Why buy an investment property in Berlin?

With a population growing twice as quickly as city planners anticipated and educated young professionals flocking to the city, it’s not surprising that there’s still a huge demand for rental properties across the city.

It’s 30 years since the wall came down and business is booming. We look at why Berlin is still so attractive.

The people

Vibrant creative and tech industries, plus low cost of living, have attracted affluent and well educated millennials to the city. This has created a surge in demand for office space as well as a need for apartments where young international employees can live.

But they’re not the only ones looking to rent. Berlin is a city of tenants – only 18% of the properties are owned by the occupier, compared to 45% in other big German cities and 60% in London. That’s a large pool of prospective renters. They are well protected by legislation and this has led to a confident and strong rental market where tenants generally stay in one place for much longer than they do in other capital cities.

The Brexit effect

According to a report by pwc  “the Eurozone is seen as a safer and more fruitful investment destination than the UK in 2019, whilst others equate the risk with opportunity.” Europe’s senior property professionals believe that the impact of Brexit on real estate investment has seen the market decrease somewhat in the UK by 56%, but only a 9% decrease in the rest of Europe.  And in 2019 Berlin was ranked as the 2ndmost popular city for investment prospects.

The property is (relatively) cheap…

The amount you need to invest in property in most European capitals is substantial. This is not the case in Berlin. A top of the market one bedroom flat in the centre of the city will cost around 300,000 euros, which doesn’t buy you much in London. In fact property in London costs on average £2000 a square foot. Berlin property is closer to £600 a square metre. This may be a mixing of units of measurements, but the message is clear! Naturally, as in London, the further you move out of the city the better value the properties are.

And so is money

It’s advisable to borrow money in the currency you are buying in, so buying in Berlin means borrowing in Germany. This has several benefits; it’s cheaper to borrow in Germany than the UK. Interest rates are typically between 1.8 and 2.5% above the base rate. This compares with the UK which ranges between 4-5%. And loans in Berlin are non-recourse. This means if you find yourself in the position of not being able to pay your mortgage the bank will take your property, but not additional assets if the property has lost value. This is not the case in the UK.

The tax situation is also favourable. If a property has been owned for ten years or more and is then sold, no capital gains tax needs to be paid. The banks also encourage long-term investment, with 10-year-fixed rate mortgages the norm.

Berlin property

And most importantly… the returns

The two ways in which a property can make money is rental income and an increase in property price that can be released once you sell. Rental income on its own doesn’t illustrate much; it’s the rental yield that is key. This is the rental income divided by the costs associated with the property. It’s usually expressed in terms of a percentage, with a high percentage being good. Currently in London the yield is between 1-2%, but the yield in Berlin is significantly higher, at around 3-4%.

And Berlin property prices have increased by 35% in the last five years. According to Knight Frank’s Prime International Residential Index, luxury real estate prices increased by 9% in the city last year.  This compares favourably to other German cities Munich (8%) and Hamburg (7.5%), as well as other capitals. By contrast, Paris’ luxury real estate value dropped by 3.5% last year.

The future

At the moment the typical Berlin tenant pays out just over 20% of their income on rent, compared to 70% by their London counterpart, according to an English Housing Survey. However, Berlin rents are rising quickly, at almost twice the national average. This is still much less than other German cities.  For example they are half of what is charged in Munich, which indicates there is room for a continued increase in rental income, despite rent caps.

Add all these elements to the fact that much of the existing apartment stock is not in very good condition.  Communism and rent caps mean a lack of investment that means windows need repair and paint needs refreshing. If you can do this, your Berlin property will be significantly more attractive than others on the market, making renting apartments out much easier.

If you are looking to invest in property in Berlin and wish to benefit from our complete range of expert advisory, management and transactional services, please get in touch.  [email protected]

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