In Berlin, there is once again serious talk of expropriating large private property owners, but this time the plan is no longer merely a referendum proposal: it has become part of the negotiations to form the new government of the German city-state.
Following the victory of the radical left-wing party Die Linke in the regional elections on 20 September, Sunday, the party reached a preliminary agreement with the Social Democrats (SPD) and the Greens, which provides for the transfer to public ownership of around 150000 flats belonging to the largest private property companies, with total compensation not exceeding 16 billion euros. The scheme applies to companies owning at least 10000 homes in Berlin, rather than the threshold of 3000 set out in the original proposal.
The consequences could extend far beyond Berlin residential property market. A Scope Ratings report of the analyst Mathias Pleissner says that the nationalisation of properties under the terms of such a project could push down 60% the book value of the assets and completely wipe out the net worth of the property owners with more debt whilst the proceeds from the nationalisation would not be sufficient to repay the whole liabilities.
The move could call into question the mortgage guarantees protecting creditors and the legal certainty that is a foundation for the German Pfandbriefe market. These mortgage-backed bank bonds are some of the safest instruments on the European market.
According to the agency, the socialisation could affect around 14 billion euros of Pfandbriefe collateral, equivalent to less than 3% of the total warranty. In quantitative terms, therefore, the exposure would be relatively limited compared with the size of the market. Indeed, the agency does not foresee any immediate consequences for the credit risk of Pfandbriefe, as the collateral portfolios are diversified and the loans generally have sufficiently prudent loan-to-value ratios. Banks should therefore be able to replace any underlying assets that may be affected.
The real risk, however, lies in the legal certainty of the property collateral. If the mortgages were to be discharged, the issuing banks would have to replace the assets in the cover pools that no longer meet the collateral requirements with other eligible loans. Furthermore, the loss of the collateral could enable borrowers to demand early repayment of their mortgages.
Large property owners may thus repay or refinance debts before their scheduled due dates, at a time when they have lost the properties used as collateral and received compensation that is potentially below market value. The risk would therefore be a liquidity crisis, with the possibility of a rise in insolvencies amongst property borrowers. Furthermore, investors might begin to question the actual reliability of mortgage guarantees in other contexts as well, reducing the attractiveness of such instruments and demanding higher returns.
The timetable that Scope reported says that the financial plan may finalise in 2027 ahead of a mid-2028 draft bill submission while property transfers may start in than 2029. Furthermore, Die Linke will have to decide on 31 October, Saturday, whether to formally proceed with coalition negotiations. The previous agreement is not yet an approved law or a final decision on expropriation.
The German federal government also expressed its opposition to socialisation, raising the possibility of introducing legislation to restrict it. The political debate and potential appeals to the Federal Constitutional Court remain open.
