Cash-strapped German councils are selling their homes to private investors


Fri, 22 Aug 2008 | By Simon Brandon

Cash-strapped German councils are selling their homes to private investors. Simon Brandon looks at how the shift from not-for-profit provider to moneymaking venture is affecting communities

Stock transfers have proved extremely controversial, so try to imagine the reaction if the largest local authorities in England were to sell their housing stock to private investors.

It is unthinkable. But over the past decade, almost 850,000 publicly owned properties in Germany have been sold to foreign private equity firms and real estate investment funds.

Two years ago, Dresden became the first city in Germany to offload all its public housing stock in a deal with New York-based private equity firm Fortress Investments. It sold 48,000 units for €980 million – around £20,000 per property at the time. That would be worth £772 million at today’s exchange rate.

That deal was eclipsed in June this year. The municipality of North Rhine-Westphalia, Germany’s most populous region, sold 95,000 units of its public housing to the Whitehall Fund, a real estate investment vehicle owned by Goldman Sachs, for €3.5 billion (£2.8 billion). That works out at around £29,300 per property.

Unsurprisingly, this has not been welcomed by the region’s tenants. ‘We have lost much public control over public housing in our region,’ says Knut Unger, a spokesperson for the Ruhr Tenants’ Forum, a coalition of tenants’ groups in North Rhine- Westphalia set up to oppose the sale of the region’s public housing. ‘The housing and neighbourhoods are now directly controlled by foreign investors and are therefore affected by global financial conditions.’

But that is not the main concern of Mr Unger and his fellow activists. The shift has been from not-for-profit landlords to very-much-for-profit owners, and it is a change that they believe will soon be felt by tenants.

‘These new owners are driven by returns, not social investment,’ he adds. In North Rhine-Westphalia, community investment by its former public housing company, LEG, has been crucial. Much of the region’s public housing was built by Neue Heimat (New Home), a huge not-for-profit housing association owned by a group of trade unions, in the decades before it became bankrupt in 1986. The local authority, through LEG, bought Neue Heimat’s stock, much of it consisting of sprawling estates, for a nominal one Deutschmark.

The estates have had their share of social problems since as a result of their size. ‘LEG was very active in social renewal processes in some of those neighbourhoods,’ says Mr Unger. ‘We fear that social investment will decrease. We have to fear this because it is not very profitable to engage in social management.’

And profits were the reason behind Whitehall’s purchase. Neither Whitehall’s parent company, Goldman Sachs, nor Fortress Investments, would comment on their roles as landlords or on how they plan to maximise their profits from the deals.

Barbara Steenbergen, head of European Union liaison at the International Union of Tenants and a former policy maker with the German Tenants’ Union, has a few ideas however.

‘Their first strategy is to sell the best units to tenants. The second is to increase rents where possible – public housing rents are almost always below local comparative rent levels. Third, investment – especially in maintenance – is frozen,’ she explains.

The new owners have not had all this their own way, however. Each purchase was conditional on a ‘social charter’ that set limits on how far rents could be increased and set minimum levels of neighbourhood investment.

But it hasn’t been enough, believes Mr Unger. He claims that the social charter’s regulations around rents have applied over the whole country rather than on a regional basis, which has given the new owners opportunities to increase rents in some areas where they were lower than the nationally calculated average to begin with. In cities such as Dusseldorf and Cologne, he says, public housing rents have increased considerably, while investment has decreased across the board.

‘In many cases, a yearly investment of €25 per square metre has been lowered to €15,’ says Ms Steenbergen. ‘This is how you make money.’

As in the UK, however, public housing in Germany is not simply about low rents and pleasant neighbourhoods. It plays a much wider social role – Ms Steenbergen calls it a ‘pillar of the welfare state’. When Germany was suffering from a lack of housing in the 1980s, it was the municipal housing companies which invested in new stock.

‘It was not about a return to shareholders but a return to society,’ says Mr Unger. ‘It was because they had a political task to solve social problems.’

He adds that German public housing has traditionally provided homes for more vulnerable groups such as immigrants and those at risk of homelessness. If public housing disappears, he argues, so will its social contribution.

Cash isn’t king

But all is, perhaps, not yet lost. Germany has not been immune to the credit crunch and its effect on housing markets. The new private owners’ first moneymaking scheme – to sell the best properties to tenants – is not going entirely to plan.

‘They [private investors] saw how successful the right to buy was in the UK and thought everyone would want to buy, but they did not see that many tenants in these properties live on low incomes,’ says Mr Unger. ‘They overestimated their chances. Companies like Terra Firma [a UK private equity firm which now owns former public housing built for workers in state-owned industries in Germany] had to learn, when the mortgage crisis hit, that they couldn’t increase rents too much and they couldn’t sell privately. They changed tack. They have a midterm, rather than a short-term, strategy now: they are building proper housing companies.’

Through its subsidiary Deutsche Annington, which owns 220,000 properties, Terra Firma is now one of the largest private landlords in Germany. A spokesperson for DA confirms that the company has had to move with the times: ‘Over the past three years, we have adjusted our strategy to reflect market conditions,’ she says. ‘Under current market conditions, it makes more economic sense in many cases to retain the flats in the portfolio.’

The spokesperson adds that DA is ‘first and foremost a socially responsible portfolio owner’, although the company declined to answer questions about the rents it charges and the amount of investment it makes in its properties.

Nor have all sales gone through unhindered. Tenant activists have attempted to organise referenda to force each sale to a public vote; the city of Freiburg has had to put its sale on hold as a result.

Referendums in Germany are highly regulated and tricky to organise, however. With enough signatures a referendum can be forced – but only those with a German passport and eligibility to vote can sign the petition. As Mr Unger points out, many public housing estates contain large – and ineligible – immigrant populations. So he and his fellow activists are looking to the future instead. ‘We have to think now how a not-for-profit housing sector can be built again,’ he says.

He’s got a few ideas. The seeds might lie with giving Germany’s housing co-operatives, which between them own 2.5 million properties, and the smaller municipal housing companies that have slipped under investors’ radars, the incentives to build and invest.

‘They have problems finding low interest rates on capital markets,’ he says. ‘They are handicapped compared to private equity firms – so how would it be possible to get access to capital for these organisations?’

Tighter regulations on private landlords are also now necessary, he believes, to force them into investing more in neighbourhoods, for example. And finally he is calling for tenants to join hands and mobilise at a much greater scale, across Germany and across national borders, too. ‘We have tenants organised at a neighbourhood level – but our landlords are now global companies,’ he says.

For now, though, tenants’ groups will continue to fight against the privatisation of Germany’s public housing stock, more of which is expected. While the repercussions for communities and local authorities are at this stage more fear than reality, what is beyond doubt is that a pillar of the country’s welfare state is eroding fast.

The extent of the damage it will cause remains to be seen.
Right to rent: public housing in Germany

‘It is very attractive to be a tenant in Germany – the houses are good quality, often in city centres and they are well-maintained,’ says Barbara Steenbergen, of the International Union of Tenants. ‘Many people choose to be a tenant.’

Indeed they do. According to Ms Steenbergen, 57 per cent of all German households live in rented accommodation. Only Switzerland has a greater proportion of renters.

There are 2.6 million properties remaining in public ownership following the sales, she adds. It is not quite social housing as we understand it in the UK, however; while public housing is offered at reasonable and limited rent, and is prioritised for low-income households, middle earners can apply too. Social housing’s strict equivalent in Germany is a system of subsidies for which anyone – private or public tenant – can apply.

But the 2.6 million households in public housing all benefit from controlled rents and a not-for-profit landlord with a vested interest, as the local authority, in investing in their neighbourhoods and communities.

‘Public housing companies don’t just care for the houses, they look after their neighbourhoods, parks, playgrounds and green spaces,’ Ms Steenbergen says. ‘You won’t see a lot of difference between public and private housing estates in Germany.’
Why sell?

What has prompted the municipalities to sell their housing stock? The main reason is debt. Local authorities have been struggling with large deficits since German reunification in 1990. A 1997 report by Germany’s central bank noted that ‘public debt has soared since the beginning of the 90s, mainly because of the fiscal consequences of unification’.

When the Berlin Wall came down, East Germany was dilapidated and poor. After unification its local authorities bore much of the cost of its reinvigoration, while in the richer west municipalities struggled with the cost of accommodating a flood of east Germans seeking work and a better life.

‘Public budgets in Germany are very stretched after reunification,’ says Ms Steenbergen. ‘If they [local authorities] get an offer like this they will take it.’

In 2006, Dresden rid itself of its public housing and its debt in one swoop.

But Ms Steenbergen believes that by selling their housing stock, the municipalities are only creating problems for themselves in future. The right to decent housing is enshrined in Germany’s constitution, and while local authorities have relinquished their housing stock, they still have a legal responsibility to provide affordable housing to those that need it.

‘This is no sustainable solution,’ she says. ‘When there is a shortage of affordable housing, the owners will sell it back [to the local authority] at a high price… North Rhine-Westphalia will have a lot of problems in future.’