Recent Regulatory Restraints in the Berlin Housing Market

Berlin is attractive to foreign real estate investors. Prices for residential properties are low here, compared to other European capitals. However, Berlin has established regulatory restraints on splitting title in rented buildings. This can impede an investor’s upside potential. Furthermore it cuts short the supply of individual freehold apartments.

By Uwe Bottermann, Lawyer and Partner at Bottermann Khorrami LLP

Berlin’s residential real estate market is attractive to foreign investors. Property prices in the German capital have risen significantly in recent years but are still well below prices by national and international comparison. This, together with the stable legal and commercial environment, attracts foreign investors looking for a solid investment basis. Until recently, investors found good upside potential in splitting the title in rented buildings to make individual freehold apartments. In sum, sales prices for individual apartments are generally substantially higher than the one-off price for a rented building. An example: a rented building in a good location in Berlin sold for EUR 4.45m. Had the title in the building been split, the sum of all apartments could have sold for approx. EUR 5m, giving an approx. EUR 500k upside. Then why did the seller not split the title before the sale? The simple answer in this case: because he was not permitted.

The City of Berlin passed a law prohibiting title splits in certain areas in the city from March 2015. The so-called Conversion Ordinance (Umwandlungsverordnung) applies in all current and future designated social conservation areas (Milieuschutzgebiete). The districts of Berlin can establish such conservation areas if they deem the local population in the area especially worthy of protection. Thus far, four central districts have established 22 social conservation areas. However, plans are under way to increase the number of conservation areas considerably.

Owners of residential buildings should therefore consider splitting the title and making individual freehold apartments now. Provisional title splits are possible and the costs are relatively reasonable. Establishing individual freehold apartments does not mean they need to be sold straight away. Owners can keep the individual apartments just as they kept the building. Additionally, social conservation areas are a long term measure. The newly elected Berlin Senate will not repeal the Conservation Ordinance. Rather, the Senate will presumably extend the initial five year term to the full permissible 10 years. Any development beyond that is difficult to project. One result is clear, however: the supply of freehold apartments in Berlin will decrease. Therefore, now is the time to act.

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