BOOMTIME BERLIN?

Berlin’s property market may have witnessed a slump while other capital cities soared, but investors are now betting on a comeback. Watch this space…

WORDS BY LAURA LATHAM

Anyone looking at the property markets over the past 10 years could be forgiven for thinking the whole of Europe has been in one long boom. In most countries prices have risen at phenomenal rates, but Germany has remained in a slump.

During the euphoria of reunification in the early 1990s it looked as though Germany would go from strength to strength. However, a combination of reduced exports, stagnating wages, low consumer confidence and the huge cost of reintegration (which ran into trillions) created market conditions that were nothing short of disastrous. These conditions were most keenly felt in the property sector, with eastern areas hit the hardest as people just stopped buying.

Despite its new capital-city status, Berlin has stagnated more than other German cities, with prices at levels similar to or below what they were in 1996. In fact, they’ve been so low for so long that there’s a strong feeling that the situation simply can’t go on, and investors are eyeing up the city as, possibly, the next big thing.

“Berlin has low prices compared with other capitals,” says Julian Lu of French company Imoinvest. “Apartments currently cost €1,000 per square metre compared to around €7,000 in London or Paris–even Sofia is more expensive. The economic drop in the past 10 years was reflected in the price of property, but now we’re seeing growth in the economy and we hope that property will follow.”

It’s this hope, bolstered by the installation of the Merkel government last year, that has brought foreign investment to the city. Though economic analysts are reporting a rise in confidence in Germany, and August saw the release of data showing the best quarterly growth since 2001, this could be partially assigned to the economic boost created by the World Cup. In the same month, the central Bundesbank reported that “The German economy still has not moved beyond the opening phase of a cyclical recovery”. In actual terms, growth is still slow and there are concerns that the reported strengthening of the property market may purely be due to speculation.

“There is a great deal of hype and most of the increases in property have been generated by foreign investment,” says Charles Bond of property consultancy CDM Associates. Nevertheless, Bond believes current price rises in sought-after areas of Berlin have been around 10% to 15% in the past 18 months and is so certain the city is a safe long-term bet that he’s bought there himself. He claims good property is moving so fast that he advises clients to act quickly to secure anything they’re interested in.

According to Bond, a major hurdle to growth is the low confidence of the Germans in investing in their own market after so long in the doldrums. He thinks that once people genuinely believe they can make a profit things will start to improve. “Rents are very low compared with the rest of Europe, with tenants paying around €5 per square metre, which is 10% of the average salary as opposed to the UK where rent is nearer 30%,” he explains. “That’s what’s kept people out of the housing market. When rents creep up to €8 per square metre it starts to look like an attractive deal.” He adds though that it may take time for rents to reach those levels, and that “some areas may never get there.”

More than just a confidence problem with buying, Berlin also has a financial system that favours renting. “Only 44% of Germans own property, with only 13% owning in Berlin,” says Michel Hendrickx of Solid Rock Consultancy. “Property isn’t a topic of dinner party conversation like it is in the UK.”

This situation might seem a good prospect for investors looking for regular income while they wait for their property to appreciate, but the situation isn’t necessarily clear-cut. German law is highly protective of tenants and long-term contracts are the norm. Rents for established tenants can only be raised a maximum of 20% over a three-year period and current market rents can only be implemented once the tenant has moved out. Even these must be in line with government guidelines, known as the Mietspiegel.

In addition, once installed, it’s almost impossible to evict tenants without good legal reasons. This means many apartments in Berlin are currently being sold with sitting tenants who may have lived there for 40 years and have no intention of leaving. But if that makes you determined to purchase vacant property you need to be aware that German banks are often reluctant to finance vacant apartments because they want to be sure of a return of some sort. “Banks took a real pounding 10 years ago,” says Hendrickx, “and still have a lot of underperforming real estate on their books.”

Like Charles Bond, Hendrickx also thinks that present price increases are fueled in part at least by speculation, and claims there’s uncertainty in the market but feels this may still be the kick-start the city needs. “I expect the market to be filled with foreign investment but then the local (Berlin) investors will step in.”

Hendrickx has seen prices in some areas of the city drop by up to 40% in the past 10 years, but warns investors not to rush into purchases that seem extraordinarily cheap, particularly in the east and northern areas of the city. “There are parts of Berlin being marketed that I wouldn’t touch,” he says. “In Marzahn-Hellersdorf, for example, I don’t see substantial growth happening ever.” He advises prospective purchasers to look at where tenants are most likely to want to live, such as the trendy Prenzlauer Berg district, Mitte, Friedrichschshain, Wilmersdorf and popular Charlottenberg.

Charles Bond is also keen to point out that buying in Germany isn’t cheap, with costs averaging around 12% of the purchase price, and says this rules out any quick returns. “You have to keep the property a reasonable amount of time, as it will take one or two years just to recoup the buying costs. I suggest you look at owning it for 10 years at least to make a profit.”

On the upside, however, the city is ideally placed to be the pivotal point between the established western markets and the strengthening economies of eastern Europe. There also seems to be more faith in the job market in a city where unemployment is currently around 18%. Many government agencies and foreign embassies are relocating there and, though the multinationals have been slow to follow, investment into science and technology parks and new media is generating interest among start-up companies.

More importantly, the German government is looking at ways to pull itself out of the slump. It’s moved towards relaxing the country’s stringent employment laws and is opening up the domestic market to more competition. In relation to property, 2007 will see the introduction of real estate investment trusts (reits), a more tax-efficient way of investing in a property portfolio. According to Michel Hendrickx this could make a big difference to the way Germans view property investment. “Reits will have a big effect on the market, definitely.”

Julien Lu feels that it won’t be long before Berlin will soon mirror what’s happening elsewhere. “We’re starting to see good trends and I think it’s going to go well there now. The Germans have just emerged from a very difficult period.” So, if you’re priced out of other cities and fancy a punt, Berlin might be somewhere to see decent long-term returns. Most experts agree Berlin will rise once more–they’re just not sure exactly when.

This article originally appeared in the November 2006 issue of easyJet IN-FLIGHT magazine.