Berlin has been on a property tear in the last few years. The German capital has seen faster price growth than any other location in the country — including traditional economic and banking hubs at Munich and Frankfurt — and it has emerged as one of the best investments in Europe. Building is finally on the rise, giving international investors more opportunity to enter the market. But is the primary market the only way to go?
Berlin is one of the world’s great cities (see Leisure) and since Germany’s reunification in 1990 Berlin has leapt to the fore within Europe; it’s hard to fathom where the continent would be if Germany weren’t a member state in the EU during the recent Eurozone crisis. The city’s growth in all areas has led to a robust property market where the underlying fundamentals are strong too. “While the population declined between 2002 and 2010 as a result of weak economic growth and a relatively high level of unemployment … it has been growing again since 2011,” said Jones Lang LaSalle’s German Residential Market Overview for the first half 2015. Germany, it’s worth noting, understands its looming population and labour crisis, and unlike some parts of Europe (Denmark, Hungary) has been welcoming the migrants at the heart of the current so-called “crisis” with open arms.
Despite unspoken worries of a bubble, the city is in the same strong position it was in 2014: prices are low, yields are high and rental demand is steady (vacancy is below 3 percent). “Berlin’s economy continues to grow, more and more jobs with rising incomes are producing the demand for housing as strong as ever,” says Sebastian Fischer, Engel & Völkers managing director in Berlin-Mitte. “Besides the investment aspects, the many people moving to Berlin from abroad support the ongoing change in Berlin and make living in the city as such extremely exciting.”
Prices are on the rise, but they remain well below those in other capitals. “When you look at the prices in other large European cities, for example Paris, London or Moscow, it’s clear that property prices are normally much higher than they are in Berlin,” states Thomas Zabel, CEO and founder of Zabel Property Group. In addition, Berlin is historically a rental market. “Only 15 percent of the city’s population are owner-occupiers. For buy-to-let investors and landlords, the risks of rental arrears in Berlin’s good and very good locations is extremely low,” he argues.
Success often breeds a change in tactics. “The attractiveness of investing in German residential real estate has increased noticeably for both German and foreign investors. However, the lack of offers is increasing, so that prices have greatly increased and investors have to resort to secondary locations and lower quality assets,” said JLL. With its profile rising, glittery new developments are springing up all over the city. In April, The Financial Times reported two high-profile projects — Russian developer MonArch’s mixed-use Alexander A and American developer Hines’ Frank Gehry-designed residence and hotel — were on the verge of approval in Alexanderplatz (formerly East Berlin), taking investment property to the next level.
New Old World
As such, some investors are looking at alternatives in the secondary market. Asian buyers in general prefer new builds for their ease of management and lower maintenance, crucial for long distance owners. But trends are changing. According to Fischer, architectural individuality, historic neighbourhoods and substantive buildings are making second hand properties increasingly popular. “From an investment perspective, second-hand can make sense as German tenants love the so-called Altbau-buildings and therefore letting risk is low,” he argues. But Zabel disagrees, noting, “Our Asian clients tend to prefer new-build condominiums. A major reason for the desire to buy is psychological. There is not much private ownership of real property in China … The lack of true ownership means that there’s no real market for existing condominiums. From a Chinese perspective Germany offers the right to truly own a property, which makes Germany attractive.” On top of that, the altbau — “old buildings” — can have hidden costs (repairs, higher taxes and fees, mandatory inspections) that eat into yields.
Either way, districts spreading out from Mitte (central Berlin) remain key locations and the surrounding areas, as in London, are picking up the overflow. Fischer likes Kreuzberg and Friedrichshain (to the east), certain areas of Pankow and Lichtenberg on the other side of Friedrichshain. Zabel likes western Charlottenburg and agrees on other former East Berlin locations like Prenzlauer Berg (in Pankow) and Friedrichshain, especially for condo buyers. “Prenzlauer Berg and Friedrichshain have been extensively refurbished and are now also high-quality residential quarters subject to consistently high demand from German and international buyers. All of the inner-city neighbourhoods are developing positively, with tenants and buyers all keen on living space in central districts,” says Zabel.
JLL points out that the investment market is currently characterised by its slipping yields across regions, not just in big centres like Berlin. However, “As long as there is no fundamental change in interest rates, capital will continue to flow into the housing market … benefiting from the good economic situation and the stability of this asset class in Germany,” said JLL. Which doesn’t mean there aren’t challenges on the horizon. Berlin’s notoriously fastidious city planners can slow things down, and policy like the “Mietpreisbremse” — rent control — can come into play. “Rent control limits owners to increasing rents at a certain level only,” explains Fischer. “It’s not a big problem for investors with long-term investment horizons but tenant communication and German bureaucracy can be exhausting.” Fischer recommends reputable property management and if investors aren’t buying new developments ensuring the altbau are “refurbished completely.” At the more macro end of the spectrum, Zabel points to monetary policy as an influencing factor that’s difficult to predict. “If the Euro starts to gain in value, there could well be an impact on foreign buyers’ loans,” he warns, citing Germany’s conservative mortgage regulations. But Germany is likely to remain Europe’s safest haven, creating an ideal environment for Berlin’s continued growth. “The city’s population is growing … but only between 6,000 to 8,000 new apartments are being built each year,” concludes Zabel. “Demand is not going to weaken, which means that prices for housing in Berlin will continue their stable development.”