The German rental market
With a share of nearly 55 % of the total housing stock, the rental housing market in Germany is one of the largest in absolute numbers in the EU. Given its eminent role in housing provision, policies concerning modernization of the rental housing infrastructure, especially energetic retrofitting, play a crucial role in the national energy efficiency policy.
A large share of the rental housing stock has been built in the postwar years of economic recovery and, given its age, is due for deep retrofitting right now. Given the rather simple and highly standardized construction methods of the time, this should allow for a quick uptake of modernization activities.
Despite these facts, energy efficiency modernization rates are lower than necessary in order to achieve Germany’s carbon reduction policy goals in the building sector. Studies show that annual investments in energy efficiency in the institutional rental housing industry only are short of about 4 billion € annually.
On the demand side, this can be attributed to the regionally different demographic situation. In most non-urban housing markets, the long term aggregate housing demand is decreasing, despite recent demand peaks in booming central cities. With negative real rent growth rates investment levels were hard to raise to the level needed for deep retrofitting during the last decade. In the recent market up cycle, rent levels seem to adjust not only in all major urban markets but also in second tier cities. Together with low capital costs, this may boost retrofitting investments in the housing sector.
1 Policy goals
Based on the European 20-20-20 goals, i.e. the 20 % reduction of CO² emissions, the 20% increase of renewable energy sources and the 20% increase of energy efficiency until 2020 the Energy Concept of the German Government (2010) foresees climate neutral new construction latest in 2020.The whole housing stock shall be nearly climate neutral until 2050. This will be achieved by reducing the primary energy demand by 80% compared with the base line of 2008 and a reduction of the heat demand within the stock by 20% until 2020 and the doubling of the modernization quota of the construction heat protection increased to 2% for the whole stock. This shall be in line with the reduction of the green gas emissions by 40% until 2020 and by 80% until 2050.
The main driver for energy efficiency is the EPBD and it transposition into German law: it is foremost the Energieeinsparverordnung-EnEV – which has been tightened several times thus demanding increased efficiency of new construction and existing stock. Recent Civil Law changes have been made in order to give better incentives to the landlord to invest into energy efficiency modernisation. Local funding programmes next to those of the two big federal funding institutions the KFW and BAFA-see under 3.3- are at the discretion of the each municipality.
2 Housing stock typology
Relevant model buildings for the private rental housing sector are all multi-family houses.
The typologies consist of the following elements:
· a classification concept for existing residential buildings according to age, size and further parameters,
· a set of example buildings which represent specific building types of the national stocks,
· typical energy consumption values for the example buildings,
· showcase calculations of the possible energy savings,
· statistical data for buildings and supply systems.
RentalCal will use the stock typology approach as a starting point for the calculation of energy efficiency investments and savings in the rental housing sector. In addition, the typology framework will allow for calculations of aggregate investment data for the rental housing stock.
3 Structure of the German housing stock
The latest 2011 census data reveal that the total housing stock in Germany comprises about 40,5 m units, of which about 18.7 m are single family houses (detached/semi-detached and row houses) and 21,8 m are in multi-family buildings. Homes in multi-family buildings add up to 1.500 m sq.mt net habitable area, or roughly 40% of the total residential area. Most of the multi-family buildings are rather small: only about 20 % of the area in multi-family buildings is in large dwelling units (13 and more units).
Efficient energy retrofitting measures of the housing stock are bound to lifecycles of structural components. Thus, the age distribution of the housing stock is a crucial factor for investment policy frameworks. In Germany, most of the housing stock can be attributed to three distinct construction periods: first, housing of the Wilhelmine era of rapid urban growth, second, housing from the post-WW II periods of reconstruction and following economic and demographic growth, and, third housing from the post-unification period that was mainly driven by westbound migration from Eastern Germany and Eastern Europe. While most housing from the third period is not yet subject to major lifecycle bound modernization activity, the post war housing stock is predestinated for deep energy retrofitting.
4 Energy performance data of the housing stock
According to the 2011 census data about 86 % of the residential buildings (81 % of dwellings) are supplied by central building or apartment heating systems, 5 % of the buildings (13 % of the dwellings) by district heating and 8 % of the buildings (6 % of the dwellings) by room heating systems (e.g. stoves or electric storage heaters). About 49 % of the dwellings are mainly heated by natural gas, 28 % by oil, 13 % by district heating, 4 % by electricity, 4 % by biomass, 1 % by coal and 1 % by environmental heat (via heat pumps).
More than 60 % of German residential buildings are of single-leaf brickwork, about 30 % of cavity walls. The fraction of timber work and half-timber is about 7 % and of panel buildings about 2 %.
5 Modernisation activities
In 2009 the state of thermal modernisation of the German residential building stock was about 21 %. That means that 21 % of the thermal envelope area of the building stock (related to the area of all walls, roofs or upper floor ceilings, ground floors or cellar ceilings and windows) had already been modernised. The respective area-weighted annual rate of thermal modernisation was in the magnitude of 0.8 %/a (mean value 2005-2008). This rate is defined as the area of building elements (walls, roofs/ upper ceilings, ground floors/ cellar ceilings, windows) which is in a year provided with improved insulation divided by the total area of those elements in the building stock.
The annual rate of modernisation of the main heat generator could be observed in a magnitude of 2.8 %/a (mean value 2005-2009), most of the new installed heat generators (about 83 %) were gas or oil boilers.
Energy consumption rates vary over construction periods. The highest annual consumption can be observed in residential buildings of the inter-war and postwar periods. In the same time, deep renovation measures return highest energy savings in these periods. Even after accounting for comfort increases and rebound effects, effective savings reach up to 40 % lower average consumption levels. Since the first energy savings ordinance of 1979, consumption rates for new constructions keep falling steadily.
6 Ownership structure
On the supply side, the highly fragmented ownership structure restrains modernization activities. About 40 % of the rental housing stock is property of individual private landlords and another quarter is held by condominium associations. Private property holders face specific disadvantages like poor economies of scale, high risk aversion, a lack of knowledge and possible capital constraints, compared with other investor groups. But even within the institutional housing industry’s main pillars – private companies, public housing and cooperatives – investments in energy efficiency face specific constraints: knowledge on green value issues is still poor and split incentive barriers, also due to social concerns increase payback periods. On the other hand, investment periods decrease due to the ongoing internationalization of the institutional housing sector in Germany.
Viable market solutions for energy efficiency investments both need secure rental incomes, a viable tax regime as well as social and legal stability. Given the increasing attractiveness of direct foreign investments in the German housing market, some of these prerequisites are being fulfilled. It is the scope of RentalCal to see how to improve the others.
The ownership structure where private landlords prevail and foreign investments increase reflects the relevant stakeholders.
According to the most actual 2011 census data, Germany’s total housing stock comprises about 40,5 m units, of which 55 % or roughly 22 m are rental housing. Of this share, more than two third or about 14.5 m units are held by individuals as private landlords or as members of condominium associations. Public, i.e. predominantly municipally owned housing companies hold another 11 % of the rental housing stock. Although these companies lost their public interest status in 1990 that allowed for corporate and real estate tax exemptions, these companies do still hold the major share of social, i.e. rent controlled housing units, and do still try to maintain special social and ecological CSR policies. Due to ongoing privatization policies of public bodies, the share of municipal, federal and state level housing companies is decreasing. Yet 9 % of the rental housing stock is owned by private corporate housing companies, an increasing share of which are held by international investors. An equivalent share of the rental market consists in cooperative housing companies that operate under a special tax regime (e.g. no corporate tax). Only minor stakes of the rental housing stock are held by non-housing-related institutions, i.e. 4 % by corporations and 1 % by non profit organizations, e.g. churches.
8 Rental markets
With more than the half of the total housing stock, rental housing serves different social groups from low income to medium income levels. Nevertheless, rental housing is a mere urban phenomenon, with a market share of up to 80 % in larger cities but much lower figures in suburban and rural areas. This geographical divide is also visible within the ownership structure: In rural areas, rental housing is provided predominantly by private landlords in small units often partly inhabited by the owner. Professional housing companies that operate larger units or blocks can be found in medium sized and larger cities mostly. This general rule does not fully apply to Germany’s Eastern states, however, where formerly state owned housing companies often manage large scale housing estates in small towns too.
Although renting is not restricted to low income households, it is often the only accessible choice, with ownership being restricted to upper middle income households, given the usually considerably high down payments and transaction costs. Especially in urban markets with restricted land resources and strict zoning regulations, housing shortages drive up rents and reduce accessibility to the private rental housing sector for low income groups. Although rent regulations in Germany have always been designed to keep the interests between tenants and landlords balanced, restricted rights of contract termination –even in the case of outstanding payments, increase the risk premium of letting especially for private landlords. Thus, low income households often face severe accessibility risks within the private rental market.
High costs of labour, elevated construction standards and regulations together with restricted building land availability contribute to high housing cost burden rates in Germany. This might not be visible in the first sight with a mere 22 % of households who rent at market price faced housing cost burden rates of 40 % and more of the disposable income in Germany, compared to 26 % in the EU-27 in 2013 (source: EU-SILC), but this due to the relatively larger share of middle and high income households in the national rental market. Nearly 19 % of all households face housing cost burden rates of 40 % of the disposable income and more in densely populated areas in Germany. This makes Germany’s urban population housing costs third highest in the EU after Denmark and Greece, followed by the Netherlands (source: EU-SILC). Regional disparities are high, though. While market rents in Munich reach an average of 15 € per sq.mt and month, average rents in rural areas may be less than 5 €. Compared to other western European countries, unit rents in major cities are considerably lower, but this is offset by larger habitable areas per capita.
Rent setting in the market based rental market is – under certain legal restrictions – subject to individual price negotiations. However, since 2015 federal law introduced adjustable rent ceilings that may apply in specific regions with severe housing shortages. Tenancy in Germany is usually unlimited and can be terminated by tenants only within a three month period. Average tenure is about 5-15 years, depending from age and size of the household.
Rent termination by the landlord is highly restricted to extraordinary cases. During rent renewal negotiations, rent levels may be adjusted unilaterally by the landlord within certain limits (a moving average rent ceiling derived from the usual market rent levels of the last four years for equivalent housing in any given location applies). In addition, bilateral agreements on rent increases are legally possible, as long as cumulative rent increases stay below a 20 % increase within three years.
Operation costs usually are paid by tenants, with the legal obligation for full metering of water and energy costs by landlords. The operating costs ordinance limits the possibilities of what tenants can be charged. Full repairing and insuring leases are not legal in residential lease contracts. If agreed on by contract (flat rates or prepayment are possible) tenants account for heating and electric energy, (waste) water and garbage, inspection, maintenance and services, property taxes and insurance (related to the property), landlords for management, repair and renovation.
Average operational expenses in Germany amount to about 2 to 2.50 €, but may exceed 3 €, depending on the installation and service standards, adding about a third to net rental payments.
9 Financing and regulatory environment for energy efficiency measures
The discourse of the energetic modernisation as a crucial tool for contributing to the German climate goals increasingly stresses the social /financial dimension: who pays for the energetic investment? Who benefits? The main pillars of energy efficient investment policies in the housing sector are subsidies – in the first hand public subsidized loans. At present the main public funding schemes come from the federal government owned bank Kreditanstalt für Wiederaufbau. To al lesser extent, grants are available from different federal, state and municipal bodies. Taxation does not play an eminent role in facilitating investments. Requirements to capitalize modernization investments exist for all investments that lead to any substantial increase of the standard of the building. Linear depreciation allowance rates range from 2 % to 2.5 % annually. Any other costs are eligible for immediate write off or write off over a 5 years period. Thus, recovery periods are not bound to the working life of building components within the tax system.
Given the eminent role of the private rental sector, the reduction of split incentives in the rental housing industry is the second pillar of energy policy. The regulations dealing with the split of interests between landlords and tenants are those of the German Civil Law, the BGB. Basically, the legal system opens two different approaches: the cost approach and the rent-control-approach.
Choosing the cost approach, the landlord has the right to implement (amongst others) modernisation measures which induce sustainable savings of energy (heat and electricity) or water unilaterally. Modernization costs may be charged to tenants at an annual maximum of 11 % of the investment costs (net subsidies and maintenance costs). In competitive markets, effective rent increases usually are below that figure, though. The second approach allows an increase of the contract rent in case of modernizations up to the level that average market participants would pay for the improved comfort or energy cost reductions. In other words, energy efficiency may shift the rent ceiling upwards, thus incorporating “green” premiums in the legal system of rent control in Germany. Landlords have to evidence the existence and size of the market premium, though. In order to facilitate this, IWU has executed several research projects for the federal ministry of housing, that deal with the question how to empirically measure market premiums for energy efficiency in legal rent surveys that most major cities establish in order to facilitate rent renewal negotiations between landlords and tenants.
 In case of windows the availability of thermal protection glazing was considered.