german-hawk-group
Disappointing outlook for Berlin’s residential market
Market Letter #3 '06
The demand from international investors for residential properties in Berlin is enormous. The motivation, we’ve been told, is that Berlin is cheap and undervalued. But be careful, enthusiasm is sometimes not based on facts.
There are basically 3 reasons put forward to invest in residential property in Berlin:
- Profiting by buying residential apartments in order to privatise and sell them one by one to the tenants.
- To create value by raising rents.
- To create value simply from anticipated improvements in the economy and consequent increased value of the property.
In 2005 Berlin had 3,397,000 inhabitants, it is by far the largest German city even though its population has been in decline from the mid 90ies to 2000.
Source: Federal Statistical Office
In 1994 Berlin had about 3.48 m inhabitants, which is around 80,000 more than today. According to the Federal Statistical Agency its population is expected to decline further at a rate of approx. 5,000 a year resulting in an overall population of less than 3.1 m in 2050.
Berlin is losing attractivity. People either move out of town to the fringes or leave Berlin for good.
Berlin is suffering severe structural problems. Located in the eastern part of Germany, Berlin was artificially kept on track economically by high subsidies during the cold war. It was an island surrounded by socialism.
In fact Berlin still benefits from federal subsidies. Between 1999-2003 subsidies averaged almost € 8,000 per capita.
Even though Berlin was been reinstated as capital of Germany following reunification on October 3rd 1990, there are no signs of Berlin becoming the “economic capital”.
Source: Berlin Senate Department of Finance
Its debt structure is alarming. Berlin is supposedly bankrupt. Even the Berlin Senate Department of Finance itself admits that public budgeting is in dire straits. Debt has increased from approx. € 10 billion in 1991 to approx. € 58 billion in 2005 and is expected to reach nearly € 70 billion by 2009. Expenditure on interest was around € 2.4 billion in 2005.
As a result public expenditure on infrastructure, public services and social housing has been reduced to a minimum.
Berlin has one of the highest unemployment rates in Germany. It is 17.20 % compared with the overall German unemployment rate of 10.50 %.
Source: Federal Statistical Office
There are only 2 German labour markets in a worse position: the states of Saxony-Anhalt and Mecklenburg-Western Pomerania.
Anyone hoping to sell apartments to tenants is going to have to face the fact that one in five tenants is unlikely to be in a position to get financing.
The 'Wirtschaftswoche', a quality German business journal, recently conducted a survey to rank the 50 most attractive cities in Germany. Munich, Frankfurt and Stuttgart took the top 3 positions as most attractive and promising cities. Berlin lags at number 48.
Whereas the average GDP per capita is € 34,623 it is only € 23,460 in Berlin. In this regard Berlin is again only number 45 in a total of 50 cities.
If there is no financial power to support higher rents or even higher properties prices, what then?
Well, there is slight hope on the horizon.
The projected extension of the Berlin Brandenburg International (BBI) Airport in Schönefeld is expected to boost the sluggish economy. With 20 million passengers estimated for 2011, this number is forecast to increase to 30 million in the years that follow. However an economic boost such as that which Munich experienced from the Franz Joseph Strauss International Airport seems a scenario realistic only for the mid to long-term.
The unemployment rate is still high, but improved from around 20 % at the beginning of 2005 to 17.2 % 6 months later (due to overall economic improvements).
Rents are increasing, although only slightly and are still at a low level in comparison to the peak in the early 90ies.
How to take advantage: Yield is always a risky matter. We see many buildings with repair and maintenance backlogs for sale in weak locations. Many of them have already changed hands once or twice recently. Berlin still has its troubles. Even if it appears cheap, it is not, when risk is considered. Comparisons with other capitals like Paris or London are extremely deceptive as every property market follows its own rules and Berlin is no exception.
Long-term prospects look better due to the positive impact of the German economy and expansion of the BBI airport.
As reported in the 'Wirtschaftswoche', cities such as Munich, Frankfurt and Stuttgart rank highest. So, why not have a look at them?