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Overview of the residential property rental market in Berlin

Berlin has a total population of 3.44 million and with over 85% of people in the city renting it makes a rental population of over 2.9 million. As 90% of the population live in multi-family buildings with an even higher rental rate in this type of properties roughly 2.65 million people live in 1.7 million rented multi-family homes at a density of 1.6 residents/dwelling.

Rental practices in Berlin, as in the rest of Germany, are well established, well regulated and form an efficiently managed part of the housing sector. As renting dominates the housing market, particularly in Berlin, there are many well established companies offering services for all aspects of the market. These include Building and Tenancy Managements companies, Facilities Management and Repair, Property Rental, Snow Clearance etc. It is even possible to get insurance for legal and refurbishment costs incurred during the eviction of non paying tenants.

Most tenancy agreements in Berlin are open ended and referred to as permanent, properties are almost exclusively "Un-furnished" and typically include modern bathroom equipment and heating but with only the basic kitchen facilities with tenants normally installing their own kitchens. This tendency reflects the practice of residents to stay in the same rented property for a very long time. There is an old adage that "Germans" own their cars and their kitchens.

Tenants have extensive rights including security of tenure, assurance of rental rates and protection from hardship due to unfair landlord practices.

To ensure that new tenants are suitable references are normally required when a new agreement is being taken out. This would include evidence showing the ability of the tenant to afford "All Rental Costs", verification of their current salary (including copies of wage slips etc) and evidence provided of a good history of prompt payment of rent to their current landlord. While this may appear to be an excessive intrusion it is common practice and with so many rights given to tenants these are one of the key checks available to landlords for their protection against repeat defaulting tenants. Ensuring the identification of a tenant is also essential and it is allowed to ask for and keep a copy of their Identification Card/Passport.

Types of Tenancy Contracts: There are two types of property rental contracts temporary "Fixed Term" and indefinite "Permanent" contracts (most rental contracts are indefinite). Fixed term residential contracts are rare and can only occur under a "Qualifizierter Zeitmietvertrag" - "Qualified Term Lease" where the landlord has a reason for limiting the term (eg. Where the property will be required by the landlord or dependant, or where the property is to be demolished, at a known date in the future).

With this contract the tenant has equal rights as an indefinite lease apart from the period limitation.

Indefinite residential rental contracts are the default residential contract and provide a permanent right of residency unless the tenant defaults on rental payments or fails to comply with the terms of the contract (eg, operating a business from the property or sub-letting the property).

Standard tenancy agreements are used in many cases as the terms for a life long residency agreement.

Where a particularly low rent has been maintained in a desirable area which bears no relationship to current rental rates existing tenants who need to leave Berlin temporarily may sub-let to maintain the terms of their original lease, while this is usually barred in any lease agreement it can still occur.

Facts about renting in Berlin.

The tenant can terminate the contract at any time providing the agreed notice period originally set in the contract (typically 2 or 3 months).

A tenant has protection against eviction unless the landlord has a legally recognized reason, this includes Serious violations of the lease agreement in particular the non payment of rent, allocated operating costs or uses the property in a manner contrary to the terms of the lease (ie uses it for a business or sub-lets).

There are two main conditions where a compliant tenant can be evicted:

Where eviction is necessary there is a minimum notice period which is: 3 months for a residential period of up to 5 years, 6 months for a permanent home of more than 5 years and 9 months where the residential period is more than 8 years. If a tenant fails to leave after the notice period it is the Landlords responsibility to serve notice in the courts to evict the tenant, the tenant has rights to resist eviction and it may be possible for the tenant to retain residentcy if they can show that the hardship to them would be greater than that of the landlord.

There are limitations to the maximum rent that can be charged for a particular property. These are defined within the "Qualified Mietspiegel" rent index.

The applicable "Rent Index" for any dwelling is based on a representative cross section of local residential lettings taking into account; the year of construction, size and features of the property.

some of the most desirable areas of Berlin certain properties my only be made available at a greater rent than the "Maximum Rent Index Amount", in this case a commercial rental agreement can be set-up which bypasses the problem of maximum rent limits for the most excusive properties but does not provide the same protection to the tenant.

The maximum rate of rental increase and the frequency of rent increases. Landlords are generally allowed to increase rents by up to a maximum of 20% in any 3 year period. No more than one rent increase in any 15 month period is allowed unless an increase is due to the approved Modernization/Upgrading of the property. The increased rent level must comply with the rates for the property established in the appropriate "Qualified Mietspiegel" (Rent index). The notice period for a rent increase is up to three months, the month in which the rent increase notice is issued plus the next two months. Separate rent increases are not permitted where an indexed lease contract or a fixed rent has been agreed.

Tenants "Right to Buy", where conversion of a Multi-Family House into smaller holdings occurs through the sale of individual dwellings existing tenants must be offered the option to buy based on the Notarised conditions of sale of the property he is a tenant in. The option to purchase is valid for 2 months however completion can be carried out before this notice period pending notification from the tenant of his intent not to buy. Where transfer of ownership occurs all existing tenant rights transfer without change to the new Owner/Landlord.

Property Repair and Modernization/Upgrade expenditure that can be passed on to tenants as rent increases.

When considering whether costs can be passed on through rent increases costs spent on "Repairs" and "Modernization/Upgrades" should be considered separately.

Where Repairs are carried out on a rented property these costs cannot be passed on as rent increases as in principle the repairs are part of routine expenditure and by there nature do not offer any additional benefits to the tenant.

Where Modernization/Upgrade is to be carried out on a residential property the tenant must be notified in writing at least three months in advance of any construction commencing. This notice should include details of the modernization/upgrade and how long it will take, when work will commence, what interference may be caused to the tenant during the construction and the projected increase in rent resulting from the upgrade. The tenant can be charged an increase in annual rent of up to 11% of the capital cost of modernization/upgrades, details of the expenditure should be provided to the tenant to support application od the increase in rent. A tenant is within his rights to abject to the construction if they will suffer unacceptable hardship as a result, hardship can be cited where the construction itself causes hardship or where the projected rent increase to the tenant is not affordable. A petition to the court can be made by the landlord to force a tenant to accept the modernization/upgrade or to terminate the tenancy. No work can commence before approval by the tenant for the work or a court has given judgment in favor of the landlord that the construction can be carried out.

Increasing the rent level is forbidden in any case where the landlord has financed refurbishment of the property using subsidised loans provided by the local authority.

Some Key Words

Nettokaltmiete (NKM) "Net Cold Rent" The basis rent per month without operating or heating costs. The tenant pays this amount for living in the apartment. Generally the tenant also has to pay directly the utilities like electricity and gas separately.

Wohngeld "Maintenance Fees" The term is indicative of a "social entitlement" and in Berlin, with its high percentage of social housing, it is still used to describe the costs allowance paid to those entitled to housing support. The level of Wohngeld for an individual dwelling is specifically defined and controlled by the local government administration.

However, as it has been mostly used throughout Western Germany, it is also normal to use the term to define the tenant and landlord costs of an individual dwelling. Typically this is paid by the landlord of an individual dwelling to the building management company from the net rent and operating costs paid to them by a tenant.

Gesamtmiete "Total Rental Costs" is a single figure usually used for rental properties where all costs, usually only excluding electricity, to be borne by the tenant are included.

Bruttokaltmiete (BKM)/ Gesamtmiete "Gross Cold Rent" The base rent per month including operating expenses, but excluding heating costs which are usually paid directly by the tenant/occupant.

Bruttowarmmiete (BWM) "Gross Warm Rent" The base rent per month including operating and heating costs. Operating a rental agreement based on BWM is most often used where a heating charge has to be pre-determined based on historical yearly use with a re-balance of the heating account on completion of the annual cost allocation for real usage. With the dramatic changes in heating charges now occurring this can result in an un-welcome shock at year end with the potential for a loss to the owner of any shortfall.

"Brutto" is an added complication in the calculation process as it includes Betriebskosten "Operating Expenses" some parts of these charges can be allocated to the tenant and some must be paid by the owner. Its historical use reflects the position rental plays in the property market in Berlin as its use defines costs more from the tenant's point of view bracketing all their costs in a single figure.

When reviewing/comparing costs it requires a little more to re-calculate rates. Where annual "operating costs" change over time the changes in items that the tenant is responsible and one's the owner is responsible for must be quantified separately and reallocated accordingly.

A more transparent method when setting tenancy agreements is the "Netto" principle where costs to be paid by the owner are separated out from the costs to be paid by the tenant. This makes it easier to see who pays when there are any changes to one of the operating costs. Also where a percentage increase in rent is to be applied this would normally be based on the Net Cold Rent and be more transparent.

Sample Rental Calculation Table for a single dwelling in a multi-family house

Rental Terms and Cost Guidelines: The figures for costs listed below are based upon the Betriebskosten "Operating Expenses" for Germany (for the year 2007).

Heizkostenvorauszahlung "Heating Costs" 0.85 Euro/m2. These are paid by the tenant and when listed in a rental schedule or income listing it indicates that there is a common heating system for the whole building. This cost is based on the projected annual costs aggregated out to each dwelling based on historical usage data. There should be an individual heating use recorder, typically fitted to all radiators for a water based systems, which will accurately record usage on a room by room basis so that at the end of the year a dwelling that has been only partially used will see a credit issued equivalent to the underuse.

Warmwasser "Hot Water" 0.22 Euro/m2. Where hot water is also provided as part of a common supply there will be a meter on the Hot Water Supply which will be similarly used for apportioning costs. There are difficulties with a heating "pre-payment" method where heating costs dramatically change during the period between true cost allocations.

Betriebskosten "Operating Expenses" and Nebenkosten "Service charges" are commonly used to refer to the recurring costs incurred in a rental property excluding the Net Cold Rent and Heating (water and room). While most of these costs will be passed on to the tenant there are some elements, such as Building Management charges, that cannot be passed on to the tenant and must be borne by the landlord. These costs are generally allocated using either the percentage area of a building that the individual unit covers, an a resident proportion basis or by the number of dwellings in a building depending on which classification best reflects how the costs are incurred.

Operating Expenses/Service charges can include:

Grundsteuer "Property Tax" 0.20 Euro/m2. Run by the municipality collected, in part, in rental contracts as "public detriment of the land".

Wasser/Abwasser Kosten "Water / Wastewater" 0.39 Euro/m2. This includes costs of metered water, the cost of a water meter including periodic calibration costs. Costs are based on individual usage where each dwelling has a dedicated meter or is allocated based on number of occupants or area. The drainage costs include the urban sewerage charges, this can include the costs of a private scheme, the cost of removal and cleaning of its own sewage tank. It also includes the municipality taxes, such as Sielgebühren "surface drainage".

Aufzug "Lift" 0.16 Euro/m2. This includes the cost of operating current, the supervision, operation, monitoring and maintenance of the elevator system, the periodic review of operational readiness and operational security, including the recruitment of a professional, and the costs of cleaning the plant and the cost of emergency preparedness. Excludes any repair costs.

Straßenreinigung "Street cleaning" 0.05 Euro/m2. These include the municipality collected fees and the costs of cleaning up the streets and sidewalks that are necessary. Also, the cost of winter service can hereunder.

Müllbeseitigung "Waste Removal" 0.18 Euro/m2. This covers the costs of waste collection, but also the ongoing costs for a rubbish chute, a garbage lock or other systems for the collection of waste quantities. No cost of waste disposal is, if containers are positioned to look for renovation or upgrading works rubble or go to dispose of bulky.

Hausreinigung / Ungezieferbekämpfung (House cleaning, pest control): This includes costs for cleaning the common areas ( for example, hallways, stairways, basement, laundry, etc) and the application of insecticide spray for pest control.

Gartenpflege "Garden and Play Area upkeep" 0.09 Euro/m2. Costs incurred for care of outdoor space including gardens, flowerbeds and the cleaning/maintenance of playground space. May include maintaining some interior decorative plant pots etc.

Gebäudereinigung "Cleaning of common areas" 0.14 Euro/m2. These are costs for the cleanup of shared parts of the building, such as entrances, hallways, stairways, basement, ground facilities, laundries or lift. As far as the tenant lease agreement, according to the obligation, the common rooms themselves at regular intervals to clean, no umlagefähigen building cleaning costs.

Allgemeinstrom/Beleuchtung "General Electricity/Lighting" 0.04 Euro/m2. These are the electricity costs for the external lighting and the illumination of shared parts of the building, such as entrances, hallways, stairways, basement, ground facilities and laundry.

Schornsteinreinigung "Chimney cleaning" 0.03 Euro/m2. Costs for cleaning chimney's where solid fuel heaters are used within an individual dwelling. There are still many older multi-family properties in Berlin which only have individual solid fuel heating systems.

Sach- und Haftpflichtversicherungen "Property and liability insurance" 0.12 Euro/m2. These are the insurance costs of the building against fire, storm and water damage, costs of the glass insurance, liability insurance for buildings, oil tank and a lift. Also costs for insurance against natural hazards, such as floods or earthquakes, are included in this group. However, it excludes the premiums for the legal protection insurance or household insurance of the landlord.

Hauswart "Janitor" 0.20 Euro/m2. Among the typical responsibilities are upkeep of common areas, staircases and street cleaning, garden maintenance, operation and monitoring of the hot water supply and the elevator.

Gemeinschaftsantenne/Kabelfernsehen und Breitbandkabel "Community Antenna/Cable TV and Broadband" 0.10 Euro/m2. The cost of the operation of the Communal systems for TV and operation of the broadband cable network.

Sonstige Kosten "Other costs" 0.05 Euro/m2. This can include the cost of a pool, a sauna and other community facilities in the house. Also costs for fire extinguisher's or gutter cleaning could be included in "other operating costs". All items included in this charge should be defined within the lease agreement.

Owner Cost Guidelines/Terms

These are the costs that are payed by the Landlord and cannot be passed on to the tenant, they should be deducted from the "Netto" Rent when calculating actual yield for a property. Many real estate agents will do this lovely little exercise where they quote yield at X%, based only on Net Cold Rent and list Nebenkosten/Service charges as an additional cost. For a more accurate calculation of true yield Net rent (cold) should be added to the Service Charges to make the Gesamtmiete/Total Rental Costs. Than the Wohngeld /Maintenance Fee from the Total Rent Costs producing a final figure of "Net Income" which should be the bases for calculation of true yield and which may is many cases be dramatically less than the Net Rent figure quoted for yield calculations. This little bit of creative accounting will be passed off as "the way it is calculated in Germany"!!!!. The effect is more notable where costs made up a higher proportion of the Total Rental Costs. (The Rental Property Examples shown above reflect how Income Rates can be affected by this).

As a comment many rented properties in Berlin have seen the Total Rental Cost's decrease dramatically over recent years (probably since the late 1990's), as the Service charges and the Wohngeld/Maintenance Fee have seen little change this has had the effect of leveraging the reduction in "Net Income" to the extent that many properties are only just about covering all costs and not a lot is left over for the landlord to cover their own finance costs even before the Black Hole of "Repairs".

Non performing rental investments, where rental income does not cover current finance costs, have resulted in more Zwangsversteigerung/Forced Sales in Berlin than anywhere else in Germany. In 2007 there was an increase of 9% in Bankruptcy Sales over the total for 2006 to nearly 3000 properties. It is expected that 2007 would be the peak year for these forced sales as the residue of over-financed properties work their way through the system to a much lower long term rate.

Landlord/Owner Costs explained

Management Costs. This covers the costs for managing the administration of a Building/Property and the management of the tenants in a property. Separate contracts may be held for each service however where properties are under single ownership it is likely that a single management contract will cover both.

/Hausverwalter/Verwaltervertrag "Management Costs / Building Manager / Management Contract", the building manager has responsibility for administrating all aspects of the building structure and the common areas with there primary responsibility the allocation and collection of costs from all owners in a building. They are responsible for maintaining building insurance, cleaning of common areas, building repairs etc. Costs for this type of contract are usually based upon a fixed cost per unit, typically €20 to €25 /month (ex Vat).

Sondereigentumsverwalten/vertrag "Individual Dwelling Tenancy Management/Tenancy Management Contract" provides for the management of the tenancy and internal structure of a single unit, they should also act as the agent for the owner in all dealings with the Building Management Company. Uict-Sonder-Verwaltung "Tenancy Management" is another general term for tenancy management and refers more to muiltiple tenancy management. Typical tenancy management costs are €15 to €20 Euro/Dwelling/Month (ex Vat).

Where a building/property has a single owner it is more likely that a single management contract covering both building and tenancy management will be negotiated. Costs can still be based on a set rate/unit or as a percentage of rental income. There are many veriants when using a percentage rate, including Net Cold and Actual Net Cold (this is based on real occupancy rates and should help focus attention on maintaining high occupancy rates), with typical costs from 5% to 7% of Net Rent.

Kostenverteilung bei Instandhaltungs/Instandsetzungs. "Allocation of costs for Maintenance/Repair" This covers costs for work carried out on the building and common areas and not within individual dwellings. These must be carried by the landlord and represents the principle "unquantifiable" cost of any investment. A good property manager should have detailed records of these cost's for a wide range od properties and be a good information resource when evaluating the likely returns of a potential investment.

Self manage or contract out?. It can be reasonably easy to directly manage an individaul property or small number within one building. However, even with reliable long term tenants, issues built up which require a more active role. At this stage it is proably best to have a professional look after these issues. While a full tenancy management contract may not suite where yields are low and added costs undesirable it may be possible to negotiate a contract which only provides for an annual review of the tenancy contract and the yearly update for the allocated charges which usually are completed by the March or April after the end of the year.

Failure to actively manage rental properties will result in poorer occupancy/lower rental rates, over time poor management can result in comparatively low rents. With the strong tenant rights that exist in Berlin it may be difficult to increase charges very quickly if at all. As property values in Berlin are so closely tied to rental income capital values and capital appreciation will suffer under poor tenancy management.

Instandhaltungsrückstellung "Maintenance Reserve": This is a fund built up over time by a community of owners within a multi-family residential building. The fund is there to cover the costs of both anticipated and unanticipated repair and upgrades to the fabric of the property. It does not cover any repairs/renovation for individual properties unless the work required is due to a failure that has resulted in damage that the community of owners would normally be liable for. It is a truism that the better quality properties in higher social class areas tend to be better maintained, have larger reserves and are overall better propositions when reviewing likely long term repair costs. As all repair costs come outside the normal costs for a rental property they are the responsibility of the owner and cannot be passed on to a tenant. Reserves serve to minimise issues of unpredicted expenditure/cash flow and protect the community of owners when an individual owner may be unwilling or unable to pay for a one-off large repair cost.

Further information on Building and Tenancy Management contracts are available at the Property Management page.