Landlords

What can we learn from the German PRS?

Richard Rowntree - Paragon
|
22nd February 2021
Richard Rowntree 250

Although Brexit has seen the UK sever many of its ties to the EU, there is still much that can be learned from our European neighbours.

Differing housing models have been adopted across the continent with varying degrees of success, but it is the approach taken by Germany that has been pointed to as an example that the UK would be wise to emulate.

According to RentalCal, a German-based research project on energy efficiency in the European housing market, rental properties have a share of almost 55% of the German housing stock. This makes it one of the largest in absolute numbers in the EU and the size of the German private rented sector (PRS) is a clue to one of its interesting characteristics.

In Germany renting is viewed as a long-term choice for people across the income spectrum and only approximately 40% of Germans own their own homes compared to 65% in the UK, according to English Housing survey data.

So why is Germany different?

One notable difference is regulation that results in a high level of stability for German tenants.

Unlike the assured shorthold tenancies commonly used in the UK, properties in Germany are usually let on an unlimited timeframe where the required noticed period increases with the length of residency. Eviction is only possible where tenants are in breach of contractual obligations, such as significant rent arrears or damage to the property.

A cap on rents, introduced in 2015 and updated in 2020, means that rent may not exceed 10% above the local comparative rates when existing dwellings are re-let. The German Institute for Economic Research has found that this has resulted in a "measurable braking effect" on rent increases.

Like the UK, Germany suffers from housing shortages so, to avoid deterring much-needed investment in new housing, the rental price brake does not apply to newly constructed buildings. In order to maintain high standards, a similar logic is applied to modernisation and this helps to avoid the view of rented properties being a poor relation to owner-occupied. Where landlords have invested money in modernising a premises – this needs to be at least one-third of what a new building would cost and bring the property to a similar standard of a newly built home – they are exempt from the rent price break for the course of the first tenancy.

While I don’t imagine many UK landlords would welcome further regulation - our own research shows that two-thirds feel regulation makes it increasingly difficult to operate – changes that facilitate longer tenancies can benefit landlords as well as tenants.

Long term tenants can be more likely to pay their rents reliably, be respectful of the landlord’s property and help to positively contribute to the communities of which they are a part.

By speaking to UK landlords we know that many actively try to build positive relationships and keep good tenants – three quarters responded to a survey stating that the reason they were looking to decrease rents were to either secure longer-term, good quality tenants or keep the ones they have currently.

Unfortunately, however, although not as widely reported as stories of ‘rogue landlords’, there are a number of tenants who don’t always play by the rules. With landlord surveys also showing that almost 6 in 10 landlords have experienced a problem such as property damage, rent arrears or anti-social behaviour in the past 12 months, it is clear that any regulation should be balanced to protect landlords and tenants alike.

Another important aspect of PRS policy in Germany is taxation where investment in the PRS is encouraged with a range of tax incentives.

German landlords can offset any expenses resulting from rental income against their taxable income from rent. This includes mortgage expenses in addition to costs for maintenance, improvements and repairs and depreciation.

In addition, profits from the sale of properties that have been privately owned for more than 10 years are exempt from German Capital Gains Tax (CGT).

In stark contrast to proposals that will see UK landlords subject to further taxation through increases to CGT, this encourages long term investment in the German PRS, something which can be linked to a more professional landlord base who manage higher-quality portfolios.

Commentators trace attitudes to renting in Germany back to the period immediately after the Second World War and fully understanding them requires us to explore varied and complex factors.

But it is in adopting this attitude that we can learn most from Germany – a housing model where tenures are not pitched against each other and the population can move fluidly between them in response to their needs and not a preconceived idea of status.

This is not a new idea, in the 2009 Mortgage Market Review, the FSA considered the benefit of ‘re-educating consumers away from the idea that renting is bad and homeownership good’, but it is one that could encourage long-term private investment needed to fill the gap created by a deficit in social housing supply.

By championing both landlords and tenants and being involved in discussions that result in effective policy, the sector can help to make renting a long-term choice for a diverse mix of people.

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