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The Berlin Market Is Booming but Still Has Plenty of Room to Grow

October 22nd 2018

By Mansion Global

Berlin’s star is rising. Thirty years after the reunification of the once divided city, the German capital’s real estate market is experiencing rapid growth: Home prices went up almost 15% from March 2017 to March 2018, according to Knight Frank’s 2018 Berlin Insight report, while average rents increased 11%.

And PricewaterhouseCoopers’ Emerging Trends in Real Estate report for Europe dubbed Berlin the top city for investment and development in 2018, noting its growing population and booming IT sector.

"Compared to other metropolitan centers, property prices in Berlin are still relatively low and the economic strength of the German capital is growing steadily; the influx of people is rising and the housing supply is still lagging behind the demand," Ms. Locke said. "International demand is also strong with 43% of buyers coming from abroad in the prime market."

The capital’s tumultuous political history means that it still has a way to go until property values are comparable to those in other major world cities like London and New York. A 2018 Berlin housing market report from Berlin Hyp and CBRE released in January 2018 noted that the city still has lower average household purchasing power and rent prices than other large German cities.

The entry price for buying in Berlin’s premium home market is €10,000 (US$11,526) per square meter, according to said Sebastian Hoeft, founder and CEO of First Living, with some luxury home buyers spending as much as twice that amount.

And now, with unemployment falling and more people moving to Berlin, drawn by both employment opportunities and a thriving local culture, long term growth is expected.

"The price increase of recent years, even in the hotspot Berlin, where prices have gone up by an average of 11.4% between 2016 and 2017, is not a bubble, I believe," Mr. Hoeft said. "The German market is catching up and is now joining the international market. But you do have to act soon and you need to choose carefully."

Indicators That Growth is Far From Over

In the decades since reunification, Germany has become an economic powerhouse. According to a market report from Berlin Sotheby's International Realty, with a GDP of over €3.26 trillion, the country’s economy is the largest in Europe and ranks first on the continent for infrastructure.

But these strengths don’t mean the window for investment has closed. In Berlin, in particular, one of the strongest indicators that prices will continue to rise is the scarcity of housing stock. Each year, 40,000 to 60,000 new residents arrive in the city, and the Knight Frank report noted that to keep pace with demand, Berlin must add 20,000 new units of housing annually, but last year, only 15,670 were built. 

Low rental inventory, coupled with low interest rates and plentiful forms of subsidies for purchasing property, has translated into a buyers’ market in Berlin.

"There’s a huge demand of tenants to rent properties, and vacancy rates are below 1.2%," said Achim Amann of the Berlin-based real estate firm Black Label Properties. "Now it’s a perfect time to buy. Investors can expect a safe legal and political environment, a highly quality of build, and huge demand from tenants to rent property."

Despite the scarcity of housing, Berlin’s home prices remain low relative to other major European metropolises, as well as to other large German cities, attracting both foreign and domestic investors.

The uncertainty created by Brexit is bringing in British buyers, and investors from Spain and Italy are also an increasingly large presence in Berlin, Mr. Hoeft said.

Germans, too, are flocking to Berlin. "This is the baby boomer generation, which is currently inheriting a lot of money and will also be retiring in the next 10 years," Mr. Hoeft said. "These are people, who 10 years ago would have moved into rural areas, but now want the culture and excitement of a big city. This is also reflected in the fact that top international architects, such as Daniel Libeskind, Frank Gehry and David Chipperfield are designing residential buildings here."

New developments like Europacity, for example, a 99-acre mixed-use project near Berlin’s central train station, is set to open in 2025 and is drawing international interest.

 "In the last weeks, foreign investment has soared," said Dhaker Haj-Ali, a property investment advisor with First Citiz Berlin. "Home prices are going to continue to go up for some years."

Berlin becoming the German Silicon Valley

The influx of new residents to Berlin has much to do with the city’s robust start-up culture, particularly in the IT sector. According to a June 2018 Ernst & Young report on venture capital in Germany, the country’s top 100 startups have received $8.5 billion in funding. Nearly 70% of those startups, which include furniture retailers, streaming music companies and food delivery services, are based in Berlin.

"Startups and household companies like Google, Samsung, Pfizer and Siemens are being drawn to the capital for its vast reserves of talent," Ms. Locke said. "Recruitment costs are on average 40% lower than in other German cities. What’s more, half of all startup personnel come from abroad. That’s true for only one other innovation center in the world: Silicon Valley."

Many of the new Berliners employed in this sector are renters, not buyers, Mr. Hoeft pointed out, so they don’t have a direct impact on the prime real estate market in the city, but, he added, "a great many startup millionaires from other countries, and some German ones, too, have bought properties in the city."

Furthermore, young IT workers flooding the city contribute to the housing scarcity and drive up rental prices, potentially beneficial to investors who intend to rent out the properties they purchase.

They also contribute to Berlin’s cultural cachet, another draw for many new residents.

"Young expats and IT staffers are more interested in East and South Berlin, where the urban life is more active," Mr. Haj-Ali said. "They’re looking in areas like Kreuzberg that are already in the process of gentrification."

And the amount of new leases being signed in Berlin by newcomers means that the city may not remain a bastion of relative affordability for long.

"Due to the growing economy and with about 400,000 companies founded every year, Berlin will soon be a city with four million inhabitants," said Claudia Schücking, project manager with Berlin Sotheby's International Realty. "About 40,000 people move to the city every year. All of these people need, above all, housing."

What Investors Should Expect

Foreign investors can expect to face few hurdles when investing in property here, whether or not they are E.U. citizens.

"It is no problem for a foreign buyer to purchase real estate in Germany," Ms. Schücking said. "The buyer would have to set up a German bank account and would even be able to get a loan from a German bank. The conditions are dependent on personal criteria and income. The bank would usually be able to grant a loan for 60% of the purchasing price."

Non-German-speaking buyers should note, though, that they must consult a German lawyer to oversee transactions, as all official documents will be written in the native language.

Investors can expect a higher return on investment in certain Berlin neighborhoods than in others. Furthermore, Mr. Hoeft recommended seeking out properties that distinguish themselves by architectural and design features, as well as location.

"Anything along the river in the East, and prime locations in Western districts such as Charlottenburg and Wilmersdorf, are interesting in terms of appreciation," he said. "You need to be wary of expensive and therefore sometimes over-priced properties in Mitte and Prenzlauer Berg. And if you love historic buildings, you will definitely find your dream property here."

Investors intending to rent out their properties can expect an annual return on investment of around 3%.

"We advise investors to look at a 3% yield per year on rental income, plus 5% capital growth," Mr. Amann said. "As there is a 10-year tax break, most investors will hold their properties for 10 years. After this, they should have made 80% return on their investment, mainly tax-free income."

Holding onto their home purchases for a decade or longer is likely to pay off for patient investors, given that despite its ongoing boom, Berlin still has ample room for growth.

"Berlin is still the cheapest European capital to buy in," Mr. Amann said. "There will be a long way to go until it reaches London or Paris prices. However, the speed of change is fast, so people should not wait too long before making a decision to invest or not to invest."