On the move to expropriate Berlin property

Would the upcoming referendum on property expropriation set a precedent for the rest of Germany?

Dear Reader,

This is the first members’ newsletter after my summer break. Thanks for bearing with me, I hope to bring you some insightful content over the coming months.

This week I’m looking at an eye-catching proposal that's being put to a referendum in Berlin on September 26th - whether to expropriate around quarter of a million properties from private companies and put them into public ownership.

I want to address three questions. 1) Why did this initiative come about? 2) Could it solve the problem it claims to address? 3) Is it likely to happen?

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1) ‘Mietenwahnsinn’

The referendum is happening thanks to the hard work of a group called Deutsche Wohnen & Co. Enteignen (DWE). The name is a reference to one of the largest property companies in the country - Deutsche Wohnen, which owns 115,000 flats in the capital - enteignen means ‘to expropriate’.

“Rents in Berlin have doubled in the last ten years,” DWE says. “Wages have barely risen in the same period,” meaning people are being pushed out of the city. “Particularly in the inner city, hardly anyone can afford the rents.”

Why is this happening? “Scheming rent sharks” are pushing up prices to pay big dividends to their investors. “Their business model is profit based on pushing up our rents.”

Do these claims stack up?

As I have previously written, the general claim that rents are rising is superficially true, but when put in proper context is actually misleading.

What’s real: if one looks solely at new rental contracts, the average price has almost doubled over the past decade, from €6.65 per square metre in 2012 to €10.50 today. This is most likely to impact young people. Under 30s are driving growth in the city’s population - they are the ones who have to take the new rental contracts.

But this obscures a key aspect of the picture. Overall, Berliners are spending less of their income on their rent now than they were in the past.

Recent studies by the left-wing Böckler Stiftung and conservative German Economic Institute come to the same conclusion: rent is no more of a financial burden on Berlin’s households than it was 10 to 15 years ago.

The Böckler Stiftung concluded that the average Berliner spent 28 percent on his income on rent in 2019, down from over 30 percent in 2006.

How can this be? 

Firstly, most people are on secure long-term contracts from the days before the eye-watering price hikes. In a country of renters, the average household stays in a property for eight years.

Secondly, the sole focus on rents ignores the fact that disposable income has been increasing steadily in Germany’s blossoming capital. Post-tax income has risen by about a quarter over the past decade.

What about those rent rises - who is at fault?

The cause of rent rises is more complex than the “scheming rent shark” rhetoric of the DWE. Berlin’s housing stock was in a moribund state at the end of the last century (half a million homes were still heated with coal in the 1990s!) and has undergone extensive modernization to conform to basic environmental standards in recent years. Renovations have pushed up rents that were previously very cheap by national comparison.

At the same time, the city’s population has grown unexpectedly quickly in recent years as Berlin has become one of the most desirable destinations in the world. The surge in demand overwhelmed a limited supply of homes and has attracted investors to the rental market who are seeking high returns.

It is young people who are paying the bill. Any solution to this problem should ensure that new rental contracts do not rise wildly above wages.

The DWE have misdiagnosed this problem; would their initiative help nonetheless?

Let’s look at the details.

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2) Is the initiative likely to solve this problem?

This is what DWE plans: Every property company that owns more than 3,000 apartments will be forced to hand them over to the city at a level of compensation that would allow a new public company to lower rents - at no cost to the taxpayer.

Initial estimates suggest that some 250,000 of the 1.6 million rental properties in the city would be affected by the expropriation. 

To afford the bill, the city would take out a super mortgage of billions of euros that would be paid off over the next four decades via the income generated by rents. DWE have calculated an affordable rent based on current income levels and derived from that a compensation package in the range of €11 billion.

That’d be good for the tenants - rents could then drop by €2.50 per square metre.

Reading the initiative’s website, it sounds like they want a universal rent of €4.04/m2 in all the apartments of this huge new property portfolio. That would be a bizarre proposal which will in effect mean people living in the inner city paying the same as those on the outskirts, but without the commuting costs - hardly fair. 

Also, would rents go up over the 40 years that the mortgage is paid back, or is this rent level für immer? If so, tenants still on the private market will see their rents rise, while the fortunate few will pay ever less compared to their income.

Leonhard Lenz/ Creative Commons

When I asked DWE to give me specifics, they replied with a vague statement that the public company would “consult with tenants about the exact configuration.”

Another central problem. Are the properties in this new company going to go to those who need them most?

Probably not. DWE feels the need to calm the nerves of current occupants. No one is going to be forced from their home, they promise.

Fine. But that also means that many, if not most, of the people who will benefit are going to be on older, cheaper contracts. If they suddenly find themselves paying a few hundred euros less a year, they are hardly likely to give way to a young family who is looking at double the price on the private market. This risks just entrenching the interests of an arbitrarily chosen few.

Weirdly, DWE don’t even support means-testing for new tenants, saying this would add too much bureaucracy to the process. Instead, they claim that all Berliners will benefit due to the fact that expropriations are meant as a threat to smaller landlords, too. Or as they put it: “The expropriations are an important signal - after all, the small rent sharks take their cue from the big ones.”

So, there are already serious question marks about the “fairness” of the initiative, should its wish list come true.

But this is all too assume that compensation of €11 billion is remotely realistic.

The city senate has done its own calculations and puts the compensation package at between €29 billion and €36 billion. The senate is controlled by a left-wing majority, so it can’t easily be dismissed as being in the pocket of the property sharks.

€36 billion is the estimated market value of the properties. That is likely to be the minimum the property companies would aim for in court. They would argue that, when land is expropriated for road construction, as often happens when autobahns are built, land owners are always compensated at the market value.

Even with the senate’s lower estimate, the new public landlord would have to increase rents by one euro per square metre to cover the costs, making a nonsense of the whole idea that its about tenants’ rights.

Alternatively, the city would have to use billions of euros of taxpayers’ money. But critics have pointed out that that these huge sums could be better invested in directly building new social housing - thus creating affordable homes and alleviating the strain on supply.

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3) Is it likely to happen?

Many, perhaps most, Berliners want the initiative to succeed. Despite lockdowns, DWE collected 350,000 signatures - a record for a Berlin petition. And polling suggests that it could get the required number of votes at the referendum to win.

But that’s probably where things will end. Referendums have been won and then ignored by Berlin governments before (In 2017 voters wanted to keep Tegel Airport open, but the city didn’t care).

Is there political support? It goes without saying that expropriations will happen over the CDU and FDP’s cold, dead bodies. The SPD, leading in polling, are also against it. Even the Greens have been equivocal. The only party to leap on the bandwagon is the hard-left Linke.

The wariness has to be understood in historical context. There are few words in the German language as historically loaded as the term enteignen. 

Throughout the 1930s, the Nazis slowly sharpened their laws of expropriation against Germany’s Jewish citizens. Those who fled the Reich were made to pay exorbitant duties on their property; after Kristallnacht, all Jews who possessed more than 5,000 Reichsmark in assets were ordered to give up a fifth to the state; finally when the Nazis started deporting Jews, they stole all of their belongings.

Immediately after the war, it was the turn of the communists. Under the slogan “Junkerland in Bauernhand”, the East German state confiscated three million hectares of land from Prussia’s landed nobility, giving them 24 hours to pack their bags and leave.

For this reason private property has an almost sacred status in democratic Germany. But there is still a clause in the constitution that permits expropriation.

Grundgesetz (GG) Article 15 states that: “Land, natural resources and means of production may, for the purpose of nationalisation, be transferred to public ownership or other forms of public enterprise by a law that determines the nature and extent of compensation.”

Advocates of expropriation point to how open this article is - it doesn’t attach any strings to a law of expropriation.

At the same time Article 15 has never once been used. The required law on compensation has never been written.

Critics of expropriation point to Article 14 of the constitution, which states that expropriation is only permissible “for the public good.”

The constitutional court would have to be convinced that there was an overwhelming public interest in expropriating the properties. Given that there are other tools available to the state (eg rent control laws), it is hard to see that happening.

It is rare that Der Spiegel and the Axel Springer press agree on anything.

But on the prospect of expropriation they are surprisingly united. Die Welt has called it “a suicide mission” that will be killed off by the judges, if not by politicians. Der Spiegel is even less generous. Dismissing the initiators as “professional big mouths”, the magazine asks why “Berlin should spend tens of billions of euros on real estate without creating a single new apartment?”