and assessment as to the spillover risk of this or similar legislation remains unchanged. We believe that this is a Berlin-specificsituation which will not be copied by other states(except in the unlikely event that the Federal Constitutional Court were to rule largely in favor of the legislation). We expect the Berlin rent freeze to be challenged in front of the Federal Constitutional Court soon after it becomes law. A sufficient number of members of the German Federal Parliament (“Bundestag”) have already indicated that they will launch a formal proceeding against the State of Berlin (“Normenkontrollklage”).
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