Berlin Rent Control Plan Threatens Israeli Real Estate Investments

Berlin is considering a plan to transfer thousands of rental apartments from large landlords to public ownership, a move that could significantly impact Israeli investors who have heavily invested in the city's real estate market for over a decade. The proposed legislation, backed by left-wing, Green, and Social Democratic parties aiming to form the next local government, would require companies owning more than 10,000 apartments to transfer all units above that threshold to the municipality in exchange for compensation. The total compensation is capped at 16 billion euros, averaging around 100,000 euros per apartment, a figure considerably lower than the properties' book value. Apartments built since the beginning of 2021 are exempt. The law is expected to reach the local parliament by mid-2028 and take effect about a year later, potentially affecting around 160,000 apartments. Vonovia, with approximately 138,000 apartments in Berlin, would be the largest affected entity.

For Israeli investors, Adler Group, which owns about 24,000 apartments in Berlin, is a key concern. Adler Group, formerly ADO Properties, was acquired by the German Adler in 2019. If the plan is implemented as presented, Adler would need to transfer roughly 7,400 apartments, nearly 40% of its Berlin portfolio. The market has already reacted, with the price of the group's 2029 bonds falling significantly, as Berlin properties serve as collateral for its debt. Adler's stock has also been trading at low levels.

Adding to the complexity, ADO raised approximately 1.15 billion shekels from bondholders in Tel Aviv between 2015 and 2018, with a commitment to focus on Berlin rental apartments. The bond trustee recently filed a lawsuit for 118 million shekels against Adler, investor Joehdt Kaner, and management, alleging the company stripped its assets. Defendants have not yet filed defenses.

Yakir Gabay's Grand City Properties, with around 8,433 apartments in Berlin, is currently below the 10,000-apartment threshold and thus not directly targeted by the initial proposal. However, Gabay's exposure is indirect, through potential declines in Berlin property values and investor appetite for German real estate. A previous referendum in 2021 saw Berlin residents vote in favor of expropriating properties from landlords with as few as 3,000 apartments, indicating potential for stricter measures in the future.

Many smaller Israeli investors also own individual apartments or buildings in Berlin, often through companies that subdivided and sold units to Israeli buyers. While the current proposal targets large landlords, the broader discussion could influence apartment prices in the city. Meanwhile, the German federal government is reportedly working on legislation to block Berlin's plan, and Vonovia has stated the proposal is unconstitutional.