The Berlin property market is a one-way bet. Anyone from a Wall Street real estate mogul to an amateur British buy-to-let investor will tell you that bricks and mortar in Berlin are ridiculously undervalued compared to those in other capitals such as London, Paris or Dublin. A nice flat in a hip area like Prenzlauer Berg is a secure investment with the potential for double-digit growth. Or at least this was the majority consensus at the beginning of this year. Then the global financial system almost collapsed.
It is too early to predict the long-term effects of the financial crisis on the Berlin property market, but the city's estate agents are already suffering from a falling demand for properties.
Roy Frydling, the Berlin-based director of Savills Germany, says capital investment in local residential property has "decreased dramatically" over the past six months. "Berlin has a complex residential market, but everywhere has been affected [by the global financial crisis]."
Michelle Held, a marketing manager at a Prenzlauer Berg estate agent, says the number of customers walking through the door on Rykestraße has halved over the past two months. "We have lost some very good customers because of the fear factor. People stopped buying real estate because they did not know where this whole thing [the financial crisis] was going," she says. "Now we are seeing some of the fear going out of the market, but we are not getting these customers back because now we have the consequences of the financial trouble." Held says demand from overseas buyers from America, Denmark, Italy, Ireland and the United Kingdom - which accounted for a quarter of all of her customers - has now completely dried up. She says that, together with the increasing number of wealthy local people who are getting cold feet, this drop in foreign interest could result in prices falling by as much as 10 percent in the next four years. "We expect it to be a difficult time for business next year. But we have selected areas where we sell high quality apartments and we hope they will keep their price," says Held.
International property investment companies are also retreating from some larger projects in the German capital. "We have heard that several construction projects have been abandoned. There was one in Mitte's Linienstraße that was shelved recently by a company," says an estate agent who asked not to be named.
The right buy in the right location
Nevertheless, Boris Paterok, a Prenzlauer Berg-based property lawyer, expects properties in prime downtown areas to retain their value, although he estimates prices could fall by as much as 10 percent in less central, less attractive districts such as Köpenick and Lichtenberg. As for up-and-coming locations such as the much-hyped "Kreuzkölln" neighbourhood - where the northern tip of Neukölln meets the southern edge of Kreuzberg at the Landwehrkanal - there are no signs of a slump.
"In areas such as Neukölln prices are still going up. This area will be almost immune to the financial crisis as prices were so low properties are just rising to the market value," Paterok says. "There are also neglected downtown areas like Wedding where you have nice old buildings which are selling for just €1,300 per square meter. The price of these properties is unlikely to fall and they are still great value."
Until very recently, the smart money was on rising property prices in pockets all over Berlin. Estate agents in the city's most sought-after areas have reported a 25 percent increase in property values over the past four years. The price of a one bedroom flat in a prime location in the city increased from about €50,000 in 1997 to about €125,000 today. Anyone who had any doubts about how hot the Berlin property market was earlier this year would doubtless have had a copy of Emerging Trends in Real Estate Europe 2008, a report published in March by
PricewaterhouseCoopers (PwC) and the Urban Land Institute, thrust in their face by an estate agent. After spending the previous two years languishing in 25th place in a league table of the European real estate market, the German capital leapt into the top 10. A belief among property experts that apartments in areas such as Prenzlauer Berg, Mitte, Kreuzberg, Friedrichshain and, more recently, "Kreuzkölln" were good investments helped propel the German capital into ninth place.
The survey, which collected views from 490 international real estate investors, identified Berlin as a place where rental yields were improving. Paterok underlines the good value of rental yields on local apartments by pointing to a €1.25 million block of 35 apartments in Schönhauser Allee that produces an attractive annual yield of 7.7 percent, on par with central locations in cities like London and Paris, and outperforming southern European capitals such as Rome and Madrid. The PwC/Urban Land Institute survey did, however, caution that buying an apartment in Berlin was not quite as stable an investment as buying a flat in Hamburg, Munich or Frankfurt. Nevertheless, investors in Berlin are banking on the capital's as yet unrealised potential. Berlin has a lot going for it: the city is rapidly developing into Europe's creative centre; it's a magnet for tourists; start-ups and hi-tech firms are sprouting abundantly; and all of these positive factors will only be boosted by the new world-class Berlin-Brandenburg International airport, which is scheduled to open in 2011. The city's unemployment rate, though still the highest in Germany, has dropped from 19 percent to 13 percent in the last few years.
Paterok believes that Berlin will only grow in stature as a centre of corporate power in Germany. "A lot of advertising and media companies are relocating to Berlin from other cities in Germany such as Cologne. In the long term Berlin is still a great buy compared to other capitals," he says. "The quality of the building work here also compares favourably with places like London and Paris." Prices might be stagnating somewhat, but they will rise.
Andrea Park, 42, is not concerned about the current downturn in the Berlin property market. "It's a temporary situation. When the crisis is over I think prices will go up again," says Park, who has settled permanently in Berlin. She purchased a three-bedroom apartment for €2,700 per square meter in December 2006 and has seen its value rise by 25 percent, to €3,375 per sqm. Park, who also owns the Memory Cafe beneath her apartment on Prenzlauer Berg's Schwedter Straße, moved here from France. "The quality of the workmanship in the bathroom and kitchen in my apartment is much better than what you usually see in Paris," she says. "I also much prefer living in Berlin. Each quarter of the city is like a village but you have the advantages of big city life." American owner/occupier Jane Hatman does not believe a serious downturn is coming. "Listen, I bought this amazing 105 sqm flat two years ago for €2,000 per sqm - it's right near Kollwitzplatz, a beautiful Altbau with amazingly high ceilings, stucco, parquet floors, original doors and windows - a dream come true. The facade falls under historical protection laws and can't be tampered with. Already then I was told that prices were reaching their peak in this part of town. But in two years the price per square meter rose by €1,000 to reach €3,000. Today, similar flats are advertised for over €320,000 - and often they actually are blocks away from the famous Platz! Crisis? This part of town doesn't seem to have heard about the crisis."
Crisis as opportunity
Irina Kornikova, a Russian Moscow-based PR manager with a US passport, sees her recent purchase of a flat on trendy Kastanienallee as a safe, sensible decision. "With the crisis hitting Moscow, people are panicking. No one knows what's going to happen with banks and investment is really risky. The Moscow property market is inaccessible: the prices are crazy and the market totally instable. I had a bit of money on the side and it was a real relief for me to buy a flat in Berlin. The return is good - and it's a reliable income. I advised a friend to do the same. Maybe we'll found a small Russian colony!" Ironically, the crisis could turn out to be a blessing in disguise for buyers in search of a sound investment at a good price.