Berlin Property Prices and Rental Yields - Emerging Real Estate

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Berlin Property

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The German/Berlin culture towards home ownership.

Only 13% of Berlin residents own their own property and the city is still very much a renters market.   In Germany, renting property as opposed to buying property is not seen as being socially inferior and people who could easily afford to buy property choose not to because renting is such good value. 

Before the wall came down, Berlin enjoyed a privileged status which attracted numerous subsidies. This affected rents and house prices as both West and East Berliners were encouraged to stay in the city and subsidised housing was one of the incentives.  This hangover from the past is one of the reasons that the property market in Berlin has not developed as quickly as other cities in Germany and in
Europe.

Property prices

"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," a recent report from Jones Lang. LaSalle recommended.  ”Since demand exceeds the completion of apartments in the next few years, a shortage of appropriate apartments can be expected in partial markets“, the report says.

Rents and house prices are still relatively cheap in Berlin, half that of the cities Munich and Frankfurt.   Economic conditions are currently favourable and improving, interest rates are on the rise and many foreign real estate funds are making substantial investments here. These factors point to predictions that the Berlin market will catch up.

A renovated flat in a prime Berlin area can cost €1,500 a square metre while one in London is €15,000. 

Rental Yields

The Global Property Guides put rental yields in the city at 4.4%. They report that the best yields, of between 6-7%, are for apartments in the city centre that are less than 90sq m. German law is very pro-tenant and a landlord 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 quite high and can be up to 25% for non- residents owning rental properties in the city.  Average rents have only increased slightly in the last 10 years according to the Jones Lang LaSalle report but they are likely to increase more quickly as the property market gets hotter.

Factors to consider when buying a property

• a. The size of property is always measured in square metres (m²). 
• b. The number of rooms quoted generally does not include kitchen and bathroom. 
• c. In Berlin - as with most European cities, the vast majority of dwellings are apartments. Detached houses are generally found on the outskirts of the city and tend to be exclusive and expensive.

Economic Factors

Berlin has seen huge multi-billion pound investments in property from UK and European investment banks such as Terra Firma, which are buying up vast blocks of apartments. In addition, leading multinationals such as Sony and DaimlerChrysler have set up headquarters in the city.

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.

The German government has invested 75bn in rejuvenating Berlin and this considerable injection of investment has kick-started property market growth - 2006 saw a tentative 0.2% rise in prices after losses in the previous year. The German economy as a whole expanded by 2.5% in 2006, the fastest growth since 2000, and looks set to increase by a further 2.5% in 2007. Unemployment in Berlin fell to 7%, its lowest level in four years in November 2006 and this trend is set to continue. 

Prices currently are low but as unemployment decreases and the economy recovers, buying power will increase which will affect prices and rental returns.

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 bought 65,700 units of Berlin public housing for €2.1bn. Investors from Britain, Ireland and America spent £7 billion on properties in 2006.

Summary

Germany is a new market for most overseas investors and it will take time to develop so investors should take a 10 year view rather than expecting instant returns.

"Berlin is a market that offers the investor the ideal combination of security of investment and the potential of some significant capital appreciation,” says Dr Wilfried Leyens, a former Harvard lecturer in Marketing Strategy.