Berlin rising for residential

By Mike Hilton
It’s easy to forget quite how young Berlin as a capital city is. It is still less than 30 years since the demolition of the Berlin Wall, a defining moment in modern European history, perhaps matched only by the UK’s decision to leave the EU.

Since then, the city has grown rapidly: the economy, employment and income have accelerated, with little signs of slowing down as shown by Property Week’s recent report into the city’s post-Brexit opportunities.

Now firmly entrenched as the country’s political centre, business is growing in all sectors, helped by an increasing culture of entrepreneurship.
This has led to strong employment growth which is outstripping the rest of Germany and causing many to flock to the city. Last year Berlin’s population grew by 47,000 and this year is set to eclipse that with 42,000 moving to the city in the last six months alone.
This influx of people, 60% of which were from other European cities, has put even greater pressure on the supply of housing in the capital and a significant supply-demand imbalance now exists.

There are other factors adding to this shortage of housing; in Berlin there is a clear trend towards single person, rental households with an average of 1.8 people per apartment, with around 80% renting. If you were to combine this with the population growth, the calculated new demand sits at around 20,000 new units per annum in order to satisfy the city’s needs.

Slow rate of supply
However, since the early 1990s, there has been virtually no privately financed construction and the rate of new supply continues to fail to meet the considerable demand for homes. 7,000 units were built in multi-family homes in 2015, the majority of which were condominiums at higher price levels.

Condominium prices have doubled since 2010 and by almost 10% in the last year to €3,320. Both are still far below the price levels of other European cities, with a lot of catching up to do – rents for example are still only a quarter of the price they are in London.

Over the last eight years that Phoenix Spree have been investing in Berlin’s residential market, there has been considerable investor interest in the market, attracted by the mix of stable income growth, the potential to modernise and to capture the uplifts from reversionary rental growth as well as the opportunities for increased returns provided by sub-dividing multi-apartment assets for condominium sales.

However, the market remains very fragmented as many buildings remain in private ownership and in need of extensive refurbishment. This, combined with the potential for growth, property values below the cost of construction, underpinned by low interest rates, investor interest remains healthy. It’s no surprise.

Berlin, after years of relative inactivity, is still healing from the effects of its reunification, but is one of the most exciting European cities.

Mike Hilton, Phoenix Spree founding partner