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Project development: incentives on their way?

1. Dezember 2015

Project developmentProject development – tax breaks planned

Project development is crucial if Germany is to get to grips with its housing crisis. There  was a very interesting article in Spiegel Online on 26.11.2015 outlining plans being floated by Germany’s coalition government, namely via the CDU’s “iron-fisted” finance minister Wolfgang Schäuble, to help relieve the pressures on housing in many of the country’s major cities. Read on to find out what the coalition is proposing and how project developers and industry insiders have responded to the revelations.

 

Project development – ignored so far

It’s no secret that Germany, and in particular the country’s large and populous metropolitan areas, are facing something of a housing crisis. The main problems (and the solutions that have so far been introduced, or floated, to deal with them) are as follows:

  • Rents are on the up—the Mietpreisbremse “rental brake” limits increases to 10% above comparable local rents.
  • Comparable local rents (i.e. the basis for the Mietpreisbremse) are difficult to determine—legislation will be introduced to make sure that Mietspiegel (rent indexes) more accurately reflect current rental housing markets.
  • Tenants have been “fleeced” for years—they’ve had to pay rental agents‘ commissions, even though the agents were normally working for a property’s landlords, not its tenants. The Bestellerprinzip introduced the principle that the party commissioning a rental agent’s services should pay for those services.
  • Speculators have been “snapping up” residential portfolios and driving prices (and rents) up—an anti-speculator tax of 19% on real estate deals involving more than 50 residential units has been proposed in some cities to pour cold water on an overheated market.

The tone of the language used here has deliberately been chosen to reflect some of the rhetoric employed by politicians (usually SPD and Green), tenants‘ associations and commentators.

As you can see, the first three measures (included in this year’s modified Tenancy Act) are all aimed at making life easier for the huge number of tenants in the country. They (should) either reduce housing costs, reduce the rate at which housing costs are rising or add transparency and consistency to a market with strong regional variations.

 

All investors are not equal

The fourth measure above, at this stage still an idea up for discussion, rather than a certainty, takes a completely different approach. If enacted, it would be the most explicit attack yet on those who have been identified by many as drivers of spiralling housing costs—investors. It’s interesting to note that the specific focus of this 19% tax would not be all investors, just those investors who acquire large numbers of apartments from within the existing housing stock. There has been a process of portfolio building and consolidation over the last few years and, if anything, the pace of this process has picked up again recently. Such a tax, if certain politicians are to be believed, would put an end to these developments and make it more difficult (or at least more expensive) to buy packages of rental apartments.

Many larger transactions have been structured as share deals over recent years. One benefit of such deals is that they minimise transaction costs, for example by circumventing property transfer taxes (Grunderwerbsteuer) as it is shares in real estate that change hands rather than the real estate itself. Many of these deals are being examined by tax authorities to ascertain whether taxes have been incorrectly avoided. Some are predicting the potential end of real estate share deals altogether.

 

Project development – tax incentives are on their way

So, lots of measures that protect tenants and make life for landlords and investors more difficult. But as these changes are all targeted at existing housing, none of them are going to deliver the new apartments that are required at a rate of up to 400,000 per year. As stated in the article in Zeit Online, “only” 260,000 apartments will be completed this year, 120,000 of which are rental apartments—quite a shortfall. So what is the government now planning in order to engage developers and private investors? After all, they are the only ones who are able to deliver such a boom in housing construction.

Schäuble’s statements so far have indicated that the coalition government is well aware of the urgent need to boost housing construction, particularly in the social and affordable segments, and is willing to take action to spur investment. Possible measures include:

  • Special tax write-downs (Sonderabschreibungen) of up to 10% for costs associated with the construction of rental apartment buildings (but only between 2016 and 2018, and only in areas with overheated housing markets).
  • Suspension of property transfer tax (Grunderwerbsteuer) for developments covered by the tax write-downs above.
  • Fast-track planning and building permit processing to speed up the development of pipeline projects.
  • Relaxing the “overly strict” building codes in order to make it easier to expand buildings upwards, or to have buildings with larger footprints and more floor space.
  • “Watering down” (at least temporarily) a number of the demanding energy-efficiency requirements for new buildings in order to reduce construction costs.
Glossary:
to float (a proposal/plan): unterbreiten / vorbringen
on the up: steigen
to fleece (someone): jdn. prellen/schröpfen
to snap up (something): aufkaufen/ergattern
overly-strict: übermäßig streng/allzu strikt
to water down: verwässern/abmildern

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