The Assetz View of Investing Property in Berlin

Berlin is a high-quality city that commonly surprises visitors with its sophisticated shopping centres and high-quality architecture. In addition the spaciousness of the city centre is quite outstanding with large parks and green tracts of land between the monolithic city architecture in the centre of Mitte, Berlin.

Berlin does not give the impression of a half finished city or a rundown location, rather its top end shopping streets with the likes of Chanel, Gucci, Bulgari and numerous other top fashion and jewellery stores are highly developed and the city centre with the new and old government buildings, new central train station and amazing architecture looks the part as the capital of Germany.

As you walk the streets you really do get the feeling that this is a city in waiting, a city comfortable with its status, quality and development and yet somehow unaware of its strangely low property prices compared to almost any other developed or developing country. The common opinion of a Berliner is why on earth would anyone want to buy their property when it is so cheap to rent. This is an opinion that we believe is on the change and perhaps by the time Berliners wake up to the opportunity on their doorstep, their doorsteps will all be owned by foreign investors.

Rents

Rents are heavily controlled in Berlin and have been significantly mismanaged over decades - in some cases leading to some very low rental yields where tenants have been in place for a long time. It is not uncommon to see 2% yields where someone has been in an apartment since the 1950s. More usually yields are around the 4.5% mark and this equates to rental rates of between four and nine euros per square metre per month.

It is not possible to just raise rents in Berlin as there are legal rights of the tenants in respect of rent increase control. One of the simplest solutions that normally works is to offer the tenant one year’s rent in order for them to leave the apartment and cancel their lease. Alternatively, many tenants are quite old, particularly those in apartments with low yields, and it could be considered that at some point in the near future these apartments will be vacant although, of course, there is no guarantee of this.

Many management companies in Germany have not taken advantage of the legal limits for raising rents over the years and this has led to a number of tenants agreements having very low yields on current property valuations. When new management companies come in to oversee buildings, they are looking through the detail of each individual lease and immediately beginning the process of raising rents on a steady basis over the years to come.

Some apartments are available untenanted and these offer an opportunity to achieve 4.5% to 5% yields on purchase price. It is normal in Germany to rent an apartment out to a tenant without a fitted kitchen and due to the longer tenancies, the tenant pays for the supply of their own kitchen and will often take it with them at the end of the tenancy.

There is no sign of it yet, but we would expect rental controls to be relaxed in years to come.

Prices

Individual apartments are available in Berlin at between €1,000 and €3,000 per square metre but individual apartment buildings can often be bought at a substantial discount to the price of each individual apartment, and we have seen examples where apartments are worth perhaps €2,200 per square metre but the block is available at around €1,500 a square metre. Quite often the older classic buildings have planning permission, or could obtain it, for conversion of loft space into further apartments which offers quite an uplift in value potentially on a building.

Assetz have available blocks of apartments between €2 million and €10 million for larger investors and we will consider syndicating these in the future to allow smaller investors to take advantage of this situation.

Germany as a whole had close to zero price increases on property in 2005 but there is evidence that localised quality locations have begun to move upwards. This is mostly driven by the weight of money through large funds such as Terra Firma and Fortress.

In London and Paris for example, prices can be €10,000 to €15,000 per square metre and as Berlin is the capital of Germany with the government having moved there a few years ago from Bonn, we would expect prices to rise substantially from the typical €2,000 per square metre at present. It may however take many years for this process and investors should be prepared for a long wait of perhaps 5 to 10 years.

Demand for Rental Property

The population of Berlin is around 3.5 million people and immigration just from Poland a few hours away is said to be officially 30,000 people a year but we suspect this is closer to 50,000. In addition there is significant immigration from western Germany into Berlin. For example Berlin is becoming the centre for media, advertising and design in Germany due to a lot of factors, one of which is low property rental prices.

Assetz would estimate that the reported hundred thousand apartments available, mostly in eastern Berlin, will be absorbed fully by population growth in the city within around two years. There are no guarantees of this but, as the better areas will fully rent sooner than the lower quality areas, we expect price increases as soon as this year, 2006.

 Mortgages

Mortgages are available on individual apartments or one whole apartment blocks at loan to value levels of 60%. If the rental income is particularly low then a lower loan to value is likely. If the investment is a whole apartment block with some diverse commercial units on the ground level and the majority of the apartment block is tenanted, then loan to value levels up to 80% are possible. Assetz can assist with mortgages for clients purchasing from ourselves.

Types of Tenants

In Berlin there is a wide range of tenant types. This ranges from older retired couples, young and older families, students, young professionals, tradesmen (often immigrants from other countries particularly Eastern Europe) and the recent influx of creative types working in the rapidly growing media sector making Berlin its home. There are certainly many houses on the outskirts of Berlin, for example the Westend area but, for most, apartments are the property of choice.

Which types of properties

Houses are relatively cheap in Berlin but central apartments are where the highest levels of demand will be seen in our view. In particular we like buildings constructed at the turn of the last century between around 1900 and 1910. These buildings have high ceilings, great architectural features, plaster ceiling reliefs, feature doors and door handles and wooden floors. They have often been upgraded to include lifts and many of these blocks could be upgraded with a further floor or two in the roof space, adding greater returns for investors.

Most refurbishments are not, at present, of a particularly high standard compared to British upgrades. We are quite surprised that on the whole apartments are just being renovated to quite a basic standard with floors being sanded and varnished and doors, walls and ceilings just being painted over. At this stage in the market, we would not be too concerned about this, as high-quality plaster reliefs and doors are well protected under layers of paint and could still be renovated in the future to a much higher standard.

Locations

The city is dynamically adjusting to immigration and with the development of the centre and its restaurant and café culture we are now seeing a more formalised location structure developing. For example, Charlottenburg is becoming a quieter residential destination with one of the two most important shopping districts at its centre. Families of typically 40 year olds or more are settling here in large apartments near to the main overland and underground railway stations.

Mitte is the centre of Berlin and is less dense from an apartment point of view and surprisingly green with vast tracts of parkland. It is very central but Mitte is actually just outside of the main café and restaurant centres that are attracting the youngsters to the east.

The old East German sectors of Friedrichshain and Prenzlauer Berg are rapidly developing as the destination of choice for younger city-dwellers who want to be in the centre of the developing café, bar and club culture. There is superb architecture on the eastern side of the centre but many older Berliners are snobbish about living on the eastern side of the old border and this perhaps offers an opportunity to buy in at low cost into property of a similar quality to that in the western side of the centre in Charlottenburg. The Assetz view is that the older dwellers of Charlottenburg can probably better afford higher rents than the youngsters to the east of the centre but, over time perhaps, the youngsters will be priced out as more and more professionals move into the quality buildings in the centre.

Why now

At present, Berliners think that foreigners are mad buying up their property when it is so cheap to rent and they just do not understand the desire to own property. This, in itself, is an explanation of why property prices are so low, but as foreign investors begin to drive prices up, we are sure that the local market for property ownership will increase once Berliners see the opportunity to make money and rents start to increase significantly. We suspect that 2006 will be the beginning of the growth curve for Berlin and Germany as a whole but there is plenty of time this year to pick off individual opportunities right at the bottom of what we are sure will be a long-term price growth curve.

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