Berlin property - Strong rental market

A large majority of Berliners (across all social classes) live in rented accommodation, mainly apartments. Only 14% of Berlin’s population are owner occupiers. This is not only extremely low by EU standards but also significantly lower than the 42% home ownership rate in Germany as a whole. The resulting strong rental market presents an excellent opportunity for a buy-to-let investor looking for reliable and secure rental returns. There are early signs of increasing willingness of the local population to purchase their home, as well as growing numbers of Germans looking to buy a rental apartment as a long term investment and pension.investment and pension.

World’s most undervalued property

OECD and numerous international institutions consider the German property market to be the world’s most undervalued. This is even more true for Berlin property. Property prices in the German capital are 30-40% lower than those in other larger (West)German cities. In fact, prices in Berlin are significantly below the construction costs!

After a decade of falling values Berlin property has reached an all time low in 2005. Since the post re-unification property boom prices in Berlin have dropped by 40-60%. After the fall of the Berlin wall the overall optimism and expectations of a sharp increase in demand for residential and commercial property in the new German capital led to a property and construction boom. Coupled with massive tax incentives and grants introduced by the German government to aid reconstruction of East Berlin and the former East German states, this created an oversupply and a market based mainly on speculation. When the tax incentives were abolished in late 1990’s prices collapsed. This was further exacerbated by the poor performance of the German economy in the last decade.

Exceptional growth potential

Economic recovery and increasing interest in home ownership are expected to lead to a significant rise in German property prices in the medium to long term. The historically low construction rates (apartment construction virtually at a halt for the last decade) coupled with the growing number of households will lead to a shortage of housing in the medium term. This in turn is likely to have a strong impact on property prices in areas of demand.

Smart money pouring in

One of the main factors to aid Germans’ awakening to the advantages of home ownership is foreign investment. Hundreds of thousands of residential properties in Berlin and other German cities have, over the last 18 months, been purchased by international (institutional and private) investors who in many cases have been encouraging tenants to purchase their property at favourable prices. Since 2004 foreign investors acquired nearly 600,000 residential units in Germany and this enthusiasm is unlikely to end anytime soon.

The multi-billion euro purchases by experienced, profit-oriented overseas investors are also expected to lead to rising rental values, providing yet further motivation for tenants to become home owners. Furthermore, the government’s housing policy is increasingly encouraging home ownership as an important component of people’s retirement plans. 

The current low owner occupancy rate in Germany mirrors the situation in the UK, Ireland, Spain and other EU countries 10-20 years ago. Today up to 80% of Irish, UK or Spanish population own their own home. There is no reason to doubt Germany will see similar development in coming years.

The turning point… (Buy low, sell high!)

Although a change won’t happen overnight, it has already started. While the former West Germany has higher home ownership levels than the East, it is the former East German states that have, in the last few years, seen the highest increase of young households entering the owner occupier market. 

There is also evidence of a beginning price uplift now, in particular in quality property in sought-after areas. In 2005, for the first time in over 11 years, property prices started rising again.

German housing affordability

RENTAL MARKET

The strength of the rental market coupled with high yields (compared to other European cities) and extremely low prices make German and in particular Berlin property an excellent, low risk investment proposition.

However, foreign investors need to understand the particularities of the German market, including the regulations that apply to rental property. After all, only an informed decision is a good decision.

Given the strong rental culture in Germany, and more so Berlin, tenants tend to live in a property for many years – 10 and more is not uncommon. It is therefore understandable German tenants typically consider their rental apartment their home, and treat it as such. Properties are rented bare – tenants provide their own furniture and even kitchen (and take it with them upon vacating the property). The only furnished rentals are for short term lets (typically 1-12 months).

By law tenants must hand over the property in the same condition they received it (set rules apply to how often tenants have to repaint walls, update bathrooms, etc). In most cases, therefore, the landlord does not face any major costs or burdens before re-letting the property.

Rental contracts in Germany are generally for an unlimited period (with the exception of short term rentals). The landlord can only evict a tenant upon significant breaches of contract (mainly non payment of rent or running costs, disturbance or breaches of house rules, anti-social behaviour, unauthorized use or subletting, damaging property, etc). Similarly to the UK, a court order has to be obtained before an eviction can take place.

Rents are capped in Germany; each city and municipality sets the maximum levels of rent (in euro/m2/month). Investors need to ensure they do not set rents above the values in the rent table (Mietspiegel) applicable to the area and the particular standard of property, otherwise they can face severe penalties in addition to being forced to return the excessive rents to the tenants. In some cases tenanted property offered for sale has rents set above the permitted values (to achieve a higher selling price). What may initially seem an advantage of high rental yield will likely turn into a serious problem for the new owner, causing a loss of revenue and possible legal repercussions.

A good news for investors and landlords is that German tenants are liable to pay utilities as well as running costs of the property (including insurance, property tax, etc). Investors will however pay the fees for house management and property (rental) management.

There are legal restrictions on rent increases. In general it is possible to increase rents up to 20% within three years. Rents can only be increased once every 15 months. Additional rent increases are permitted (under set rules) following a modernization of a property. The Mietspiegel values are still applicable though.

OPPORTUNITIES

Berlin and other German cities currently offer top opportunities for both residential and commercial investors. Well maintained or renovated apartment blocks in medium to good locations of Berlin can be purchased at 1,000-1,500 euro/m2 (more for top buildings in prime areas), yielding 5-8% net. Unrenovated buildings in such locations can be had at 500-1,000 euro/m2, with yields (if tenanted) of up to 10%. Single apartments in popular areas cost 1,200-2,500 euro/m2 and yield 4-5%. Absolute top prices can reach 4,000 euro/m2, although this is rare. (To compare, prices in Paris, London, etc are rarely under and in many cases significantly over 10,000 euro/m2.)

Other cities offering attractive investment opportunities include Leipzig and Dresden in the East (with higher yields and lower prices yet higher risk in the rental market except in best areas) and Hamburg, Koelln, Frankfurt, Stuttgart, Munich in the West (with stronger economy yet higher prices and low yields in particular in Munich).

Where are the best opportunities for a residential investor?

1. For medium to long term hold:
Good quality apartment buildings, generally sold tenanted, in solid central areas.
While profit can be made, in some cases, on renovation, it is rarely advantageous for investors to purchase unrenovated buildings. Full renovation costs are high in Germany (400-1,000 euro/m2 depending on standard) and German lenders typically don’t finance acquisition and reconstruction of such properties. For smaller investors, single apartments in good locations with strong rental demand.

2. For short term profit:
Buying apartment buildings, renovating, splitting into individual units and selling on. Here it is important to differentiate the target buyer. In case of selling apartments to local owner occupiers, the property needs to be in one of the best areas and extensive, high spec renovation is necessary (often including layout changes, building lifts, etc). Therefore, purchasing a vacant or nearly vacant building is of advantage for such strategy. If, on the other hand, sale of tenanted units to individual (local or foreign) investors is the objective, it is possible to acquire tenanted blocks and undertake necessary building renovation to a good but not high-end standard. In all cases the disadvantage of purchasing properties in need of renovation is the lack of local finance for such undertaking (investors need to source their funds outside Germany).

In general, property investments in the main German cities represent profitable and secure long term capital investments – provided buyers take advantage of expert knowledge and guidance.