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DR. RAINER ZITELMANN
A new generation of investors has come to set the pace on the residential investment market in Germany. The place of investors hailing from the United Kingdom, the United States, and Scandinavia, and defining the scene just years ago, has been taken by German institutional investors. A recent poll by Ernst & Young Real Estate found that 80% of all insurance companies intend to buy residential real estate. This would translate into an increase of 25 percentage points year-on-year.
Add to this the numerous specialised funds for institutional investors that focus on “residential.” A few years ago, there was only one institutional fund specialising in residential real estate; today, there are ten and in the coming years, they will invest several billion Euros in the German housing market.
So what is the attitude of these players vis-à-vis Berlin’s residential market? Unlike the erstwhile generation of foreign investors who dominated events some years back, many German institutional investors are reticent in regard to housing in Berlin.
Insurance companies prefer to target cities like Hamburg, Stuttgart, Munich, Frankfurt am Main, Düsseldorf and Cologne. Virtually the same goes for specialised residential funds, which – apart from a few exceptions – favour the West German metropolitan regions. Quite a number of investors shy away from investments in Berlin. Others would like to commit themselves in Berlin, but limit themselves to choice downtown locations.
What is the reason for such reticence? One explanation is the poor economic strength of Berlin compared to cities such as Munich or Stuttgart. The jobless rate and the share of welfare recipients are substantially higher, the economic momentum is much lower.
But just how plausible is this line of reasoning? Of course Munich runs circles around Berlin, economically speaking. But this is factored into the prices anyway. A residential property sold at 15-fold the annual net rent will sell at a multiple of 20 in Munich. Since rents are at least twice as high, the purchase prices for apartments in Munich are drastically higher than in Berlin.
I suspect that the reasons for the reticence vis-à-vis Berlin may have a historical background. Many investors who staked their bets on the heavily subsidised Berlin housing market of the 1980s and 1990s lost a lot of money. The massive sponsorship through rent subsidies and tax benefits precipitated an inflated price level and led to an oversupply on the Berlin market that kept rents low. Everybody has heard of people getting burned on the East German or Berlin market, and turning away in frustration.
While tax breaks and rent subsidies for investors have long become a thing of the past, the trauma of the special deduction for-depreciation program (Sonder-AfA) is not forgotten, and it may explain the hesitant attitude of many institutional investors today.
Personally, I consider their reticence a good thing: let them all sink their teeth into Munich, Stuttgart, and Hamburg, and nurse their grudge against Berlin. It will keep prices for residential real estate in Berlin on a moderate level and thus provide splendid entry opportunities for cost-aware investors.
