Since my Zibel Real Estate portfolio first started investing in Berlin over a decade ago, residential real estate prices have increased by over 200%. By July 2021 median asking prices had climbed to €5,140 per sqm for existing properties and €6,840 for new builds. The bottom line is that Berlin remains a magnet for people from all over the world and will remain so after the pandemic.
Originally published in Property Investor Today on 26 July 2021)
It is inevitable that prices will continue to rise. The question of course is whether Berlin can continue on this trend. After building my career as an investor by getting in early on the latest trends, my feeling is that it will, but that Berlin real estate investors will also need to be a lot more discerning in their choices compared to a decade ago.
The opportunity going forward as I see it is to avoid the ‘general’ market and instead supply the inelastic premium end of the market where I expect yields to remain robust and asset values to continue to climb in double digits.
Even after ten years of appreciation, average real estate prices in Berlin still compare extremely favourably to London (€12,000 to €18,000 per sqm) and Paris (€10,000 to €18,000 per sqm). Average gross rental yields in London and Paris are now below 5%, but in Berlin it is still possible to recoup a yield of 8% by focusing on premium ‘A’ micro locations.
Supply remains extremely restricted. In 2020 just 17,500 residential sales contracts were executed in Berlin, compared to 24,600 in 2015. Berlin already has the lowest rate of home ownership in all of Germany at 20%, compared to a national average of 52%. And in coming years prices in the ‘general’ residential will reach a natural limit that will restrict growth.
That is why in my opinion real estate investors entering the Berlin market should focus on premium segments. Since 2010 the ‘general’ rental segment of €5-8 per sqm has been consistently declining in size and volume, whilst the rental segment above €14 per sqm is consistently growing.
My own strategy has been to focus on established micro-locations in central Berlin that will transcend cycles, and as a result I have enjoyed near to 100% occupancy. This is not unusual: occupancy rates in Berlin typically hover around 98.5%.
Analysts suggest that there is a supply deficit of 205,000 residential units in Berlin, and that with the 2020 rental cap now removed, the political emphasis will have to turn to removing red tape to enable more building and increase supply. But even if supply is increased, which will take decades, new supply in the suburbs will not challenge demand for premium properties within the highly desirable ‘micro locations’ in the central districts of Berlin.
As well as housing many ‘A’ micro locations within its central districts, Berlin is ranked as one of the best cities in the world and is famous for its safety and infrastructure. Berlin’s parks account for 35% of the land in the city which is a unique location for artists and entrepreneurs. Germany is the second largest exporting economy in the world and 70% of investment into German start-ups flows directly into ventures in Berlin.