Since my Zibel Real Estate portfolio first started investing in Berlin over a decade ago, residential real estate prices have increased by over 200%. By July 2021 median asking prices had climbed to €5,140 per sqm for existing properties and €6,840 for new builds.
The bottom line is that Berlin remains a magnet for people from all over the world and will remain so after the pandemic. It is inevitable that prices will continue to rise.
The question of course is whether Berlin can continue on this trend. After building my career as an investor by getting in early on the latest trends, my feeling is that it will, but that Berlin real estate investors will also need to be a lot more discerning in their choices compared to a decade ago.
The opportunity going forward as I see it is to avoid the ‘general’ market and instead supply the inelastic premium end of the market where I expect yields to remain robust and asset values to continue to climb in double digits.
Even after ten years of appreciation, average real estate prices in Berlin still compare extremely favourably to London (€12,000 to €18,000 per sqm) and Paris (€10,000 to €18,000 per sqm). Average gross rental yields in London and Paris are now below 5%, but in Berlin it is still possible to recoup a yield of 8% by focusing on premium ‘A’ micro locations.
Supply remains extremely restricted. In 2020 just 17,500 residential sales contracts were executed in Berlin, compared to 24,600 in 2015. Berlin already has the lowest rate of home ownership in all of Germany at 20%, compared to a national average of 52%. And in coming years prices in the ‘general’ residential will reach a natural limit that will restrict growth.
That is why in my opinion real estate investors entering the Berlin market should focus on premium segments. Since 2010 the ‘general’ rental segment of €5-8 per sqm has been consistently declining in size and volume, whilst the rental segment above €14 per sqm is consistently growing.
My own strategy has been to focus on established micro-locations in central Berlin that will transcend cycles, and as a result I have enjoyed near to 100% occupancy. This is not unusual: occupancy rates in Berlin typically hover around 98.5%.
Analysts suggest that there is a supply deficit of 205,000 residential units in Berlin, and that with the 2020 rental cap now removed, the political emphasis will have to turn to removing red tape to enable more building and increase supply. But even if supply is increased, which will take decades, new supply in the suburbs will not challenge demand for premium properties within the highly desirable ‘micro locations’ in the central districts of Berlin.
As well as housing many ‘A’ micro locations within its central districts, Berlin is ranked as one of the best cities in the world and is famous for its safety and infrastructure. Berlin’s parks account for 35% of the land in the city which is a unique location for artists and entrepreneurs. Germany is the second largest exporting economy in the world and 70% of investment into German start-ups flows directly into ventures in Berlin.
The cherry on the cake is that Germany offers 100% tax relief upon resale of a property after ten years. Taking everything in the round, it offers a safe haven for investment with the prospect of 8% annual rental yields and, in my opinion, asset price growth in the premium segment that will consistently break double digits for the next ten years.
Beyond properties within premium ‘A’ micro locations that transcend cycles, there are also some sub-trends in Berlin that are worth exploring. The characteristics of the market that I have outlined above are driving demand for ‘co-living’, which is why one of my biggest investments in Berlin is a development of 226 fully furnished short and medium stay hotel apartments of between 22 sqm and 51sqm, which provide lots of on-site facilities.
My philosophy has always been to make my profits when buying real estate by securing good deals. Beyond the clear investment case for Berlin, I would suggest that given the unique characteristics of the market, it is vital that investors have a trusted local partner to negotiate and to complete transactions. Local knowledge is also essential for avoiding low quality assets that have hidden maintenance liabilities that will deteriorate any gains.
At this stage in my career my priority is generating consistent and sustainable yield and value to fund the not-for-profit activities of my Tej Kohli Foundation and Tej Kohli & Ruit Foundation. Berlin remains the world’s best prospective return for the lowest level of risk and will therefore remain a primary investment focus Zibel Real Estate for many years.
*Tej Kohli is a real estate investor focused on multi-unit mixed use properties in premium micro-locations which transcend cycles, located within established and emerging technology hubs. His Zibel Real Estate portfolio includes assets in Europe, the Middle East and Asia