Housing modernisation: Landlord-tenant dilemma

If an investor is unable to realise a return because he does not receive repayment from the beneficiary of his investment for the newly created benefit, this is known as the investor-user dilemma. The legal requirements to modernise the energy efficiency of residential buildings in order to achieve the German government's climate targets by 2050 are a recurring problem. This is why the term landlord-tenant dilemma is also used in this context.

The dilemma arises when the market mechanisms that ensure an adequate return on capital for the investor are partially or fully overridden. In the housing market, this is often the case when government regulations on landlord and tenant rights or climate change come into force. Legal requirements may mean that the rent that can actually be achieved does not pay for the landlord's investment within ten years.

The landlord-tenant dilemma plays a central role in the current debate on how to spread the costs of energy-efficient modernisation of residential buildings in a way that is affordable for everyone. If the German government's climate targets are to be met by 2050, the building sector will have to make a significant contribution to CO2 avoidance. The public focus is on measures that usually require a high level of investment. For example, insulating the roof and walls of a house or upgrading the energy technology - for example, by installing a low-emission heating system.

The necessary investment is the responsibility of the building owner. At present, up to 11% of the investment costs for energy modernisation can be passed on to tenants in the form of an annual rent increase. In the dilemma situation, however, this repayment is not enough to justify the investment from a commercial point of view.

Housing modernisation - impact of the landlord-tenant dilemma on the sector

The legal regulations on energy modernisation and the possibility to pass on the rent for rented dwellings are controversial on all sides. According to the law, landlords are only allowed to ask tenants to pay the surcharge until the rent is increased in line with general price increases. The increased rent may not exceed the local comparable rent. However, this period is usually not long enough to amortise the investment. Rents in the residential market are already so high, especially in desirable locations in major cities, that it is not possible to add a premium for energy-efficient modernisation within the legal framework. In less popular locations with high vacancy rates, on the other hand, it is often almost impossible to push through a standardised surcharge on the rent in the market.

Tenants' associations, on the other hand, criticise the fact that high surcharges force tenants out of their homes, while the energy benefits of refurbishment and modernisation are often questionable. Citing a study of 200 modernisation projects, the Berlin Tenants' Association criticises the fact that in most cases the savings in energy consumption do not offset the increased burden on tenants. The German Tenants' Association is therefore calling for the abolition or at least a significant reduction in the annual surcharge of 11 per cent of modernisation costs.

Cost Ratio: Energy Saving & Home Improvement

At 40 percent, the building sector's contribution to the German government's 'Climate Targets 2050' is enormous - the need to renovate Germany's housing stock to make it more energy efficient is leading to intense debate about how the burden can be shared fairly between landlords and tenants.

Landlords and tenants face an investor-user dilemma. The investment costs incurred by landlords for energy-efficient renovations can rarely be covered by the eleven percent levy on rents. On the other hand, tenants' associations warn that the actual energy savings will not offset the cost of upgrading the homes and could lead to a widespread loss of acceptance of the energy transition and climate targets.