PSD comments on the ruling by the German Federal Court on the legality of the Mietendeckel
Federal Court rules against legality of Mietendeckel
The Company welcomes the ruling by the German Federal Court today on the legality of the Mietendeckel. PSD and its legal advisors have always been firmly of the opinion that the Mietendeckel was unconstitutional and that State law could not supersede Federal law, a view which has now been upheld by the highest court in Germany.
Positive financial impact
The final phase of the Mietendeckel became effective on 23 November 2020 and had already been fully implemented by the Company. QSix, the Company’s Property Advisor, has previously estimated that the financial impact of the combined measures for the financial year ended 31 December 2020 was in the region of 4 per cent of gross rental income and that, in the event that the Mietendeckel was not repealed, the reduction of annualised net rental income would be up to 20 per cent in 2021. Following the legal ruling, it is expected that the negative impact on rental income will be reversed.
All rental agreements have been structured to revert back to pre-Mietendeckel rent levels and to allow for the back-payment of higher rents now legally due for the period during which the Mietendeckel was in place. As at 31 March 2021, the Company estimates that the amount of rent which could be claimed from tenants is approximately €1.8 million. Tenants had been advised by the Berlin government to set aside appropriate reserves for this eventuality and the Company will work on a case by case basis with any tenants suffering hardship.
The 2020 Portfolio valuation undertaken by Jones Lang Lasalle, the Company’s independent property valuer, had assumed that the Mietendeckel would be fully implemented for its entire five-year lifespan and therefore incorporated the negative impact on rental income caused by the Mietendeckel. Although market transaction values did not fall during the period in which the Mietendeckel was in place, future Portfolio valuations will need to be adjusted to reflect the fact that rental streams will revert back to free-market levels.
Future Business Model
The removal of rent controls limiting collected rent levels to well below free market levels will allow the Company to resume its reversionary rental strategy. During the period in which the Mietendeckel has been in place, the Portfolio has continued to demonstrate significant reversionary potential. In 2020, new lettings in Berlin were signed with a contracted rent at an average premium of 34 per cent to passing rents. The Property Advisor believes this reversionary gap should underpin rental growth in the medium term, irrespective of market rental growth. Additionally, most leases within the Portfolio include annual indexation increases which can now be activated.
The Company will also continue with its strategy of crystallising condominium reversionary value within the portfolio through the selective sale of individual units as condominiums at a premium to book value. Uniquely among its listed peers, over 70 per cent of the Company’s Berlin portfolio has already been legally split into condominiums, with a further 15 per cent in application . The Company delivered record condominium notarisations of last year, up 65 per cent over 2019, with an achieved sales value in excess of a 19 per cent premium to the book value.
Outlook
Predictably, the uncertainty created by the Mietendeckel has significantly disrupted the Berlin residential market. This has been reflected by a reduction in Berlin transaction activity from prior peak levels, a significant reduction in the availability of rental accommodation for tenants who require it most and a sharp decline in investment in the stock of Berlin housing. The removal of the Mietendeckel should alleviate this uncertainty, increase the amount of choice for tenants and allow resumption of investment into Berlin residential.
We believe that Berlin market dynamics remain attractive and affordability comparisons with other German cities are still favourable. It is expected that Berlin demographic trends, particularly net inward migration, will further strengthen when restrictions associated with COVID-19 are permanently removed.
The German Federal Elections are due to be held in September 2021. Following these elections there could be changes in the current tenant and property law regulations. During its 14 years of operation, the Company has adapted its business model many times to the changing regulatory environment while continuing to deliver positive returns to shareholders. During 2020, a year in which all elements of the Berlin Mietendeckel were fully implemented, the Company delivered a total return per share of 8.8 per cent.
