Germany's two biggest listed landlords Vonovia and Deutsche Wohnen have agreed to join forces in a €18 billion deal that risks stoking tensions over affordable housing in the run-up to general elections in September.

The country's biggest merger this year will create a European real estate giant with 550,000 apartments.

But the deal faces criticism in Berlin, where tenant rights and rising rents are a contentious issue.

Fabio De Masi, a parliamentarian from the left-wing Linke party that is part of Berlin's city government, urged the competition authorities to block it.

"The housing market is broken. Supply and demand do not just adjust like on the market for potatoes due to the long construction cycles and the limited availability of land," he said in an emailed statement.

Analysts say the deal should encounter few competition concerns in a fragmented market.

To try to secure support for the tie-up, the two companies pledged to limit regular rent increases to 1% per year in Berlin for the next three years and to inflation-adjusted increases for the following two years.

They said the merger was designed to help them work with politicians on providing affordable housing.

They have offered to sell around 20,000 apartments to the city of Berlin, the Mayor of Berlin told a news conference.

The city of Berlin

The deal that sources said was agreed in less than two weeks could create a European real estate giant with 550,000 flats worth €80 billion and a combined market valuation of about €48 billion.

Under the agreed terms, Vonovia will pay €52 a share and Deutsche Wohnen shareholders will retain the rights to a 1.03 per share dividend, Vonovia said in a statement.

This amounts to a premium of about 18% on the closing price on Friday.

The chief executive of Vonovia, with property in Austrian, German and Swedish cities, cited a need to make apartments more energy efficient and more suitable for the elderly.

"The combination with Deutsche Wohnen now gives us the opportunity to effectively tackle these challenges," Vonovia CEO Rolf Buch said.

"No tenant will be hurt by this transaction," Deutsche Wohnen CEO Michael Zahn said.

Projected annual cost savings of €105m by the end of 2024 will come mainly from shared technical services and property portfolio management for a combined number of apartments of over 500,000.

Vonovia said it had bridge financing of €22 billion for the deal, to be refinanced by measures including an €8 billion rights issue in the second half of 2021, following the transaction's close.

Despite its substantial lead over other German residential property groups, Vonovia has only a 0.9% share in the fragmented German residential market, according to credit rating agency Scope, which has said that any takeover deal would face few antitrust concerns.

An earlier approach by Vonovia in 2016 failed to win the required acceptance from Deutsche Wohnen shareholders for a hostile €9.9 billion takeover bid.

The proposed takeover offer will be subject to a minimum acceptance rate of 50% of the outstanding shares in Deutsche Wohnen.