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Over the last 12 months, Berlin has emerged as one of the world's property investment hotspots but what is the truth, the potential and the pitfalls of this dynamic, cultural and economic metropolis?
One key factor for potential buy to let investors is that only 12% of Berlin residents actually own their own property, so the city is still very much a renters market. In Germany, renting property, as opposed to buying, is not deemed socially inferior. Most people who could easily afford to buy real estate choose not to because renting is such good value.
Before the Berlin wall came down in 1989, Berlin enjoyed a privileged status in terms of subsidies. This affected rent and house prices as both West and East Berliners were encouraged to stay in the city with subsidised housing being one of the key incentives. This legacy from the past is one of the reasons that the property market has not developed as quickly as other cities in Germany and the rest of Europe.
According to a recent report from Jones Lang LaSalle, one of the world's leading real estate services and money management firms; "Prices in Berlin are about 10% of those in London and over the last 18 months estimates for Berlin capital investments prices rose by 20%. Next to a buy-and-hold strategy, condominium conversion may become a very interesting exit strategy and yield driver due to the low ownership rate in Berlin."
Overall, both rent and average house prices are still relatively affordable in Berlin, when compared to cities such as Munich and Frankfurt where property can be up to 50% more expensive.
Best rental yields on smaller city-center apartments
The Global Property Guides put rental yields in the city at 4.4%. They report that the best yields, of between 6-7%, can be achieved by apartments in a city centre location that are less than 90sqm. However, investors should note that German law is very pro-tenant. Landlords can be fined if they try to increase the rent to in excess of 20% above the rent charged for comparable premises. Tax on rental income is also high and can be up to 25% for non-residents owning rental properties in the city.
The city has nonetheless seen multi-billion pound investments from UK and European investment banks, such as Terra Firma, which are buying up vast apartment blocks. Private equity funds such as New York-based Cerberus Capital Management and Goldman Sachs' Whitehall investment fund have also been targeting Berlin. In 2004, the two together purchased 65,700 units of Berlin public housing for €2.1 billion. Investors from Britain, Ireland and America spent £7 billion on properties in 2006 alone. In addition, leading multinationals such as Sony, MTV, Universal and DaimlerChrysler have headquarters there.
The recent Economist Intelligence Unit's worldwide cost-of living survey found that Berlin, while having a population of 3.4 million and being the second biggest metropolis in the European Union after London, is actually only the 72nd most expensive.
German economy heads for recovery
The German Government has invested some €75 billion in rejuvenating Berlin and this considerable cash injection has kick-started growth in the property market. 2006 saw a tentative 0.2% rise in prices after losses in the previous year, while the German economy as a whole expanded by 2.5% in 2006; the fastest growth since 2000. Predictions are that it looks set to increase by a further 2.5% in 2007.
Unemployment in Berlin fell to 7% in November 2006, its lowest level in four years and this trend looks set to continue. Prices are currently low but as unemployment decreases and the economy recovers, buying power will increase which will in turn drive prices and rental returns up.
"Germany is a new market for most overseas investors and it will take time to develop. Therefore, investors should take a 10 year view, rather than expecting instant returns," argues Pelle Langli, chief executive of Emerging Real Estate, one of the UK's leading emerging property investment consultancies, and an agent for Schlosspark-Carree, an exclusive development in Berlin's Charlottenberg. "As a city, Berlin is on the cusp of great change and offers significant capital appreciation for investors at all levels."
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