MAGAZINE: Citizens fight back against rising rents

Europe is experiencing a growing backlash against private rent increases and large-scale logistics developments that are seemingly sweeping across the continent.

Protest groups and local governments are moving to curb what they see as excessive gentrification in cities and the spread of ‘bog box’ logistics properties in Germany, Spain, UK, and most recently of all in the Netherlands.

Berlin has been the epicentre of protests in Germany. In the spring, protestors took to the streets of the city to campaign against rising rents and demand the renationalisation of private property. Just a few months later, Berlin’s left-leaning state government proposed a five-year rent freeze for more than 1.5 million flats in the German capital in response to growing concerns over rising rents.

Cases have gone to court. A Berlin landlord sued after Germany’s rent control law - named ‘Mietpreisbremse’ – required it refund tenants whose rent was deemed too high. In August, the constitutional court in Karlsruhe ruled in favour of tenants not to be charged more rent.

‘It is in the public interest to counteract the displacement of less well-off groups of the population from urban districts in high demand,’ the court said in its judgement.

In Spain, the government led by the Socialist Party has introduced new rental laws to improve tenant protections. While on a local level, Barcelona officials are also looking to introduce the country’s toughest rent controls, after seeing housing costs across Spain jump by more than 50% in the past five years.

Meanwhile in London, mayor Sadiq Khan has proposed an overhaul of private renting in the capital, including a rent cap. Opponents says capping rent would be taking the UK back to the dark days of the 1970s by shrinking supply.

A changing landscape

Such issues are rearing up at a time when residential property investment volumes continue to rise - by over 40% to €56 bn in 2018, according to agent JLL. It is more specifically the rise in overseas investment into residential real estate in European cities that has caused the backlash, with residents more used to domestic investors.

Despite the need to build housing, few European cities are used to such an influx of overseas investment into real estate and it seems that there is a growing breakdown of vision between developers, planners, city authorities and local residents.

The results of recent protests are directly impacting real estate companies and investors. Berlin’s rent freeze policy sent chills through the Germany stock exchange, initially driving down the share prices of the country’s leading residential property companies, such as Deutsche Wohnen and Vonovia.

The new law proposed by the left-leaning state government is due to come into force in January 2020. The proposals will hand greater powers to tenants, allowing them to demand a rent deduction if they are paying above the market rate. New builds and subsidised housing will, however, be exempt from the legislation.

Analysis by real estate research company Green Street Advisors says the five-year rent growth outlook for private landlords will almost halve if Berlin’s government introduces the cap.

Residents fight back

Disenchantment has long been brewing among residents of the German capital, where renting has traditionally been affordable. A petition to seize up to 200,000 private apartments and place them in the public sector recently gathered enough signatures to force local politicians to consider the proposal. In the new year, Berliners will vote whether to take back ownership of the units.

It could reportedly cost in excess of €35 bn to expropriate the apartments, located across Europe’s fifth-largest city of 3.7 million residents. It could also take years of legal wrangling and possibly delay housing construction in Berlin, where 85% of residents rent.

Following the news of the planned rent freeze, Vonovia chief executive Rolf Buch said the property company would not be seriously affected by Berlin's rent cap, since only 10% of its properties are in the German capital. But Buch also warned that reinvestment into the capital’s housing stock could be put on hold.

Michael Zahn, chairman of Deutsche Wohnen, which has 70% of its 167,000 units in Berlin, also warned that the Berlin Senate's ‘far-reaching’ proposals could deter investors.

Meanwhile in Spain, rule changes are extending the length of rental contracts from three to five years, and banning annual rent rises above the consumer price index. In recent years, Spain’s hottest property markets of Madrid, Barcelona, the Basque region and the Balearic Islands have attracted investment from foreign groups such as The Blackstone Group and Cerberus Capital Management.

In London - where rents are beginning to stabilise after rising for years - mayor Sadiq Khan used the usually quieter summer months to unveil a housing blueprint for the capital. It promises to shake up private renting and cut rents by establishing a new London Private Rent Commission with renters on its board. Other proposals outlined by the London mayor include open-ended tenancies, scrapping break clauses and better dispute resolution for tenants.

However, the mayor has few powers over housing in the capital and it is unlikely the Conservative government will hand over any to a Labour Party member. But with political uncertainty and tensions running high in the country, a general election could radically change the political landscape.

Collaboration is key

Yet despite protests it is likely investor interest will continue to grow, given the pricing and availability of suitable core assets, according to PwC’s Creating an impact Europe 2019 report about emerging trends. Demographic changes and growing urbanisation mean most major European cities lack affordable housing.

The industry will have to learn to work more closely with local authorities, if they are to continue to develop. Not everyone in the industry is scared off by the protests, though. In the UK, some institutional investors in the private rental sector have not reacted with outright hostility to the London mayor’s proposals. Indeed, they view proposals such as extending tenancy agreements and encouraging investment as chiming with their long-term strategies for stability for tenants and landlords alike.

In September, Aberdeen Standard Investments said: ‘While it may appear slightly counter-intuitive, we argue that the introduction of open-ended, predictable tenancies will encourage tenants to stay longer. This would be positive for well-meaning landlords. In addition, we argue that regulation in itself should not necessarily be considered bad for the sector. As an industry, it’s vital we take this opportunity to engage with the government to pro-actively shape a fairer rental system.’

Aberdeen, whose pan-European housing fund made its first investment in the UK earlier this year, is not the only institutional investor showing willingness to collaborate.

Dan Batterton, head of build to rent at LGIM Real Assets, said that although the London mayor’s plan to control rents could discourage future investment and further exacerbate scarcity issues, it is ‘encouraging to see that purpose-built build-to-rent could be exempted from rent controls in recognition of the positive impact it is having on the sector and in supply.

‘As more and more people opt to rent, tackling not just rental costs, but resident security and flexibility is becoming ever more important. New legislation should, therefore, look to incentivise institutional investment in the delivery of large-scale, high-quality rental homes. As always, the devil will be in the detail,’ Batterton told PropertyEU.

Aberdeen adds: ‘Our experience across Europe shows that rental regulation in the private rented sector is not a new or destructive phenomenon. Regulation of rents and open-ended tenancies already exist in almost all of the jurisdictions across Europe where we currently hold residential investments. Of the circa €8 bn of residential assets we hold across Europe, over €7 bn is in markets where regulation of rents and open-ended tenancies are the market norm. An inconvenient truth is that the larger rental markets often have, or have had, forms of private rental sector regulation.’

Although institutional investors’ initial reaction to protests suggests they can and will work with local authorities and residents more closely, it is unlikely that the anti-development movement will disappear. Overseas investment continues to flood residential markets, including into the Nordics, which is less used to foreign investors in this sector.

Matthias Naumann, CIO and head of strategy for alternatives, Europe at DWS, says: ‘This is very much city-by-city because rent freezes differ by location. We like residential because of its defensive nature and our plan is not for it to achieve big growth rates, its role is to provide 98% occupancy and stable cash flow, with no downside risk on rent. We would prefer the market to be stable and growing.’

City by city is how this trend will play out. The issues are increasingly localised and the anti-development politics is not expected to disappear, as investors allocate more and more investment to alternatives.

Logistics isn’t immune

The wave of citizens’ protests is not exclusive to residential developments. Big box logistics is increasing facing opposition on environmental grounds. The size of investments, associated energy and traffic issues, as well as aesthetic concerns, mean politicians may increasingly struggle to justify big sheds.

Protests have been cropping up in Germany and the Czech Republic. In the Netherlands there have been protests from local community groups against the so-called ‘boxification’ of real estate. Residents in the Reeshof district southwest of the city of Tilburg, as well as the villages of Gilze and Hulten, launched a petition of more than 1,500 signatures against large logistics buildings close to residential areas, in what protestors says is at the expense of a ‘valuable agricultural landscape’.

A new ruling on nitrogen emissions in the Netherlands may impact up to as many as 18,000 construction projects, Dutch media reported in September.

 

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