Berlin real estate insiders remain bullish on capital's prospects

Anybody who has been following Berlin's development over the past five years or longer can't fail to have noticed the staggering growth in both the city's attractions and in the price rises across all sectors of its property market, íncluding both rents and purchase prices for residential property.

REFIRE sat down recently in Berlin at a very useful and lively round-table press discussion with three senior Berlin real estate insiders to address the subject "Boomtown Berlin – Exggeration or Sustainable Growth?" Giving us their views were Niclas Karoff, CEO and board member of listed TLG Immobilien AG; Karsten Jungk, partner and managing director of consultancy group Wüest und Partner Deutschland; and Carsten Sellschopf, management board member and COO of residential developer formart GmbH.

Firstly, all three were agreed on the following: The Berlin property market is set to continue to profit from the dynamic environment currently prevailing in the nation's capital city; a steady inflow of new inhabitants, growing numbers of tourists and a business dynamic very specific to the city will continue to exert a positive influence on the city's real estate market and its attractiveness for investors.

Studies from many leading institutes, including the Bertelsmann Foundation, forecast Berlin's population rising by about 340,000 inhabitants over the next 15 years. The rising population and increasing disposable income means rents and purchase prices will continue to rise. This will affect the retail market, but also the office market, and here too prices are expected to rise further.

Karsten Jungk of Wüest und Partner Deutschland said that the ceiling for prices and rents has certainly not yet been reached, but investors were moing further out from the centre to find suitable properties. There is still plenty of potential for new development on empty or unused land or from conversions. A handful of small but still central locations around the S-Bahn ring are becoming the next new focus of investors, he said. "The high-price segment in the inner city is pretty much saturated. In future where is interesting is where you can reach downtown in 20 minutes but where rents and prices are still affordable for the normal Berliner and for investors."

The trend is towards smaller apartments, said Jungk. "Berlin is the biggest city for singles in the country, and likely to remain so. What is needed is additional 1-to-2 room apartments of a smaller size." Developers should be looking at slightly less space per resident, but also at cutting down on ancillary and utility costs, which are just as high in Berlin as in much richer Munich.

Carsten Sellschopf also addressed the affordability issue. "The real estate industry must develop new business models to create lower-cost housing. This could mean much more efficient use of land, or standardising and rationalising products and processes", he said.

Niclas Karoff of TLG Immobilien, which is focused on commercial property in Berlin and eastern Germany, expects continued high demand for office space. "Berlin's office rents will continue to rise over the next three years, although the immediate pressure will abate", he said. "The supply of office space will react to the strong demand by providing new space." Although yields have fallen below 5%, investments in office and retail are still worthwhile given the spread above the risk-free rate of return of 0.6%-0.7% from 10-year government bonds. The share of investment by foreign investors could rise even further, and prices and rents could continue to go up quite a bit, he said.

Although more Berlin inhabitants does not necessarily lead to a higher demand for office space, pointed out Jungk, he highlighted the nature of much of the new employment in the city, which tends to be focused on young and creative workers, many involved in startups and other high-tech industries. Such workers create clusters, which attracts other similar businesses, all of which creates impulses for fresh office demand, he said.

All three agreed that a rising population will have an influence on the retail market. "This will lead to a reduction in current vacancies and heightened demand for new retail space in a variety of existing but also non-traditional locations", said Jungk. Karoff, whose company owns many retail investments, said that despite increasing competition, retail rents are still expected to rise. "With comparatively low peak retail rents compared to other European cities, Berlin is an ideal entry point or test market for expanding international or domestic retail chains."