Excessive red tape in Berlin’s housing construction sector prompts property developers to focus increasingly on office development instead. This was reported by two of the city’s dailies, Tagesspiegel and Morgenpost, as they discussed the property developer survey that bulwiengesa published in mid-June. According to the articles, the real estate consultancy firm’s head of the Residential Berlin unit observed a “shift toward commercial real estate” in Germany’s first city (source: www.tagesspiegel.de).  

Housing Share in New-Build Construction Likely to Keep Declining

According to the statistics, investors have already started to shift their focus. While the share of residential buildings still accounted for around 70 percent of the projected development space between 2016 and 2018, it has since declined to 63 percent. According to bulwiengesa, the increase in building activity in the commercial at the expense of the residential segment may well be attributable to the rising demand for offices, on the one hand. But there is also evidence suggesting that the political sentiment in Berlin is to some extent responsible for the gradual withdrawal of home builders from the German capital (source: www.morgenpost.de).

One factor coming into play is that housing development projects have to earmark 30 percent of their floor space for rent-controlled units (under the so-called “Berlin Model”). To make projects economically viable nonetheless, the other units have to be let at such high rates that default risks arise. These constraints have no analogy in the commercial sector and, what is more, office rents are soaring. The head of bulwiengesa’s Residential Berlin unit therefore expects the residential share of new-build construction to keep plummeting.  

Rent Cap could Exacerbate the Situation further

Analogously, the rent cap approved by Berlin’s Senate Government, composed of a coalition of Social Democrats, Greens and Left Party, could prompt investors to pull out of housing construction even faster because of the political risk involved. New-build flats are admittedly exempt from the rent cap for the time being, and it is not even sure whether the planned law will stand up in court (source: www.tagesspiegel.de). But it causes the political climate for investors to deteriorate further, and bulwiengesa’s observation prior to the passage of the rent cap that home builders dread the political risks in Berlin is probably more relevant now than ever.

Even the municipal housing companies are likely to run into trouble in the wake of the rent cap. For they stand to lose rent revenues amounting to an annual 150 million euros that will not be available for the construction of affordable flats – this being an amount that would suffice to finance 3,000 new flats (source: www.tagesspiegel.de). It should be added that even before the decision to enact the rent cap, Berlin’s six municipal housing companies were unable to meet their housing development targets. And since Berlin’s housing market is already defined by a serious supply shortage anyway, the situation is unlikely to ease up in the medium term.