Why invest in Berlin Property?
The buy to let campaigning of the 1990’s and early 2000’s has led, rightly so, to a degree of skepticism regarding the suitability of property as an investment mechanism. Estate agents, the world over, covet the investor’s money and proudly proclaim superb capital growth and yield opportunities.
Berlin like many other cities attracted enormous attention (and investment). Estate agents from far and wide proclaimed the benefits of investing into Berlin property (often from the safe hub of their home country) with headlines of high prospects and capital growth. Many websites, RSS feeds and brochures still send out the same message despite the global financial meltdown and falling property prices.
Without a doubt many investors have had their fingers burned and have seen paper profit and equity disappear, and the same replaced by debt and liabilities.
Investing into property still has its place but as with any investment fundamentals should be adhered to before taking the plunge!
- Returns should not be judged on ‘potential’ capital growth alone (this should be viewed as an investment bonus) - market values go up and down.
- The yield is what matters - The yield is the net rental income achieved as a percentage of the cost price of the property. This can be compared for example to the interest you will earn on a bank deposit. How does this compare with alternative investment vehicles?
- If it is too good to be true it probably is - or at least unsustainable. Rental yields and price increases should be within the realms of local economic reality.
- Liquidity - borrowing to invest can be a dangerous activity - put simply you need to be able to generate a greater return than the borrowing costs. Ensure you are able to invest over the longer term and preferably with your own funds.
- What governance is there of the investment (in this case property)
We believe Berlin offers investors a unique opportunity due to its unique history, yields and potential capital growth. Below we outline some of the factors that make it worth consideration.
Is there a rental market?
FACT - Berliners prefer to rent
Many European countries have a very high degree of home ownership meaning there is a limited market for renting out properties. Often tenants see renting as a stop gap whilst positioning themselves financially to purchase their own property. Berlin has around 13 – 14% home ownership amongst the lowest in Europe and none of the stigma associated with renting your home that exists in most countries. It is not uncommon for someone to rent a property for life.
This may well change in the future as Berlin becomes more popular with younger people who desire to purchase their own property.
Conclusions
- Property for rent is in demand and securing a tenant, or already tenanted property to purchase, is relatively easy.
- Should the trend to purchase become prominent there is very chance that the demand versus supply rule will see an increase in capital value.
Are the property prices likely to increase?
FACT - Historical Circumstances meant Berlin missed the Property boom years
Who cannot recall the coming down of the Berlin wall and the unification of Berlin leading to its reinstatement as the capital of Europe’s powerhouse Germany. For nearly 50 years the city of Berlin was cloaked by the shadow of the Berlin wall separating communist and socialist ideals. West Berlin suffered from an isolation factor, as well as a political one and East Berlin was by now a defunct communist state.
The tearing down of the Berlin Wall triggered a massive investment programme by the German government that has seen some 75 billion euros invested into its infrastructure. Restored as the home of German government the city is now well on its way to reclaiming the glorious hey days of the 1920’s.
The hype around Berlin property and attraction of foreign buyers - including the likes of Goldman Sachs, Morgan Stanley and George Soros - had many analysts predicting a boom in house prices - they did temporarily!
The impact of decades of political troubles, the unification of Germany, the waning of the German economy and the impact of the Euro were all contributing factors in depressing the value of German property, in particular Berlin. Whilst Europe as a whole enjoyed boom years, Berlin property have not increased in value since 1990 and only in a few of last years have house prices grown.
Increased lending rates and restricted access to capital, coupled with the need for companies to realise cash assets saw this mini boom come to an end. The result is that Berlin property can be obtained for a tenth of similar property in London. Even some of the less fashionable old Eastern block countries command higher prices.
Conclusions
- Whilst the only way is not up, the culmination of the above is some of the lowest price property in Europe (in fact the world) and the opportunity to purchase property in the capital of Germany for very low entry prices.
- With property prices being tied very closely to rental yields modest capital growth could be expected.
- The impact of investment into Berlin, its reinstatement as the capital and its central position in Europe have seen some 40 companies set up headquarters there, a large amount of government employees and an attractiveness to a younger set more inclined to purchase.
Regulatory big brother
FACT - German rent legislation is very strict protecting the landlord and tenant
Sometimes described as over the top and big brotherish there is no doubting that German rental legislation is tightly controlled.
After artificially propping up the economy of Berlin during the years of the Berlin Wall some 86% of Berliners prefer to rent than buy. These are 86% of voters and members of the public.
As prime examples legislation includes:
- Restriction of rental prices to published bands
- Restriction of rental increases
- Tenants responsibility to maintain the property
- Watertight lease agreements
- Rental increases when landlord improves property
Whilst many will argue that restricting rent increases (20% over a three year period) restricts yields and therefore capital growth, it also has the impact of stabilising the market and to some extend preventing a boom and bust market.
Other legislation maintains the image of the industry as ethical and professional and promotes the partnership relationship of tenant and owner with both having a very transparent playing field.
Conclusions
- Legislation is helping to subdue pricing so a low entry level is likely.
- Legislation governing rental increases and charging promotes a sustainable mid to long term investment - Berlin property is not a get rich quick scheme.
So who should invest?
Not everyone
- We don’t recommend remortgaging your family home and cashing in all you pensions.
- Investors seeking short term capital gains (unless able to take advantage of a current owners urgent need to sell)
Berlin property is particularly suitable for
- Investors with cash on hand - low interest rates in cash deposit accounts make a yield of some 5-7% a year very attractive.
- Investors able to take a long term view - in a perfect world 10 years without ‘cashing in the property’ as no capital gains tax is chargeable in Germany after this period.(subject to the property being held within the structure of a natural person or partnership)
- Investors requiring income from their capital either now or as part of their pension planning - as per the above a 5 - 7% yield can be an important part of creating income from your capital
- Those seeking some diversity in their portfolio - property offer an important asset investment, balancing holdings in equities and cash.
- As a currency hedge - for investors from countries with volatile currencies investing into Berlin property can have the double effect of a Euro currency’ investment as well as a property investment.
- Expatriate workers seeking alternatives to some of the life and endowment style investments they are offered which bring with them high ongoing charges and little control over where money is investeds.
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