Index-linked rents in upheaval: Why the planned reform is a wake-up call for tenants and landlords
Index-linked rents have become increasingly important in recent years: The rental price follows the Consumer Price Index (CPI) and rises - or falls - in line with inflation. This model gave landlords predictability and tenants a transparent logic. However, the jumps in inflation since 2021 have exposed weaknesses. Politicians are reacting: A reform of the index-linked rent is being prepared and could significantly change the rules of the game. What does this mean for your tenancy agreement, your existing property or your purchase or sale?
Index-linked rent briefly explained - and why it was so controversial recently
With the index-linked rent (in accordance with Section 557b BGB), the landlord and tenant link the net cold rent to the official consumer price index. Adjustments are possible after 12 months at the earliest and must be justified in writing. Modernisation costs may only be added within narrow limits; other traditional mechanisms (e.g. comparative rent) take a back seat.
In times of moderate inflation, this is fairly calculable. However, with inflation rates of over 7 % in some cases, index-linked rents have risen significantly in a short space of time - especially during periods of high energy prices. This is precisely where the planned reform comes in.
What are politicians planning? (state of discussion)
There are a number of possible adjustments that could be made, either individually or in combination. At the time of publication, the specific legal text is still being finalised. The aim is to introduce index-linked rents dampen, without putting the brakes on investment in housing. Discussions will include
- Annual cap: Limitation of the increase to a maximum value (e.g. 3 % per year), even if inflation is higher.
- Decoupling from energy price shocks: Elimination of particularly volatile components of the CPI so that extreme swings do not take full effect.
- More transparency: More precise formal requirements for the notification (e.g. specification of the exact index level and calculation method).
- Protection in tight markets: Tighter rules on where the rent cap applies (e.g. additional waiting periods or lower cap limits).
Note: The above points reflect the current state of public discussion. Details and start dates may change during the legislative process.
Concrete effects: Calculation examples for both sides
Example 1: Net cold rent € 1,000, CPI +6 % in the period under review. An increase of €60 is currently permitted after 12 months. With a 3-% cap, the increase would be €30 - a difference of €30 per month or €360 p.a.
Example 2: Net cold rent € 800, CPI +2 %. Increase € 16 according to current model - unchanged with cap, as below 3 %.
For landlords This means that earnings are smoother, but peaks after inflation shocks are capped. For tenants means: more predictability, fewer jumps - especially in phases of high inflation.
Benefits and risks - weighed up soberly
- Per index-linked rent: Transparent, easy to understand, reduces disputes about comparative rents, inflation-proof in the long term.
- Contra without reform: Noticeable increases in a short period of time during inflationary turbulence, social hardship possible.
- Pro Reform: Smoothes outliers, improves planning for households, reduces default risks due to excessive demands.
- Contra reform (landlord's view): Lower momentum can dampen investment incentives; profitability calculations must be adjusted.
Error: Increase without correct index value or before expiry of 12 months. Solution: Specify CPI basis (month/year) precisely, document deadlines.
Error: Mixing with graduated rent or comparative rent. Solution: Clear contractual logic; index-linked rent excludes other mechanisms.
Error: Incorrect initial rent for new tenancy. Solution: Check rent control; otherwise there is a risk of reclaims.
Practical tips for tenants and landlords
- Check contracts: Which index level is the contractual basis? What form of notification has been agreed?
- Calculate your own room for manoeuvre: Tenant: Determine the maximum amount (e.g. 30-35 % net income). Landlord: Calculate DSCR/break-even at a conservative 2-3 % p.a.
- Create transparency: Make increases comprehensible with calculation method and source (Destatis).
- Select index window: If possible, use periods with more stable index values - smoothing instead of maximising.
- Check alternative models: In individual cases, a moderate graduated rent with a longer planning horizon may make more sense.
Influence on purchasing decisions and returns
For investors, the yield profile is shifting: the expected rental development is becoming more cautious and cap rates could adjust slightly. During due diligence, you should check how much momentum existing rents still have under a capping regime. A simple stress scenario helps:
Mini stress test: Set the annual rent increase conservatively at 2 % and check whether interest, amortisation, management and maintenance (including reserves) are covered in the long term. If the model only supports an increase of >4 %, the calculation is too harsh.
Positive: Smoother cash flows reduce default risks and facilitate communication with tenants. This can reduce vacancy rates and improve the perception of the property - both of which contribute to the market value.
1) Was the last increase at least 12 months ago? 2) Correct CPI level selected and properly documented? 3) Calculation method documented and communicated? 4) Check hardship case and offer deferral/staggered payment if necessary? A clean process protects against disputes and maintains trust.
Conclusion: act prudently, communicate professionally
The reform of the index-linked rent is likely to dampen extreme swings. For tenants, this means more predictability; landlords should adjust their income expectations and strengthen communication. Those who know their contracts, calculate correctly and proceed transparently will remain capable of acting - both in the portfolio and in the transaction.
