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Dresden Sells GDR Legacy, Eliminates Debt

DW staff (dre)March 9, 2006

In a highly-controversial move, Dresden on Thursday will become the first major German city to sell its entire residential real estate holdings. The buyer? A US investor. Tenants are concerned.

Dresden's low-income housing will soon be in a US company's controlImage: dpa

By the end of Thursday, Ingolf Rossberg will likely have accomplished in one day what German big city mayors have tried unsuccessfully for years to do: eliminate his city's debt.

The Dresden city council will vote Thursday on whether to sell the city's entire residential real estate holdings -- around 48,000 apartments -- to US investor Fortress Deutschland. The sale would bring the city 981 million euros ($1.17 million), more than enough to eliminate the 740 million euros of debt the East German city has accrued.

Ingolf Roßber
Good times for Ingolf RossbergImage: dpa

A model to follow?

Across Germany, other mayors will be following the sale closely. Poorly performing economies and high social costs have saddled German big towns with mountains of debt -- Berlin alone is close to 30 billion euros in the hole. In recent years, the sale of apartments built to serve lower-income workers has become a quick way of reducing debt, to the chagrin of tenant associations. Whether Dresden goes ahead with the highly controversial strategy could set the tone for other German big cities.

"Dresden will soon be Germany's first debt-free big city," said Peter Götz, expert for city politics in the German Bundestag for the Christian Democrats. "This is a good example of sustainable local politics."

Berlin has already sold more than 260,000 apartments to private investors in the last three years. Hamburg and Cologne are also mulling such sales.

Hamburg: Alsterblick
Hamburg is also looking for buyersImage: Presse

An investor's dream, a tenant's nightmare?

Foreign investment companies, mostly from the United States, see the purchases as good investments. They pay good money, promise to stay long and reduce vacancy rates by renovating old apartments into attractive property. But they also have an eye on annual dividends of between 7.5 and 8 percent and the REIT, a tax loophole that eliminates corporate income tax.

The latter is what has led critics to doubt their good intentions, some even going so far as to label them capitalist "locusts" hungry for a quick rate of return. The National Tenants' Association sees the sale of low-income housing as nothing less than the elimination of one of the columns of the social welfare state. They predict an increase of 4 percent annually in rents, and criticize the "improvements" promised by the investors -- like balconies and double-paned windows -- as superfluous.

Aufbau Ost Allee der Kosmonauten Plattenbau
Image: AP

"The only thing they have their eye on is dividends, dividends, dividends," said Matthias Wagner, of the Dresden Tenant's Association, in a Spiegel Online article.

"Sand in the eyes" of tenants

Fortress Deutschland has tried to ease concerns, by signing a "social pact" that forces them to guarantee, among other things, no significant rent increases in the next decade, and lifelong residential guarantee to current tenants older than 60.

"We want to hold on to the property, the entire thing depends on the rent income," said Matthias Moser. He added that Fortress also wanted to reduce vacancy rates, currently at 18 percent.

But the national tenant's association has labeled the pact "sand in the eyes of tenants and local politicians."

Weighing the lesser of two evils

Still, the deal will likely go through, despite the 45,000 signatures affixed to a petition protesting it. At the moment 40 of the council's 70 members are in favor of the pact. The PDS party, the successor to the former East German communist party and the second-largest group in the council, is divided. Of the 17 members, only five are sure to vote against it.

"The alternative would be reductions in the social and cultural sector, and who on the Left wants that?" Ronald Weckesser, a PDS member of the state parliament of Saxony, of which Dresden is the capital.