Planned tightening of rent regulation by government

The Federal Government's planned reform package for tenancy law II could have far-reaching consequences for landlords, investors, project developers and tenants. In a webinar by RUECKERCONSULT, tax consultant Ulrich Creydt, Managing Director of the Ypsilon Group, Sascha Nöske, CEO of Strategis AG, Arnaud Ahlborn, Managing Director of INDUSTRIA Immobilien, and Uwe Bottermann, lawyer and partner at Bottermann::Khorrami, discussed the central elements of the planned new regulation. The focus was on the stricter requirements for furnished housing, the limitation of indexed rents in tight housing markets, new rules for short-term leases, extended protection against dismissal in the event of rent arrears and adjustments to modernisation rent increases.

Ulrich Creydt classified the reform package as the second and more comprehensive step of the new federal government after the extension of the rent brake: "The reform package for tenancy law II is intended to stabilize the rent level in Germany and avoid possible circumvention of the rent brake." At the same time, he pointed out that the limitation of index rents in particular could have a problematic effect in tight housing markets: "If I insert such a regulation, I am more likely to ensure that less and not more is built in these tight housing markets."

A central point of the reform concerns furnished living. A distinction must be made between living space from commercial providers (e.g. boarding houses) and private providers: While many professional providers of boarding houses or serviced apartment concepts operate with special contract designs in properties that are considered commercial space under building law, many private landlords offer furnished rooms in properties that are classified as residential space under building law. The latter group is the target of the new regulation.

In the future, the furnishing surcharge is to be shown separately in the rental agreement and limited more strongly. Sascha Nöske relativized the market importance of furnished offers, but warned against mismanagement: "The share is smaller than it seems in some portals. You only see more ads because the frequency of new rentals is significantly higher." Especially for people who move to a new city because of a new job, furnished living fulfills an important transitional function. "If that is not there, it will also be more difficult to get talent for the labor market," said Nöske.

Arnaud Ahlborn observes that individual project developers on the market are using furnished concepts in response to lower acquisition factors. "If you find yourself in a 15-euro market and suddenly 26 or 28 euros are called, you realize: That's because the apartment is suddenly furnished," said Ahlborn. In his view, such approaches are not sustainable: "I can't double the rent just because I pretend that it's suddenly a different product."

Lawyer Uwe Bottermann makes an important classification: He clarifies that furnished living and short-term rentals are to be considered legally separate. "There is furnished rental without it being short-term rental," says Bottermann. In the case of short-term rentals, on the other hand, complete equipment is usually an important indication that the apartment is only used temporarily. With regard to the planned regulation of the furnishing surcharge, he explains: "The new regulation brings transparency by prescribing what is to be regulated in the rental agreement. But it can also lead to lower rental income."

The experts were particularly critical of the planned cap on index rents. According to the plans of the federal government, rents in tight housing markets will only be able to be fully adjusted up to an increase in the consumer price index of three percent. Inflation rates beyond this are to be taken into account only half. Ahlborn said: "From the point of view of institutional investors, this regulation weakens a central argument for residential investment – namely full inflation protection." Index-linked leases are an important instrument, especially in new buildings, because no major modernizations are due in the first few years after completion.
Nöske warned of the cumulative effect of individual interventions: "Every single regulation is not the end of the world. But there are many small pinpricks." From his point of view, this could make investing in housing even more difficult: "There must also be a reason to invest in housing. The market is still attractive, but it should not be artificially deteriorated."

The planned changes to short-term leases were also discussed. Uwe Bottermann comments: "Until now, a term of up to twelve months had established itself on the market and in legal practice as a framework for leases for temporary use. In the future, the limit is to be six months; an extension to eight months should only be possible in the event of unforeseen need."  

Creydt also referred to tax follow-up issues in the case of very short tenancies: "If I rent out temporarily, i.e. stay within the framework of six months, the whole thing is subject to VAT." For private landlords, this could mean additional effort, for example through advance VAT returns. "This is an additional bureaucratic obstacle," Creydt said.

The planned increase in the value limit for the simplified procedure for modernisation rent increases from 10,000 to 20,000 euros per apartment was only assessed positively to a limited extent by practitioners. Ahlborn said: "For a 75-square-metre apartment, I am at around 260 euros per square metre. You can't get far there today." For professional portfolio holders, the simplified procedure is therefore only of limited relevance, because major renovation measures are billed differently according to maintenance and modernization anyway.

Overall, the experts' assessment was mixed. The planned regulations could limit individual circumventions and create more transparency. At the same time, there is a risk that additional regulation will further weaken the willingness to invest in tight housing markets. Thus, from the point of view of the participants, the reform package could have a counterproductive effect, especially where additional housing is particularly urgently needed.