Claiming the biggest share of the European residential market, the risk-ratio return of German real estate continues to compare favorably to other investment options. Keep in mind, though, demand for new construction in urban centers is outpacing lack-luster interest in older properties. Housing prices and values have yet to fully stabilize, however, often leading buyers to insist on special conditions for sales. See the following article from Property Wire, for more on this.

Hamburg, Germany

Newer property in top German locations such as Hamburg, Munich or Frankfurt represents a good real estate investment, according to a new report.

Although there is some turmoil and instability in the market in terms of transactions and prices and banks are still reluctant to lend, overall Germany has an exceptionally attractive chance-risk profile, says the report from Jones Lang LaSalle.

Low levels of liquidity in the real estate market and transaction levels are down and there is often a lack of clarity as to pricing levels, but certain property will always do well, the report points out.

‘Strong demand will still be observable for properties built in 1995 or later in top locations such as Hamburg, Munich or Frankfurt. In this market segment, regardless of the economic environment, only few or no price changes can be noted,’ it says.

However there is less demand for non-modernized property that dates from the 1950s and 1960s, located in structurally-weak regions and with a considerable maintenance backlog.

‘These properties will not become more attractive to investors in the future,’ it adds.

The report explains that between 2004 and 2007 demand for real estate was generated by the financing culture at the time which led to an extreme rise in property prices.

‘The financial crisis has triggered a painful recovery process in which real estate is once again coming to the fore.

Regardless, the German residential property market, the largest housing market in Europe, continues to be of interest for both national and international investors,’ it says.

‘Compared to competing investments (fixed-interest securities, stocks or commodities) the residential property in Germany represents an opportunity with an exceptionally attractive chance-risk profile.’

But it also points out that currently many transactions that are occurring involve vendors who are more compelled to sell, or purchasers who will only buy at discounted prices. In addition, prices agreed during negotiations are frequently reduced prior to exchange of contracts as purchasers bring to bear their greater negotiating position and ability to complete transactions in the current uncertain market.

‘In this environment, prices and values are going through a period of heightened volatility whilst the market absorbs the various issues and reaches its conclusions.

As a result, there is less certainty with regard to valuations with the result that market values can change rapidly in the current market conditions,’ it concludes.

Why should I invest in real estate in Berlin, Germany?

How is the property market in Berlin doing these days? Contrary facts and opinions are the order of the day. But also really good news. In this article we publish an interview which we had with an architect, who overlooks the “scene” from his office in Friedrichstrasse “Am Checkpoint Charlie”.

Ingo Ronski leads the office “Ronski + Burke Architects and Engineers” together with his Partner Fergus Burke.

Mr. Ronski, you as architect and project development planner know the Berlin real estate market since many years. What changes did you notice in the recent months?

I.R.: Recently quite obviously a much smaller number of International Investors is searching to buy on the Berlin market. Subsequently the prices dropped and the situation once again has become interesting for buyers.

So you feel the financial crisis effects Berlin very strongly?

I.R.: Certainly. We notice that especially in the area of residential property. You feel the financial crisis in Berlin by seeing some larger developments stopped or by slower and fewer transactions taking place. We do not in particular notice major vacancies. Around Friedrichstrasse you still find some vacant office areas. For those who are seeking to rent the situations is quite relaxed.

What is your estimate for the market? Will prices, as many say, drop remarkably especially in the German capital city?

I.R.: They dropped already. I am curious of the crisis will have even harder effects. Nevertheless I believe in Berlin as a good future market, still. Berlin will develop and prosper further, even if slowly. Berlin is very widespread as far as property is concerned; the location and the micro situation are more important than in other cities which I know of. Well known sought after areas will stay stable, per my opinion.

The hotel development boom of recent years has cooled down mostly. Apparently this market has reached a point of saturation. Nevertheless the last big surprise was the announcement that the high rise building at the Zoo will now be developed – the so-called Zoofenster-Hochhaus near the Kudamm. The famous Waldorf Astoria Hotel will move in, five stars plus, 15 floors, 300 rooms. Apparently the arabs still have good money for investment despite the financial crisis.

How do you preview the price development for land and developments around the newly planned International Airport BBI?

I.R.: A lot of industrial parks, business centers and similar developments have been planned. Our office worked on a master plan for an Irish investor to develop a large area in the region of City Schoenefeld. Planning here is for logistics an residential. Many developments were presented at Expo Real in recent years. One of the developers who I know recently counted over 20 projects in that area. Its foreseeable that some developments will fall by the wayside, because not (yet?) enough tenants or users in view. Nevertheless, it has been decided to close the other Berlin airports – Tempelhof already closed down recently and Tegel will follow – and that means that many firms around the former airports will move to BBI and that means there will be a good demand for rental space.

Tourism numbers have been rising in Berlin in recent years and the airport of Tegel is at the limits of its capacities. One is discussing already if the planning for BBI is for the right size or too small. I am expecting many positive impulses for the City and its economy from the new international flight connections to and from BBI.

If one looks a bit more south east of the Schoenefeld Airport area you find land for unbelievably low prices. Is it worthwhile to buy land and just wait?

I.R.: The question is what the community development plan says. If there exists a so-called B-plan, one has to determine carefully what development is approvable per the plan. I would not risk to invest into residential developments, the distance to the center of Berlin is too far and many suburban areas are not well connected to the public transport system. As I already mentioned, the competition is very strong, and whoever buys and develops there, has to bring a good financial cushion as the yield will only come in distant future.

Where do you see particular risks in the Berlin market, now that the “Hype” is over?

I.R.: As already pointed out, in Berlin nothing is more important than location, location, location. In no other city the value appreciation is so tightly coupled with the location. The gap between good and bad locations will become larger.

What would you recommend in particular?

I.R.: To live in the central areas where the buildings from the founding period – late 19^th century – can be found. That are areas like Prenzlauerberg, Kreuzberg, Schöneberg etc.

A last question regarding your firm. How is the current situation, what are you specializing in?

I.R.: As a German-Irish office we work mainly for English speaking property investors who want to invest in Germany. Our niche is to accompany real estate business from the beginning to end, like purchase, conversion, refurbishment, assessing appreciations, and to educate the client in English about this. Our customers are Irish, British and Australian investors, but also more and more German clients. At present we have ongoing projects in Berlin, Hamburg and Cologne and are working on some major studies for armed forces in North-Rhine Westfalia.

Berlin Barometer

Current rental development
Rental price range for new lettings, 2nd half 2008 in €/m2/month

Property Clock: Flats for Rent
2nd half 2008

Interview with Mr. Mirko Otto, Berlin

Mr. Otto, you are working as an expert for built-up and non-built-up grounds and you are active nationwide. Yet as a born-and-bred citizen of Berlin you know the market here especially well. How has this market been developing in the past two years?

Mirko Otto: The residential market is characterized by different developments: while in the district Berlin-Mitte only 1,5% of the apartments are vacant, in the district Hellersdorf it is 8,8%. There is a very large span; even though there are still enough apartments vacant in total, in the inner city you hardly find any more offers, which makes the prices go up notably. This also becomes clear if one looks at the difference between the “Mietspiegel” just published (an issue showing the conditions on the rental market, based on scientific criteria, namely a qualified issue on the subject) and the report on the rental market of the IVD (“Immobilienverband Deutschland” = real estate society Germany) that has been published a few weeks after the Mietspiegel. The final rents are (depending on the age of the building) around 20% higher than the values given in the Mietspiegel. An example: a 65 square meter large apartment in a better location of “Wedding” (a part of the center) costs 6,75 € rent per square meter based on the IVD report. I personally also know such prices from my practical experience – not just as single values but rather often being the final price of refurbished old style building apartments. Yet based on the Mietspiegel, these apartment should only cost between 3,65€ and 6,00€ per square meter. This shows that the Mietspiegel is a politically (and probably by variety of rental objects) guided instrument which does not show the rent on the market however. A matter of fact is that in several quarters of the inner city the rental prices have gone up by as much as 10% per year. Even though this is just an indicator, since the properties do not necessarily get rented out for the prices they get offered, it still shows the increased pressure on the real estate prices in the area of the inner city.

As to freehold apartments, you still have many areas in which vacant apartments are much more expensive than apartments which are rented out. In some locations the prices rise moderately, in other parts of the market they remain static. Where I see it gets problematic is real estates becoming more expensive through the law of special depreciation (for example monument protection) and which are mainly bought for the sake of tax advantages. In many cases it is doubtful if such investment decisions are really economically effective.

The market of residential buildings and commercial buildings is marked by the cutback of foreign investors. The prices today have clearly gone down; it would not be possible now to sell the properties bought in 2007 for the same price they were acquired. Yet the offer has not sunk as much as the buyers would become interested. As a result, the number of properties dealt with has decreased by 50%. Another reason for it is the bad terms of financings from the banks. By this I don’t mean the interest conditions but the requirements the banks set as to one’s own funds.

When it comes to the commercial areas, Berlin is characterized by a weak industry. In top locations commercial estates are still wanted, yet in worse areas the demand has clearly dropped.

Are the effects notable that the financial crisis has on the market?

Mirko Otto: Factually it is much more difficult to get a credit today than two years ago. Sometimes banks repel the credit requests with extremely high demands of own funds or through a very bad valuation of the objects by bank-internal real estate assessors. In my opinion, doing this they go past the purpose. One of our clients had a hard time acquiring a residential building with 30% of own funds, the house I am speaking of had a factor below 11 (meaning it was sold for less than 11x the rent). The reason of the banks being: he, the client, already had so many properties (which, by the way, had been financed with similar amounts of own funds).

How have the apartment rents been developing?

Mirko Otto: In some parts they have been developing very vibrantly (in the inner city locations, see above) and in other parts stably. There are hardly any locations where the rents are decreasing.

What city districts could you point out to be positive, and what could you point out to be rather negative?

Mirko Otto: Due to the historical development of the city with the Wall, those areas which have been the outer districts of Western Berlin for decades (Wedding, Tiergarten, Neuköln and Kreuzberg) have at once become the centre. This doesn’t have an instant effect, yet by now one can observe a positive development in those areas. Not everywhere yet, but in broad parts. Always when people invest, the rental prices go up and the clientele improves. My personal favourite area is Wedding, but also Kreuzberg shows a large increase of rental prices.

What are the factors (x-fold annual rent) at which you can acquire multiple dwellings currently? What are the offers currently?

Mirko Otto: Here you have the discrepancy between the demands of the sellers, which often want to get too much, and (partially) the idea of a very low sales price on side of the buyers.

You can’t make a universal statement in this regard. There are properties which are still worth 14X the rent (for instance when there is yet sufficient potential for the rents to be raised) but there are also properties for which I myself would not pay more than 10X, since the maintenance is very costly or there is a large backlog of maintenance to be done.

How costly are investments for modernizing actions usually in relation to the purchasing price?

Mirko Otto: There is no “usual”, no rule in this case. In some cases one can acquire un-renovated old style buildings for 300 to 400 € per square meter, in which case there is a lot to be done there, but one can also purchase a modernized old style building for 1.000 € per square meter or more, in which case there is no backlog of maintenance to be done.

Currently, is it worthwhile to purchase a property in Berlin and then partition and re-sell it?

Mirko Otto: It is, especially when part of the property is vacant and it is located in an area which is in high demand. As to outer areas or very simple areas, I would be more cautious since partitioning and maintenance in itself are costly actions.

What deficiencies of buildings do you find the most in Berlin?

Mirko Otto: Mostly you find that the technical instalments of the house are too old. Thusly, the electrical devices, water- and wastewater instalments, bathrooms and heating systems are not up to date with the latest technology. From time to time you also find a flaw in the roof, partially going along with wood pests (for instance boletus destructors). All in all, an experienced assessor will usually know where to look for flaws when seeing the house first. In the case of specific house types (such as built in the 60es or 70es) you hardly ever find infestation by pests or damp cellars. Here you usually just need to get the technical devices and the standard of the energy checked.

Why, especially in Berlin, is it advisable to get an assessor to look at the property before purchasing it?

Mirko Otto: Because usually the renting structure is in need of checking and because hardly any other market I know is as differentiated as the one of Berlin. Something that may be called good in one street might be considered much less worth only a few meters away. In small enclaves it can happen that positive developments occur years or decades later because the population structure doesn’t allow any faster development.

How do you estimate the development in Berlin? Will the prices go up or drop?

Mirko Otto: Generally the prices will go up in broad areas. This especially applies to the districts in the inner city, which are still very cheap as of right now (Wedding for instance). I am sure that those areas which are expensive already will remain good, but I find it questionable whether they will keep developing as those areas that are still cheap at the moment.

Do you have any other advices for people investing in Beriln, Mr. Otto?

Mirko Otto: Cash is King, at the moment! Whoever has enough own funds should invest into a real estate property in Berlin. I will be glad to be your advisor!

Berlin Real Estate Holding Firm

In the years after the fall of the Berlin Wall and German reunification, Berlin was the bargain basement of European capitals when it came to residential real estate.

Twenty years later, average values in Berlin are still considerably lower than those in Paris or London, but the wide gap in prices of comparable luxury units is finally starting to narrow.

And, according to Anne Riney, an agent with Engel & Völkers real estate, the top end of Berlin’s residential market has been holding firm despite the global downturn, thanks to strong interest from buyers in the Far East, Russia and the United States, as well as the European Union, including Germans.

The banking crisis has left some wealthy Germans worried about leaving large amounts of money in their accounts or investing in stocks and shares. They have turned instead to bricks and mortar and a result has been increased sales to locals. This is a real change in a city where fewer than 15 percent of the 3.4 million residents own their homes.

“Sales are constant in attractive, central areas such as Mitte and nearby Prenzlauer Berg,” Mrs. Riney said. “We have found that the market in attractive districts has even improved slightly in the first nine months of 2009.”

For example, new high-end units in Mitte within walking distance of key government buildings and the main Western embassies are selling for €6,500 per square meter, or almost $906 per square foot, about five times the average value of older apartments across the entire city.

Much of the commercial and government activity in Berlin is concentrated in Mitte, in an arc running from the Sony Center at the Potsdamer Platz to the Hauptbahnhof, the new central rail station. It is a return, of sorts, to the geography of pre-World War II Berlin; after the end of hostilities, the Russian sector contained the ruins of much of the city’s traditional business district, as well as Unter den Linden, its most fashionable boulevard.

Nearby, Prenzlauer Berg had the reputation of being something of an artistic, even alternative enclave during the time of East Germany. Apartments in its restored, high-ceilinged, turn-of-the-century apartment blocks are favorites among overseas second-home buyers, with British, Irish, American and Spanish buyers most commonly represented. The prices have risen about 10 percent since the beginning of 2008.

For example, Wombacher Immobilien, a local real estate agency, is marketing a 155-square-meter, or 1,668-square-foot, penthouse on Stargarder Strasse in Prenzlauer Berg. The property, which has three bedrooms and a spacious roof terrace, rare in Berlin, is listed at €525,000, or $792,000.

Meanwhile, a 99-square-meter unit with two bedrooms in a modern block with concierge service is available through Engel & Völkers for €395,000. It is in Mitte, and a short walk from Tiergarten park.

But prospective investors would be well advised to do their homework before putting down a deposit: The tree-lined streets around Prenzlauer Berg’s Helmholtzplatz look idyllic on a warm Sunday morning in the autumn, full of well-dressed young families having leisurely brunches at the neighborhood’s many cafes. But three or four blocks north, the atmosphere switches abruptly to rows of rundown tenements largely unchanged since East German times.

What’s more, rental laws are resolutely pro-tenant, so it can be risky for an overseas buyer to plan on financing a property purchase with rental income. Rental contracts can be challenged if either party, though much more frequently the tenant, feels the fee is out of line with the average rents published periodically by city authorities.

Alex Simpson, an advertising executive from London, bought a renovated one-bedroom apartment in Prenzlauer Berg as a buy-to-let in 2005.

“Renting out small, furnished units for periods of two or three months is a viable option in Berlin as demand from foreigners is sky high,” Mr. Simpson says. “Given the clean lakes and forests around the city, and the comparatively low number of business visitors, the peak period is spring and summer, which is unusual for a capital city.”

Mr. Simpson’s main complaint is that German tax forms are complicated and hiring a tax adviser is not economical for small investors.

Also, rents in Berlin continue to trail those of cities in the former West Germany, with most of the housing stock owned by institutional investors and city-owned housing companies. The average net rent for an unfurnished 65-square-meter apartment is €307 per month, compared with €670 in Munich, €491 in Cologne and €417 in Frankfurt.

But according to Maurice Frank, co-publisher of Exberliner, an English-language magazine, the city is full of potential for overseas buyers and residents. Exberliner was introduced in 2002; within a year, its founders had established a real estate rental agency to handle the demand from foreigners, particularly artists, musicians and academics.

Mr. Frank says he has noticed a change in the foreigners now coming to Berlin: “There are more entrepreneur types arriving, more people setting up businesses, especially Internet start-ups.”

Still, most large corporations have not relocated to Berlin from Munich, Hamburg and other cities, much to the disappointment of the capital’s administration.

Its image may have been marred by Mayor Klaus Wowereit’s much-quoted view that the city is “poor but sexy” as well as more practical problems like the large-scale disruptions to the suburban rail service last summer.

http://www.nytimes.com/2009/12/04/greathomesanddestinations/04iht-reberlin.html?_r=1

TAG acquiring residential real estate portfolio in Berlin

Germany – Today, TAG Immobilien AG (TAG) increased its residential real estate portfolio by 51,300 sqm or almost 20 percent with the acquisition of a portfolio of residential real estate located for the most part in Berlin. The transaction has a total value of EUR 43 million and is being financed by assuming existing bank debt as well as the non-cash issue of new shares. Thus, TAG is seizing an opportunity for further growth after having gone through a phase of consolidation.

The residential real estate portfolio comprises of 787 units with a total floor area of around 51,300 sqm. The buildings are for the most part located in attractive parts of Berlin such as Charlottenburg, Prenzlauer Berg and Kreuzberg. Most of the portfolio comprises of housing stock of good quality and offering potential for rental growth. Just about all of the properties are let. The average price paid is around EUR 800 per sqm. The purchase price agreed upon for the entire portfolio was well below the fair value determined by real estate valuers. With a total value of EUR 43 million, the transaction is being financed by assuming existing bank debt as well as the non-cash issue of new shares. Roughly 2.4 million new shares will be issued at a price of EUR 5.50 each and paid for through the contribution of the shares in the property owning entity; the existing shareholders’ pre-emptive subscription rights are excluded. As a result of the fresh issue, TAG’s share capital will rise from a current EUR 32.5 million to EUR 34.9 million.

http://www.property-magazine.eu/tag-acquiring-residential-real-estate-portfolio-in-berlin-12748.html