As property prices in London, Paris and quite a few other destinations on the Continent (with the possible exception of the Spanish Costas) continue to motor ahead, what are the prospects for the German city of Berlin? A big investment theme going around the City presently highlights the seemingly vast disparity in property prices between Berlin and other major European capitals.
For example, in the exclusive Charlottenburg area of west Berlin a square metre of residential property costs around €1,800 (£1,220). This is approximately one ninth of the price of the equivalent size in west London. Property prices are significantly below the level of 1990, the first post-unification year. A crude conclusion is that either London is absurd, or Berlin is absurd. The truth is probably somewhere in the middle. There are important reasons why Berlin is at this price level. Even cities in the former Warsaw Pact countries; Prague, Budapest, Talinn are more expensive. There are a myriad of issues in Berlin, some of which might be off- putting. But Berlin is worth investigating if, as the marketing suggests, the weaknesses are all in the price.
The capital of former East Germany is defined by its unique history that still touches virtually every aspect of the daily life. Almost 18 years after the fall of the Berlin Wall (November 1989) Berlin is the German capital and a major cultural centre/ tourist destination. The relocation of the German government from Bonn is about half way complete, with some major ministries and civil service still to move. There is a push to attract new biotechnology/IT and media companies and new investments such as a big new international airport. In terms of its shortcomings through, Berlin is not yet in the same league as London or Paris, and might not be for years.
Berlin has not yet carved out an area of specific expertise the way capital cities these days need to, in order to sustain a high earning local population who will demand higher quality goods and services and support investments in new infrastructure. “A house divided against itself cannot stand” said President Abraham Lincoln in 1858. The same could be said of Berlin. The legacy of its history led to two major city centres one in Frederichstrasse the other in Alexanderstrasse, two smallish airports, two lots of City council and civil service, two of everything.
Berlin seems more American than European, plenty of big non- descript buildings, which resemble more a Los Angeles type disorganised sprawl than a strict Parisian grid system. Any comparison though is unfair to Berlin if the observer does not recognise the fact that Berlin was totally flattened in 1945 and has done remarkably well to rise from the ashes. Post re-unification, Berlin worked hard to end the old divisions.
The re-building boom in the former East (1990- 1994) was premised on a speculative bubble in property in the 1990-1993 period and a big improvement in unemployment. At the time expectations were high, investment horizons were short. The office market which in 1993 had near zero vacancy and prices of €50 per sq metre collapsed. In 2005 office vacancies stood at 10% with prices just over €20 per sq metre. The ending of accelerated depreciation, tax breaks and state subsidies caused the closure and relocation of a number of mid- sized businesses in the mid Nineties.
According to a report by Deutsche Bank, in 2005 Berlin’s per capita GDP was just €21,000 in 2004, around 20% lower than other former West German cities and below the level of 1991. The city has seen a stagnant population of 3.4m and has lost families to leafier suburbs in Brandenburg. Berlin has attracted 65,000 people from elsewhere in Germany and 155,000 from abroad but there has been no net population growth. One major problem is unemployment, which stood at 20% in January 2005 up from 13% in January 1995. During the period 1996-2003 the manufacturing sector shed around one third of its staff.
The City of Berlin is in debt to the tune of €56bn; a more than fivefold increase since 1991. Around 21% of Berlin’s income goes on interest and capital repayments. This scenario resembles a mid-1970s New York situation. The Senate Department in November 2002 claimed the city’s state was “extremely distressed” ie Berlin would require transfers from the federal government. It is not obvious how Berlin intends to extricate itself from this mess, there are very few assets it could sell and it is running into the problems of an ageing population. According to the State Statistical Office the number of households in Berlin is expected to rise to around 1.95m by 2050 but over 38% of households will be over the age of 61 by that time. At present there are around 1.85m households, 20% of whom contain over 65s.
Berlin needs to attract new businesses but also needs to increase taxation across the board. Increases in business taxes, property taxes and sales taxes are likely by 2010. On the plus side, there has been a relocation of media/films, IT and communications as well as biotechnology. Recently Universal Music and MTV Central Europe located to Berlin. To some extent growth in media & IT investment in Berlin has been curtailed by the post “dotcom era” valuation collapse, which saw new investment by these companies cut back heavily.
But Berlin has found around 160 biotech companies with four biotech business parks located in around 70,000 sq metres of city space. Berlin’s BioTOP Action Centre is attempting to create conditions for a centre of excellence in biotechnology. So far sufficient numbers of small biotech companies have located to Berlin to call this move a success, but critics point to the sustainability of most of these new enterprises. Another positive is tourism. Berlin compares well as an inexpensive short break destination with plenty of good restaurants, proximity to central Europe, loads of historical buildings.
The new Berlin Brandenburg airport at Schonefeld, currently under construction, will be a new hub that could attract around 20m passengers per annum. This will primarily take business away from the two existing airports, Tegel and Templehof who together handle around 15m passengers. The new international airport will help ease transport links and raise Berlin’s profile.
It follows that Berlin is cheap for good reasons. It might present a reasonable risk now at these low prices, but anyone investing needs to do so with a view to a ten year investment. There are also certain issues regarding Berlin as a property investment. Berlin has plenty of property to choose from, notwithstanding recent enthusiastic and optimistic buying from the City, the Russians etc. Residential prices were up around 6% in 2006 and a similar rise is possible in 2007.
Buyers face a 4.5% flat stamp duty charge, legal fees of between 1.5% and 2% depending on the complexity of the transaction, and negotiable agents fees of around 6%+VAT so 7.14% net. In Germany, buyers pay estate agents commission which is then shared with the seller and other agents if the property is sold on a joint agency basis. Therefore buyers are facing a big 13.6% transaction charge on the asking price. Once purchased, capital gains taxes are levied if the property is sold within ten years. The broad effect of this measure would be to strongly deter speculators but arguably benefit long term investors, if the property tax carrot remains in place. Obtaining a mortgage in Berlin is procedurally cumbersome and takes time. Banks generally offer mortgages for a maximum of 50%-60% on 80% of the valuation.
Hence a property costing €100,000 could obtain mortgage finance worth €40,000-€48,000. In this scenario the buyers’ deposits represents the balance, 52% to 60% of the property value plus transaction costs. This might explain why only 11% of Berliners are owner-occupiers. A London based investor in a rush, would be better off securing finance in London. But this means borrowing in sterling and investing in Euros hence taking a net currency risk. German law is favourable to the tenant, in almost every circumstance. If the boiler breaks down, or there are repairs to do, or other problems, then those expenses plus service charges are on the landlord’s account.
It might take a year to evict a non-paying tenant. However non payment is relatively rare in certain areas. The main problem is rent controls, which apply all over Berlin. The rent table fixes the price of rent per square metre per month for an unfurnished property. It is rare for a tenant to pay a premium to the rent table. If an investor purchases a property with a sitting tenant, then he is bound by the terms of that tenancy. Generally the landlord can raise rents by a maximum of 20% every three years, but a good tenant may be able to negotiate this down. The best scenario, ie the purchase of a top specification empty property will secure a rent that equates to a yield of between 4-5%.
Then the investor has to wait three years for the 20% uplift at the rent review. It is worth specifying the length of lease being offered to an incoming tenant otherwise the tenancy is deemed to be of indefinite length. A resident tenant has the right of first refusal in the event the property is up for sale. The question of where in Berlin is largely down to individual taste. The Friedrichshain area is on a 120 hectare plot near the docks that will see multi-billion euro investment to create the “Mediaspree park district”. This area is a bit like the 1980s Docklands, where 60 sq metre flats can be bought for around €90,000. The Charlottenburg area is the well established Kensington sort of area where prices are around €250,000 for a family flat. Steglitz in Berlin’s leafy suburbs, a good location near to the new airport also, has family flats of 100 square metres at around €170,000.
Then there is Prenzlauerburg, the fashionable Bohemian “arty” area in former East Berlin, where 60sq metre flats are around €100,000. Recently Berlin has been marketed to investors in London by corporate agents, who are selling managed apartment blocks with ten year leases. The investor is persuaded after a weekend break in Berlin, paid for by the agent, to buy a flat in a certain block. The investor gets a net rent but in many cases is buying from the owner of the apartment block at hefty 20%-30% premiums to the prices that they would pay if they were buying through a local agent, hence achieving a profitable exit for purchasers of the apartment block.
The properties generally are not in good areas and have sitting tenants. We would steer clear of taking this approach and would suggest interested investors take a long weekend and view a good selection of properties. To sum up, Berlin certainly offers value for money. The city has hurdles to jump, and it could be years before an Anglo-Saxon style owner culture emerges. Right now Berlin is the land of happy renters and that culture will need to change for serious property appreciation to take place.