Above-average population growth in Berlin is boosting housing opportunities for investors, says Russell Handy
For the best part of two years, the talk among investment managers has been of urbanisation. Migration back to cities has driven investment strategies across all major real estate sectors. While London – expected to rise by 13% by 2022 – grapples with population growth, Berlin’s issues seem less urgent.
The German capital is, however, growing at double the pace its town planners foresaw, with a quarter of a million more people moving to the city by 2019, rather than by 2030. After decades of slow population growth, the upturn is being warmly welcomed.
Speaking last year, Andreas Geisel, senator for urban development and environment, called the increase a “great blessing”.
“The combination of low living costs and plentiful job opportunities has already led to above-average population growth in Berlin,” Moody’s Analytics said in its recent Metro Area Outlook.
Last year’s influx of refugees has created pressure on local government to build housing – pressure that Moody’s Analytics says will “ramp up even more”.
Much of that is centred on Berlin’s disused Tempelhof airport, now a makeshift shelter for as many as 3,000 refugees.
Well before last year’s migration headlines, the defunct airport was already making the news. Attempts to build on the site, to the south of the city centre, were in 2014 blocked by protestors who successfully campaigned for the airfield to remain as public parkland.
The battle for the site was accentuated by the fact that large, well-connected and undeveloped sites such as Tempelhof are a rarity in Berlin.
With the issue now closed, property agents in neighbouring Neukölln, identified by CBRE as one of Berlin’s potential hotspots, cite the disused airfield as a leisure and recreational attraction in their marketing literature.
To the north of the city, the Europacity urban renewal project is offering investors in search of scale an inroad. Benson Elliot recently bought 2.5 hectares in the area.
The site, says Philipp Braschel, partner at the UK-based firm, is a “unique opportunity” to create “high-quality rental housing right in the heart of Berlin”.
Benson Elliot’s joint venture partner, Berlin-based Kauri CAB Development, which in the past has worked with Pramerica Real Estate Investors, will develop 500 multifamily apartment units.
Austrian firm Buwog, meanwhile, is investing in a 15,000sqm section of the Europacity site, developing 200 apartments. The firm is also planning 800 residential units on a 60,000sqm plot in Berlin’s Treptow-Köpenick district, where it has two ongoing developments.
Buwog has invested in Neukölln, in the 12,500sqm Geyer-Medienhöfe complex where it will develop 200 apartments.
While predominately focused on student housing, Cresco Capital Group’s German venture, Cresco Urban Yurt, is building around 700 micro apartments.
The firm, backed by London-based LJ Partnership, is investing €83m in the 6,552sqm Brunnen Strasse site, near Berlin’s Mauerpark.
Backed by Middle Eastern and Asian institutional investors, as well as large family offices, Apeiron Capital and its German partner, Kauri CAB Management, are looking to invest up to €1bn in Germany’s residential sector. Berlin already forms part of the strategy, with €100m invested in three portfolios.
The city, says Kauri CAB managing director, Hagen Kahmann, offers “an attractive long-term structural demand-supply imbalance for housing and is one of the fastest growing capital cities in the world”.
While the development route is one way to gain access to a city firmly on the rise, investors have also bought platforms with existing portfolios in the hunt for units – and, crucially, rental income, despite returns being lower than in the UK and Sweden, according to PATRIZIA Immobilien.
“[Berlin offers] an attractive long-term structural demand-supply imbalance for housing and is one of the fastest growing capital cities in the world”
Late last year, Foncière des Régions took control of Danish firm, Berlin Hagen Kahmann IV. The move by the French REIT’s German Immeo subsidiary for the housing specialist added 2,735 central Berlin units and €16m in rental income to its portfolio.
Foncière des Régions, active in Germany’s increasingly popular residential sector since 2005, said the Berlin IV portfolio, worth €348m, held “great value-creating potential” in one of the “most dynamic German cities in terms of demographic prospects and purchasing power”.
Patrizia’s takeover last year of a Scandinavian real estate fund with €900m of residential assets in Germany and Sweden boosted its Berlin portfolio. The investment manager’s off-market bid for the Hyresbostäder i Sverige III fund added 14,000 apartments to Patrizia’s portfolio, of which more than 5,000 were in Berlin.
Such moves, of course, have been common for some time. But Berlin’s residential sector has also found itself at the centre of attempted merger activity as investors fight for scale.
Vonovia’s plan to take over Berlin-based Deutsche Wohnen recently fell apart after the latter’s shareholders failed to meet a minimum 50% acceptance threshold.
The merger would have created a company with a portfolio of around 500,000 residential units and a €20bn market capitalisation.
Rolf Buch, chief executive at Vonovia (formerly Deutsche Annington), said the deal would have been a “value-creating opportunity, further consolidating the market”.
In a separate move, Deutsche Wohnen, listed on Deutsche Börse’s MDAX, dropped its bid to take over LEG in September last year. That deal could have created a €17bn real estate portfolio.
Levels of interest in Berlin remain high, driven not only by population growth, but also by rising prices and rental growth.
Germany’s Zentraler Immobilien Ausschuss (ZIA) predicts that Berlin rents per sqm will rise by 6% this year, having increased by 4.4% last year to €7,90.
For buyers, prices have also risen 14.4% year-on-year to €2,482 per sqm. ZIA predicts 8% rises in prices in 2016.
Pricing of residential portfolios in Berlin is an issue, according to Daniel Riedl, chief executive of Buwog. “The market is currently undergoing a phase in which the purchase of new real estate portfolios in Germany has become extremely difficult as well as expensive or no longer reasonable,” Riedl recently said.
However, the German capital is still the cheapest for both rents and prices when compared with its ‘big six’ peers. Berlin is, ZIA estimates, still half the price of Munich.
“The increasing appeal of residential markets will lead to higher rental prices and a rise in property values,” says Thomas Beyerle director, at Catella Property, which estimates Berlin rents to be between €8.95 per sqm and €12.44 per sqm, depending on quality and location.
“In Germany, ongoing strong demand for residential property in metropolitan areas – and in locations with favourable population balance – is underpinned by urbanisation effects and structurally good economic conditions.”
Rental rises, however, are not a given, with the government making efforts to slow runaway rents. Germany’s mietpreisbremse, or rental price brake, was last year passed by the government. A standard median rent is applied per sqm for city districts, using figures based on a biennial state census of rents. No new rental contract within the district is then permitted to charge over 10% more than the median. The brake means that price increases for new rents are possible – but slowed.
While Berlin’s 10% unemployment rate is the lowest since the reunification of Germany, the city remains plagued by a high share of people in long-term unemployment, with a third of those registered unemployed without a job for at least a year.
Such figures, and the rental brake, have clearly not put investors off Berlin, which continues to experience heightened investor demand.