One of Europe’s biggest real estate companies argues that Germany has become “uninvestable” over proposals to seize privately owned apartments in the city of Berlin.

By Charles Daly Heimstaden Bostad AB won’t allocate more capital to Germany while the proposal remains, Co-Chief Executive Officer Christian Fladeland said in an interview. The Swedish property group owns about 20,000 apartments in Berlin valued at roughly €5 billion ($5.6 billion), representing 15% of its portfolio.

“Obviously I believe Germany is uninvestable if this is how you make legislation,” Fladeland said on Friday. “Even though this is Berlin-specific, I think there’s very much spillover to how you can evaluate the risk of foreign direct investments in a country.”A prospective Left party-led coalition in the city-state of Berlin has agreed to pursue legislation that would force private landlords with more than 10,000 apartments to transfer holdings above that threshold into public ownership. Compensation would be capped at €16 billion, with legislation planned for 2028 and implementation the following year.

Fladeland estimates about half of Heimstaden’s Berlin portfolio could be affected, potentially resulting in a €1 billion loss if compensation is set at a 40% discount to market value. He sees a “very, very low likelihood” of the expropriations ultimately going ahead, but said the uncertainty is already affecting where the company puts its money.

Political Fallout Germany’s anti-capitalist Left party is coming closer to forming a government in the German capital after securing more than 25% of the vote in last month’s election, defeating the governing Christian Democrats on a campaign focused on affordability.

Berlin has struggled with a chronic shortage of housing as rents have surged, helping fuel political support for greater state control of the rental market. The Left campaigned in last month’s election on implementing the results of a 2021 referendum that backed transferring large private property holdings into public ownership.

Fladeland said the city has been too slow to make land available for new housing and needs to attract more private capital to increase supply. The expropriation push risks achieving the opposite by discouraging investment without creating any additional homes, according to the CEO.

“By doing this measure, I can’t find a worse way of actually discouraging any capital to come into the city in order to support solving the actual problem,” Fladeland said.

The proposal still faces significant political and legal hurdles. Chancellor Friedrich Merz’s federal government agreed in July to introduce legislation aimed at preventing German states from seizing privately owned apartments, while any Berlin law is expected to face constitutional challenges.

Fladeland said he is confident an expropriation would ultimately fail in court, but is less sanguine about the immediate political outlook. Prospects for a Left-led coalition got a boost last Saturday after Berlin’s Social Democrats and Greens agreed to move forward with the plan as part of their preliminary coalition agreement. The parties will enter formal talks to form a government next month, where terms of the agreement may change.

“I have a very, very hard time seeing how the politicians who have been pitching this towards voters so aggressively one or two months ago will suddenly change course,” he said. “I think this needs to be blocked on federal level if it is to be blocked.”Industry Warnings Other major landlords are sounding similar warnings. Vonovia SE CEO Luka Mucic said that companies will direct capital toward markets where investments are welcome and there is “reliability and legal certainty.”The proposed nationalization is unconstitutional and would not survive a legal challenge, he said in emailed comments.

For Heimstaden, the immediate financial risk is significant even if Fladeland considers the worst-case outcome unlikely. He estimates about €2.5 billion of its Berlin properties could be subject to expropriation under the proposed 10,000-apartment threshold.

The estimated billion-euro loss “is a material impact for us,” he said. Even under that scenario, the company would retain enough headroom to maintain its investment-grade credit rating, he said.

Privately held Heimstaden Bostad — its main owners include billionaire Ivar Tollefsen’s Heimstaden AB and Swedish pension fund Alecta — doesn’t have a share price to track like Vonovia, but its publicly traded bonds provide an indication of how the market views the risks associated with the company.

One series of its subordinated notes, known as hybrid bonds, has slumped from about 98 cents on the euro in August to 82.5 on Friday, according to data compiled by Bloomberg. While the notes aren’t trading in distressed territory, the weakness in pricing levels is a sign of growing credit concern. Heimstaden Bostad is rated BBB-, the lowest investment-grade rating, by both S&P Global Ratings and Fitch Ratings.

Fladeland said he was “very surprised” by the extent of the decline in Heimstaden’s bond prices, arguing that the company’s ongoing deleveraging and operating performance mean even the worst-case outcome in Berlin wouldn’t fundamentally alter its credit profile. “The credit story, in my opinion, is completely unchanged,” he added.

The political uncertainty nevertheless adds another challenge for property debt investors already facing higher-for-longer interest rates. Bloomberg Intelligence analyst Tolu Alamutu said in a note that expropriation is unlikely to be the base case, but the continuing debate could hamper property transactions and asset values and limit the scope for landlords’ bonds to rally.

Frozen Market The uncertainty is also likely to keep Berlin’s property transaction market frozen and could spill over into investment elsewhere in Germany, Barclays Plc research analyst Paul May said in an Oct. 19 note to clients. While the socialization plan is “slower and smaller” than previously feared, “the risk is real,” he wrote.

Vonovia is the most exposed among the listed landlords Barclays covers, while tighter regulation of rents and landlords could pose a more immediate threat than expropriation itself, according to May. The wider concern is that similar proposals could emerge in other residential markets and affect investment across Germany, the analyst noted.