Key Takeaways
- The final version of Berlin's rent freeze, now law, is not significantly different than the draft version and so we still believe it will have a limited direct effect on our ratings on residential real estate companies with properties in the city.
- Some companies have already stopped investing in their properties in Berlin because they consider limited potential for rent increases in the next five years, the length the law is in force at this stage.
- We therefore expect the credit metrics of these companies to remain relatively stable, given our already conservative forecasts for like-for-like rental income and property values.
Berlin's five-year freeze on residential rents took effect on Feb. 23, the date landlords in Germany's capital had to start applying the new regulation. The law was subject to minor changes to the draft of Oct. 22, 2019, but S&P Global Ratings continues to believe the law will not directly hurt the creditworthiness of the residential real estate players we rate that have properties in the city. Yet, we continue to think the law will reduce like-for-like rent increases and the potential for property prices to continue their strong climb.
Table 1
| The Impact Of Changes To Berlin Rent Regulation On Landlords | ||
|---|---|---|
| Oct. 22, 2019 draft | Final law (changes are indicated with quotation marks) | Impact on landlords of the change |
| Law is applicable retroactively as of June 18, 2019. | Law is applicable retroactively as of June 18, 2019, "except for new leases signed after June 18, 2019." | A minor reduction in loss of rental income from the original retroactive approach. |
| Rents exceeding 20% of the rent ceilings (so called "Wuchermieten") shall be reduced to the rent ceiling level (taking into account premiums/discounts). This part of the law starts nine months after the law is enacted (therefore end-November 2020) and the tenant needs to request the reduction with the City of Berlin. | Rents exceeding 20% of the rent ceilings (so called "Wuchermieten") shall be reduced to the rent ceiling level (taking into account premiums/discounts). This part of the law starts nine months after the law is enacted (therefore end November 2020) and needs to be "automatically applied by the landlord." | No additional impact on the reduction of rental income because we had previously assumed that all tenants would request rent reductions from the city. However, the change could increase the administrative burden for landlords. |
| From 2022, landlords can raise in-place rents a maximum annual 1.3% to the level of the rent ceilings. The Berlin Senate can adjust the rent ceilings in line with movements of real wages two years after the law is enacted. | From 2022, landlords can raise in-place rents "by the inflation rate (as published by the Statistics Office) up to a maximum of an annual 1.3%" and up to the level of the rent ceilings. The Berlin Senate "must" adjust the rent ceilings in line with movements of real wages two years after the law is enacted. | No significant change; landlords could benefit from an upward adjustment to rent ceilings if real wages grow. |
We believe the gap between market rents, which are likely to continue to rise, and actual rents, most of which are now frozen, will probably widen. As we have stated before, stricter rent regulation, in particular freezing rents, will unlikely relieve the imbalance between tight supply and high demand, or the current shortage of housing stock in Berlin.
In reaction to the rent freeze when it was announced in June 2019, most of residential real estate companies we rate stopped investing in assets in the city. In the long run, we believe the rent freeze will lead to a deterioration in the condition of apartments in Berlin, diminishing the quality of the capital's residential stock.
Vonovia SE (BBB+/Stable/A-2) and Grand City Properties S.A. (BBB+/Stable/A-2), two of Germany's largest listed landlords, have continued reporting solid like-for-like rental income growth of 3.9% and 3.6%, respectively, for 2019. However, each company reported a lower contribution from capital expenditure to overall like-for-like growth in rental income (see charts 1 and 2). We think this could be partly explained by both companies reallocating investments away from properties in Berlin to other areas of their business in the second half of the year, after the rent freeze was announced. Overall like-for-like growth in rental income for their Berlin properties also declined over the year (see table 2 below).
Chart 1
Chart 2
The law is facing legal challenges. Germany's opposition parties, such as the Christian Democratic Union and Free Democratic Party, have already announced their plans to derail the law at the Federal Constitutional Court. However, we do not expect a judicial decision before the end of the year.
We continue to view the direct impact of the law on the credit quality of the real estate companies we rate as limited, given our conservative base-case assumption of low-to-neutral like-for-like growth in rents and property values over the next two years. Deutsche Wohnen SE (A-/Negative/A-2) and ADO Properties SA (BBB-/Watch Neg/A-3) are the most exposed to Berlin among peers. The average exposure to Berlin for players like Covivio and Vonovia appears relatively limited and manageable. However, we believe all well-diversified companies can offset any Berlin-related decline in rental income or real estate values through their properties outside Berlin. This means Berlin's rent cap in and of itself should not result in lower credit ratios than we currently project in our ratings analysis. Moreover, our ratings already capture the risk that social issues imply changes in regulation that would be credit negative for residential real estate landlords.
Table 2
|
S&P Global Ratings' Rated Companies With Exposure To Berlin Residential Real Estate |
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Company | Data as of | Issuer credit rating | Total portfolio value, mil. € | Exposure to Berlin by value, % | Exposure to Berlin by unit, % | Berlin like-for-like rental growth 2019, % | Berlin like-for-like rental growth 2018, % | Berlin average rent/m2, € | ||||||||||
|
ADO Properties S.A. |
Sep. 30, 2019 | BBB-/Watch Neg/A-3 | 4,466 | 100 | 100 | 4.4 | 5.6 | 6.89 | ||||||||||
|
Deutsche Wohnen SE |
Sep. 30, 2019 | A-/Negative/A-2 | 24,688 | 75 | 69 | 3.6 | 3.6 | 6.87 | ||||||||||
|
Akelius Residential Property AB |
Dec. 31, 2019 | BBB/Stable/A-2 | 11,964 | 25 | 32 | 8.1 | 7.9 | 9.34 | ||||||||||
|
Grand City Properties S.A. |
Dec. 31, 2019 | BBB+/Stable/A-2 | 7,972 | 21 | 10 | 3.4 | 5.2 | 8.30 | ||||||||||
|
Covivio |
Dec. 31, 2019 | BBB+/Stable/A-2 | 15,688* | 12 | 40§ | 4.6 | 4.9† | 7.70 | ||||||||||
|
Vonovia SE |
Dec. 31, 2019 | BBB+/Stable/A-2 | 53,316 | 14 | 10 | 3.0 | 4.0 | 6.82 | ||||||||||
|
Adler Real Estate AG |
Sep. 30, 2019 | BB/Watch Dev/-- | 4,904 | 5 | 3 | 2.1‡ | 1.5‡ | 5.94 | ||||||||||
|
Blackstone Property Partners Europe Holdings Sarl |
Jun. 30, 2019 | BBB/Stable/-- | 4,377 | 24 |
73§ |
N.A. |
N.A. |
8.60 |
||||||||||
| *Group share. §Residential portfolio only. †Includes commercial. ‡Change year on year. N.A.--Not available. Sources: Latest company reports; S&P Global Ratings. | ||||||||||||||||||
This report does not constitute a rating action.
| Primary Credit Analyst: | Nicole Reinhardt, Frankfurt + 49 693 399 9303; nicole.reinhardt@spglobal.com |
| Secondary Contact: | Franck Delage, Paris (33) 1-4420-6778; franck.delage@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.