Berlin is currently one of the most oddly overlooked investment markets in the world. The city of 3.5 million may be most famous for its (one time) dividing wall but the city is a hot bed of art and culture, politics, science and education, design and social progress dating back to the Middle Ages. Right now Germany, the engine that is driving the European Union and among the world’s largest exporters by value, is something of a dark horse investment location, and the capital at Berlin is leading the charge.
Despite its capital status Berlin is not a star akin to London, Paris or Rome. The city’s division until 1989 and the restructuring that came with the collapse of the Berlin Wall have kept its progress slow and cautious. “It’s still catching up. The indirect effects are still there, but over the last five years it’s really been picking up,” explains Philipp Steinke of asset manager BACC (Asia). Until official reunification in 1990, Hamburg, Munich and Frankfurt bore the economic burden for Germany. Now, with the capital back in Berlin and its industry returning, the city is finally seeing its fortunes rebound. Jones Lang LaSalle’s first half 2014 property profile for Berlin stated, “In the first half of 2014, rental prices for new leases have increased by approximately 7.7 percent … The prime rent in the district of Mitte is over €15.00 per square metre, where the asking rents are the most expensive.”
“The capital is lagging behind other big cities in Germany. If you’re looking for capital appreciation as well as rental growth Berlin is the key market to be in,” Steinke continues. “The other cities are like London; they’re already at the top so there’s not much more to go. Right now you can get a one-bedroom in Mitte, the city centre, for around €200,000 — less than 2 million Hong Kong dollars — for a comparable size in London, which would be $6 or $7 million.” Steinke estimates current rents at roughly €12 per square metre (HK$23 to $25 per square foot) and projects an increase to as high as €16 to €17 in the coming years.
Demographics, economics and quality of life are on Berlin’s growth side too. Nearly 50,000 people relocated to Berlin last year according to Sebastian Fischer, managing director of Engel & Völkers in Berlin and only 9,000 new homes were built. “Increasing rents — still at very low levels compared to other German and European cities — make Berlin residential a very attractive investment for domestic and international buyers,” he explains. Vacancy rates sit below 2 percent, and demand is high owing to Berlin’s economic resurgence. Unemployment is dropping, incomes are rising, and “Berlin has become the start-up hub of Europe and its economy is now very well diversified among many different sectors,” says Fischer. The city’s economic development is leading directly to “the ability of people living in (or moving to) Berlin to be able to afford higher rents [or] purchase prices,” he notes. Capping it all off is a stellar quality of life supported by strong infrastructure. “People in Berlin are very outdoorsy. Never, ever buy a unit without a balcony. You’ll never get market rent,” Steinke adds.
Art & Science
Right now everyone wants to be in the central Mitte district where off-plan units are popular with investors. Other trending areas include rejuvenated Kreuzberg on the south side of the city, the western borough of Charlottenburg bisected by Berlin’s Champs-Élysées, Kurfürstendamm and the Hackescher Markt area in the former East Berlin. “There’s a lot of development in the West but the East is more interesting. There’s more to catch up with, there’s more land available and I think the value of that area will increase in the coming years,” Steinke states. Fischer agrees. “The most dynamic part of the city surely is the former East, as many empty plots offer great spots for new developments that positively influence Berlin’s townscape. Potsdamer Platz, as a place with great history, is an ideal place for people looking to live in between the East and the West. Modern apartment complexes with state-of-the-art amenities provide the ideal neighbourhood for people looking to purchase prestigious apartments close to the city’s best luxury hotels and institutions.”
If there’s a knock on Berlin it’s its non-brand name status. It (bafflingly) lacks the academic draw of Boston, San Francisco or London, even though 40 Nobel winners have come from Berlin universities and Heidelberg University predates Harvard by 250 years. Nonetheless, schools are important to many investors and in addition, “The only downside I’ve heard from people doing their own research is that Berlin has a reputation for being very artsy,” notes Steinke. The thinking is that who’s going to pay the rising rents if everyone’s an artist. “Of course it has a very artsy background but it has everything else. There’s a strong government sector and the financial sector is second to Frankfurt. I don’t see any problems,” Steinke finishes.
One issue facing investors is German rent controls designed to keep rates affordable. “The ‘Mietpreisbremse,’ a regulation intending to limit the increase in rents, is expected to come into effect 2015. However, the general development of the city is so strong we do not notice a decreasing demand for Berlin properties,” says Fischer. Additionally, Steinke points out investors looking at new-builds need not worry about that: off-plan properties are exempt from rent ceilings.
Germany has no restrictions on buying property, it’s all freehold and there is no capital gains tax on property held for 10 years but it remains a “new” market. Steinke is quick to point out that, ironically, investors from the UK are increasingly looking at Berlin in the wake of their own CGT. But the tide is slowly coming around. “We have regular investors, bankers, who appreciate a $2 million investment … [and] they’re more flexible with the idea of buying in Germany,” theorises Steinke. “Older investors are so focused on London you can’t sell Germany no matter how well it performs.”
“In a nutshell, Berlin is growing demographically, growing economically and offers a great place to live for people at all ages,” Fischer sums up. “Obviously a very good starting point for property investors.”