Market rent

Market rent is the rent normally generated or paid by the tenant on the basis of the current market situation on a property sub-market. It arises from the free play of supply and demand.1 Market rent is therefore the price to which a specific tenant agrees with a specific landlord for the use of the rental property. Objective, economic market circumstances, personal preferences, different negotiating positions and other subjective factors play a role in pricing.2
Institutional property investors forecast market rents as a significant basis of their cash flow calculations in property investment calculation. This forecast incorporates various factors such as:

  • A forecast of the development of the national economy (usually measured in terms of GDP growth)
  • An economic base analysis (analysis of the economic structure) of the micro or macro location of the property
  • Market demand for the typical types of space and use relating to the property
  • The market supply of comparable, competing space3

The market rent is distinct from the concept of “average rent for comparable dwellings in the area”, which is used as a basis for the “standard market income” when determining fair value under the German income approach. The average rent for comparable dwellings in the area, in accordance with section 558(2) of the Bürgerliches Gesetzbuch (BGB – German Civil Code) is “formed by the usual rents that have been agreed in the municipality or a comparable municipality for housing of a comparable type, size, furnishings, quality and location, including energy equipment and quality, in the last four years”.4

Except for price-controlled housing, in which only the cost rent can be set, rent can be freely agreed. This applies both to new tenants and to rent increases. However, as housing is particularly worthy of protection, legislation in Germany has set some limits.5
For example, section 5 of the Wirtschaftsstrafgesetz (WiStG – German Economic Offences Act) states that a new rental cannot exceed the average rent for comparable dwellings in the area by more than 20%, even if a higher rent would be possible based on the poor supply situation.6 In addition, there is a cap (known as the rent brake) for new rentals on strained housing markets, which means that rent cannot be more than 10% higher than the average rent for comparable dwellings in the area.7
If the average rent for comparable dwellings in the area is exceeded by more than 50%, the landlord could even be liable to prosecution for violating section 291 (exorbitant rent) of the Strafgesetzbuch (StGB – German Penal Code).8
For leases already in place, the landlord can unilaterally demand a rent increase in accordance with section 558 BGB unless contractually regulated otherwise. The conditions for this are that the rent has remained unchanged for 15 months, it increases by no more than 20% in three years and does not exceed the average rent for comparable dwellings in the area after the increase.9 If there is insufficient population with rental apartments at appropriate conditions, this cap is reduced from 20% to 15%.10

There are also legal caps for commercial and business premises. In accordance with section 138 BGB, the landlord can demand the current market rent, but this must not be clearly disproportionate to performance or contrary to public policy. However, the caps for this have been set much higher than for housing.11

  • 1 Vgl. Dröge, Ferdinand (2007): Miet- und Pachtverhältnisse. In: Sandner, Siegfried; Weber, Ulrich (2007): Lexikon der Immobilienwertermittlung, 2. Aufl. Köln, S. 436-437.
  • 10 Vgl. Usinger, Wolfgang; Minuth, Klaus (2014): Immobilien, Recht und Steuern. Handbuch für die Immobilienwirtschaft, 4. Aufl. Stuttgart, S. 757.
  • 11 Vgl. Dröge, Ferdinand (2007): Miet- und Pachtverhältnisse. In: Sandner, Siegfried; Weber, Ulrich (2007): Lexikon der Immobilienwertermittlung, 2. Aufl. Köln, S. 436-437.
  • 2 Vgl. Thomas, Matthias unter Mitarbeit von Brauers, Maximilian; Hocke, Stefan (2011): Immobilienbewertung. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 776.
  • 3 Vgl. Brueggeman, William B.; Fisher, Jeffrey D. (2011): Real Estate Finance and Investments, 14th edition, International Edition 2011.
  • 4 Kleiber (2014): Verkehrswertermittlung von Grundstücken. Kommentar und Handbuch zur Ermittlung von Marktwerten (Verkehrswerten) und Beleihungswerten sowie zur steuerlichen Bewertung unter Berücksichtigung der ImmoWertV, 7. Aufl. Köln, S. 1732.
  • 5 Vgl. Dröge, Ferdinand (2007): Miet- und Pachtverhältnisse. In: Sandner, Siegfried; Weber, Ulrich (2007): Lexikon der Immobilienwertermittlung, 2. Aufl. Köln, S. 436-437.
  • 6 Vgl. Dröge, Ferdinand (2007): Miet- und Pachtverhältnisse. In: Sandner, Siegfried; Weber, Ulrich (2007): Lexikon der Immobilienwertermittlung, 2. Aufl. Köln, S. 436-437.
  • 7 Vgl. Bundesrepublik Deutschland, vertreten durch das Bundesministerium der Justiz und für Verbraucherschutz (Herausgeber) (2015): Bürgerliches Gesetzbuch (BGB). § 556d Zulässige Miethöhe bei Mietbeginn; Verordnungsermächtigung. Abrufbar im Internet. URL: http://www.gesetze-im-internet.de/bgb/__556d.html. Stand: 26.09.2015.
  • 8 Vgl. Dröge, Ferdinand (2007): Miet- und Pachtverhältnisse. In: Sandner, Siegfried; Weber, Ulrich (2007): Lexikon der Immobilienwertermittlung, 2. Aufl. Köln, S. 436-437.
  • 9 Vgl. Bönker, Christian; Lailach, Martin (2009): Praxisleitfaden Immobilienrecht. Erwerb Finanzierung Bebauung und Nutzung, 2. Aufl. München, S. 222.
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http://www.corpus-sireo.com/en/glossary/market-rent
: 17.02.2019