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With German Chancellor Angela Merkel and her conservative Christian Democratic Party (CDU) looking to form a coalition with the leftist Social Democrats (SPD) following September's elections, experts are sounding the alarm for residential property investors.

'This coalition will soon put new regulations into effect putting caps on residential rents and forcing owners to invest massively in heat insulation in order to reduce carbon emissions,' Günter Vornholz, professor of real estate economics at the EBZ Business School in Bochum, told PropertyEU.

Resi stocks fall
Both measures will weigh heavily on the profits of investors and on the prices of residential real estate, said Thomas Beyerle, head of research at real estate company IVG in Bonn. 'The German apartment market is not the sector investors want to be in over the coming years.’ Investors are already getting the jitters: in the days following the election, shares of residential companies like Deutsche Wohnen, Gagfah, GSW and LEG fell by up to 6%, while shares of commercial real estate companies like Alstria Office und DIC Asset remained unaffected.

Although Merkel's CDU and its conservative Bavarian sister party Christian Social Democrats (CSU) emerged as the winner of the election with 41.5% of the votes, they are in a predicament. Their previous coalition partner, the liberal Free Democrats, fell short of the 5% voting threshold needed to gain seats in the Bundestag. 'With the Liberals out, Germany's real sector has lost its patron saint in parliament,' Beyerle said.

Three-way coalition
In order to form a new government, Merkel's party is making strong advances to the centre-left SPD, which came out as the second strongest party with 25.7% of the votes. Theoretically, the Social Democrats could form the new government in a coalition with the Green Party, which collected 8.4% of the votes, and the leftist party Die Linke with 8.6% of the votes. This would put the three parties three seats ahead of the CDU/CSU in the Bundestag. However, the SPD has ruled out a coalition with Die Linke due to its extremist demands including Germany's exit from NATO.

In order to win over the SPD, the CDU is moving to the left. ‘Merkel is taking on positions that are of extreme importance to the Social Democrats,’ said economist Thomas Straubhaar, head of the Hamburg Institute of International Economics. Already, finance minister Wolfang Schäuble (CDU) said, a raise in income tax for the wealthy, one of the main demands of the SPD, is ‘conceivable.’ ‘Next, the CDU will give in to demands for a rental cap,’ Vornholz predicted.

Rental cap
Besides higher taxes for high incomes, a cap on housing rents was the main issue in the SPD campaign after rents increased by more than 20% in Germany's large cities over the past six years. Already the German tenants association (Mieterbund) is pressing the party to deliver on its promise. 'A cap on rents is desperately needed in this country,' Mieterbund president Franz-Georg Rips said. More than 54% of the households in Germany are renters.

At the same time, Merkel’s party is pushing for massive improvements in heat insulation in order to reduce carbon emissions in their push to wean the country off nuclear and fossil fuels. The new Energy Reduction Order set to take effect in 2014 and 2016 will raise the cost of building new residential apartments by 15%, according to the German association of residential companies GdW.

Patron saint
In the past four years, the FDP has blocked moves to force owners of existing buildings to improve their heating insulation. 'With the Liberals out, Germany's real sector has lost its patron saint in parliament,' Beyerle said. Now residential companies fear they could be forced to invest massively in their building stock while the rental cap leaves them picking up the bill themselves. 'New apartments will only be built and residential stock improved if it can be done in an economically feasible way,' said GdW president Axel Gedaschko.

The rent increases of the past few years have led to a pick-up in construction with investors betting on attractive returns in the residential market. According to the German Bureau of Statistics, 96.000 new apartments were built last year, 13,3% more than in 2011. 'If politics would let the market take its course, new construction would add enough supply to put rent increases in the near future on hold,' Vornholz said. 'At this point in time, it does not look as if the market will be left to sort the problems by itself.'

Richard Haimann
German Correspondent PropertyEU