Dear Reader,

A turbulent year is drawing to a close. Politically, we are still on unsteady ground. Fortunately, the economy – and especially the real estate sector – continue to grow. These latest developments are reflected in the topics and subject matter of this, the last edition of our newsletter for 2017. Growth naturally leads to more specialization and higher demands in each segment. We take a close look at Berlin and find a city with several, distinct markets, all with their own dynamics. We look at buyers and see different priorities, especially among international buyers. We look at asset classes and also observe a differentiation of offerings – student housing, micro-apartments, temporary housing.

We wish you pleasant reading and happy holidays!


Holger Friedrichs and Jürgen Michael Schick

Guest Article

Ulrich Jacke Managing Partner at Dr. Lübke & Kelber GmbH

In Berlin, it’s the district that makes the difference

Alt-Treptow is the most attractive district in Berlin for investments in residential properties. The district in Berlin’s southeast is the clear winner in Dr. Lübke & Kelber GmbH’s Berlin Risk/Return Ranking 2017, for which the company analysed each of Berlin’s 96 neighbourhoods to determine the correlation between achievable property/equity returns and the minimum return required by Dr. Lübke & Kelber, which reflects the level of risk in the respective location. Such a micro-analysis is indispensable, because, although Berlin is generally regarded as an attractive location for residential investments, it is almost impossible to make a fair assessment of such a large and polycentric city. A look at the twelve administrative districts in Berlin is also not detailed enough, as the risk/return ranking shows that, even within the districts, yield potentials vary widely.

“Hidden champions” outside the S-Bahn ring

The results of the ranking confirm that it makes sense to follow the ABBA strategy in Berlin, i.e. to invest primarily in B locations. Mainly in districts outside the S-Bahn ring, prices are still largely commensurate with location risk. This is clearly shown by the winner of the ranking, Alt-Treptow, where achievable returns on equity in both the portfolio and new-build segments exceed the recommended minimum by a clear margin (by 2.05 and 1.82 percentage points, respectively). All of the top-ranked districts in the portfolio and new-build segments are located outside Berlin’s S-Bahn ring. These include the “hidden champions” Rummelsburg and Konradshöhe in the portfolio segment, as well as Wilhelmsruh and Rosenthal in the new-build segment.

To determine the recommended minimum return, risk premiums were calculated for each neighbourhood. These were based on population trends, socio-economic conditions, the housing market, the demand for housing, and current rental and purchase prices. These are combined with the risk-free interest rate and ancillary purchase costs to arrive at the recommended minimum return. The greater the margin between the achievable return on equity in a neighbourhood and the minimum recommended return, the higher the neighbourhood appears in the risk/return ranking.

Northern neighbourhoods have the lowest risk

Admittedly, it is worth emphasizing that the neighbourhoods with the most attractive risk-return ratios are B locations. Nevertheless, it is almost impossible to make blanket statements about Berlin’s B locations. Alt-Treptow, for example, may be the winner of the Berlin risk/return ranking, but the other neighbourhoods in Treptow-Köpenick cannot match its performance. There is, therefore, no particular district or peripheral location that can guarantee attractive potential returns. This is demonstrated by the fact that the districts primarily outside the S-Bahn ring not only include the rankings biggest winners, but also losers such as Wannsee, Zehlendorf and Müggelheim, where the achievable return on equity for residential property investments is below the recommended minimum level. In these districts, this is mostly due to significantly higher price-to-rent ratios for coveted residential areas, such as lakefront properties.

Another striking feature of the risk/return ranking is that numerous neighbourhoods in the southwest of Berlin – such as Steglitz, Dahlem and Wilmersdorf – are among those with the highest risk profiles. In particular, the slower population growth in these high-priced neighbourhoods results in elevated location risks for investors who want to invest in residential properties. In contrast, districts in the north of Berlin, including Prenzlauer Berg, Pankow, Französisch Buchholz and Weißensee, have the lowest investment risks. It should be noted, however, that even Berlin’s highest risk neighbourhoods have a relatively low location risk compared to the rest of Germany.

Nevertheless, the risk/return ranking shows the pronounced heterogeneity of Berlin’s residential property market in terms of potential returns. Investors who want to invest in apartment buildings or residential complexes in Berlin must therefore take a close look at whether the location of a property is actually suitable for a long-term investment.

You can order the Risk/Return Ranking 2017 for Berlin free of charge here:

Thomas Zabel Head of Residential Development Germany, JLL

The evolving priorities of foreign buyers

The target group for high-quality apartments in the central locations of German cities is limited. As a result, developers need to be more creative and also address international groups of buyers. For many clients from the Far East, for example, it is only natural for anyone who can afford it to buy property abroad – especially in an economically stable market like Germany. After all, investment opportunities in countries such as China – the country with the most new dollar millionaires – are limited. Furthermore, China does not even allow the acquisition of real property in China.

There have never been as many foreign investors in German cities as there are today. For many years, London was the main destination for Chinese private investors who wanted to acquire real estate within the European Union. However, the UK’s upcoming withdrawal from the EU has seriously unsettled many potential buyers on the London market. Instead, more and more Chinese buyers are turning to Germany, especially Berlin and Frankfurt, as destinations for their investments. A particularly large number of modern high-rise residential buildings are currently being built in these growth cities – a residential concept that foreign buyers know well in their home countries. In my experience, one in four buyers of condominiums in modern, residential high-rise buildings in Germany currently comes from the Middle Kingdom. This includes investors and owner-occupiers alike. This has created a high demand potential for property sales. The catch: Many developers underestimate the need to establish reliable sales channels in China in order to achieve strong local market penetration.

And that’s easier said than done, because expectations are high. Both Mandarin-speaking customers and those who prefer Cantonese (e.g. in Hong Kong) need to be served by a culturally sensitive, native speaker on the German sales side. Beyond the notarisation of the purchase contract, any consultation should also include talks with bank consultants and a lawyer who speaks the buyer’s language fluently. But that’s just the basics. If you want to develop long-term sales structures, you need to establish a wide-ranging network of partners in China, such as international service companies with close relationships with Chinese banks. This is the only way to attract buyers who do not already have a personal or cultural connection to Germany, but choose Germany purely because it is a safe investment destination.

To ensure that international cooperation runs smoothly, you need more than just the licence of a global brokerage house. After all, these licensed companies operate autonomously and without the knowledge of other licensees. However, in the case of direct collaboration, the German sales team can be directly integrated into the local and supra-regional processes. Once these structures have been established, the sales team will benefit from access to the Asia Pacific region as a whole, also gaining market access in Japan or Malaysia.

Sales success revolves around the locally-based German sales teams which need to be established by the sales company, i.e. teams of employees in the same time zone as the customer base. These ensure that the Asian offices of the real estate service provider are supplied with all of the up-to-date information they need. In addition, the relevant employees can advise their business partners face-to-face should they have detailed questions regarding German housing markets or legal issues.

Nedeljko Prodanovic Managing Director of Stonehedge Gruppe

Off to the suburbs?

Anyone living in a conurbation typically wants a short commute to work. In the Top 7 cities in particular, residents are confronted with a harsh reality: Both rents and purchase prices have risen so sharply that fewer and fewer people are able to afford a suitable apartment, let alone a house. For those who work and have their social life in the city, the only solution is to move to the suburbs. Prices are often lower in peripheral locations. The question facing those who want to move is this: Is a longer commute worthwhile? After all, a 30-minute or longer drive to the city every day is not uncommon.

According to a current market report, the total value of annual real estate sales in Munich has more than doubled since 2006. The same applies to the average price per residential unit. In the German capital, transaction volumes have even tripled over the same period. Prices for apartments and houses have risen by 160 percent.

In absolute terms, purchase prices in the German capital remain affordable compared to Munich. However, wages in Berlin are lower. Rents in Berlin have risen sharply over the past ten years, with the following effect: On average, Berliners now spend 45 percent of their household income on rent. This proportion is slightly higher than in Munich or Frankfurt. Anyone who wants to reduce their housing costs should consider moving to the suburbs rather than settling for an apartment that is too small.

The suburbs are often more affordable

The rule of thumb “the farther out you go, the cheaper it gets,” applies well to Berlin. The financial benefit starts with land prices. Building land in outer suburbs often costs only half as much as it does in the city. In addition, there are often more available plots of land on the city’s outskirts. This is true, for example, in Stahnsdorf, Wandlitz and Oranienburg, but also in Potsdam, with the exception of downtown Potsdam. As a rule, land outside the city is more readily available as municipalities and small towns are politically motivated to zone sufficient building land. But there are still a few questions would-be movers need to consider:

• Is it cheaper there? Yes. Although, families in particular must first calculate whether it makes sense for them to own their home and whether they can actually afford it. If so, there is no reason they shouldn’t have their own four walls in the suburbs. A rental apartment in the suburbs could be another option, and should certainly be considered. Apartment buildings offer an interesting mix of urban comforts, with ample space and green surroundings. Construction costs are also often lower.

• Is the nearby infrastructure suitable? If you want to live in the suburbs, you should check the local amenities. How far is it to the nearest supermarket, how fast can I get to the baker, the doctor, the day care center? All in all, there are very good local services in many communities in the greater Berlin area. Short distances to the countryside or a lake are the reward for those who do make the move.

• How good are the transport links? From the suburbs, commuters can normally get to work in 30 to 40 minutes on local and regional public transport. Within Berlin, you might spend just as long travelling to work – depending on which district you live in. Anyone who drives to work by car should check whether they can park on the outskirts of the city and continue their journey by train. The Berlin Senate and the State of Brandenburg have also responded to the evolving needs of a growing city. They want to provide better connections to Berlin’s surrounding areas and have launched the “Elbe-Spree” project. Trains will travel more frequently and waiting times will be reduced from up to 30 minutes to about 15 minutes.

Strategies of this kind have also been implemented in other major cities. After all, cities benefit from closer and better links to the surrounding countryside. Real estate prices in the Top 7 cities will continue to rise over the next few years: An important argument for taking a fresh look at outlying areas.

Jürgen Michael Schick Owner MICHAEL SCHICK IMMOBILIEN GmbH & Co. KG

Rents are still increasing, but slowly

Politicians, tenants’ associations and large sections of the media are still talking about a so-called “rent explosion” in Germany. Current figures tell a different story.
Several market studies, including the current rent index from the real estate association IVD, show that rental price growth has, in some cases, slowed significantly in the second and third quarters of this year. According to the IVD, all indicators suggest that the days of rapid rent increases seem to be over, for the time being at least. In numerous metropolises and cities, rents are only rising at the rate of general inflation. In Düsseldorf, rents are actually falling as a result of numerous new construction projects, while rents in Frankfurt and Stuttgart are stag-nating, and in the cities of Munich and Hamburg, both of which are experiencing strong popu-lation growth, rents are rising by only about 1.5 and 2.0 percent, respectively. In Germany, the average net rent for an apartment built after 1949 with an average residential value is EUR 6.28 per square metre. This represents an increase of only 2.35 percent, compared with 3.43 percent in the same period in 2015/2016.


On closer inspection, this development is not surprising. In my opinion, the most important cause is the growth in new-build apartments in Germany. New construction is having an im-pact. Adding more apartments relieves pressure on housing markets and offers the best pro-tection against sharp increases in rents. It is true that activity in the rental housing construction sector was more or less flat in the first nine months of 2017, with only 0.9 percent more build-ing permits issued. Nevertheless, the total construction volume is higher than it has been in years. While I was presenting the latest rental price index, a rather left-wing journalist asked me whether I risked playing into the hands of the FDP, which has publicly called for the aboli-tion of the Mietpreisbremse (rental brake). I refuted the suggestion and highlighted the fact that I have always been anything but the instrument of Heiko Maas, who introduced the rental brake when rents were rising excessively in some markets.

Rental price growth in the new-build sector

Incidentally, the pace of rental price increases in the new-build sector has also slowed. In the case of apartments with an average housing value, rental price growth has stagnated, and is even declining slightly in some cases. Overall, rents in the sector rose by 0.4 percentage points less than in the previous year. The only segment to register stronger rental price growth was high-quality, new-build apartments. Rental price inflation rose to an average of 3.37 per-cent, compared to last year’s figure of 3.2 percent. This increase is mainly attributable to the major cities and metropolises, where rents in this segment rose much more substantially than in 2016. In metropolises with 500,000 or more inhabitants, rental prices rose by 3.7 percent, in cities with 250,000 to 500,000 inhabitants by 3.3 percent, while prices in small and mid-sized cities stagnated.

Berlin bucks the trend

As in many other respects, Berlin holds a special position. Contrary to the general trend, rents in Berlin rose by 6.1 percent, mainly due to catch-up effects. Despite this growth, the capital city is still well below Hamburg’s EUR 9.80 per square metre, Frankfurt’s EUR 10.00 per square metre and Munich’s EUR 13.10 per square metre.

Berlin’s unique position is also apparent when the city is compared to the status of capitals in other countries. While a capital is usually the most expensive city in any country, Berlin re-mains the cheapest of Germany’s metropolises. After all, Berlin is a prime example of the ineffectiveness of a strict regulatory policy on rental housing markets. Although Berlin’s Sen-ate is particularly strict, rents are still rising faster than in any other major city in Germany.

Berlin also registered the greatest increase in rents for apartments built before 1948, at 5.77 percent. In Frankfurt, Stuttgart and Düsseldorf, rents in this segment are stagnating. Across Germany, rents for older buildings rose by 3.54 percent, compared with 3.29 percent in the previous year. In 2017, the average rent in this segment in Germany was EUR 6.95 per square metre; in Berlin, an average apartment in an older building costs EUR 7.50 per square metre.

Investors target compact apartments

This year, for the very first time, the transaction volume for business and student apartments will break through the billion-euro threshold. In the first six months of 2017, transactions in the sector totalled EUR 700 million. In addition, an estimated EUR 300 to 400 million will be in-vested in serviced apartments. And this is just the transaction volume for institutional inves-tors, not including the sale of apartments to retail investors. bulwiengesa, who presented the data at a recent Berlin Real Estate Roundtable on the subject of compact apartments, as-sumes that an additional 30 percent will be added to the total by private investors. Felix Em-bacher from bulwiengesa and Dr. Stefan Brauckmann from the Moses Mendelssohn Institute expect “a record year for micro-housing transactions in 2017”.

Over 80 percent are one or two-person households

However, developers are a long way from keeping up with demand for small apartments, i.e. those with one, one-and-a-half or two rooms. In Germany’s major cities, 54 percent of house-holds are now single-person households, and a further 27 percent are two-person households. At the same time, only 22 percent of all apartments in cities with populations of more than 500,000 are one or two-room apartments. These are the figures for the existing housing stock. But even in the new-build sector, nowhere near enough compact apartments are being built. Between 2005 and 2014, for example, 68 percent of newly built apartments had four or more rooms, while only 20 percent had one or two rooms.

Students are only 10 - 15 percent of the target group

Small apartments are often thought of as student apartments. However, students only repre-sent around 10 to 15 percent of the target group for compact apartments. Other target groups include older people, singles, career-starters and commuters. The range of compact apart-ments is varied and we need to distinguish between residential concepts and commercial concepts. Residential concepts are dominated by student apartments (typically between 16 and 25 sqm) and business apartments (usually 25 to 40 sqm). In the case of commercial concepts (serviced apartments), a distinction must be made between micro-apartments, boarding houses and apartment hotels.

SOURCE: bulwiengesa AG

Overly optimistic calculations for developments

There’s no doubt that demand is high, but participants at the Berlin Real Estate Roundtable complained that unprofessional market participants are jumping on the bandwagon – and of-ten failing with their developments. If a classic residential development does not look like it is going to pay off, because the costs of land and construction do not tally with a realistic rental strategy and market sale prices, then a project is hastily rebranded as a micro-living devel-opment. In most cases, this is because, for example, rental prices of around EUR 25 can be achieved in the micro-living segment, whereas a traditional housing development would only achieve EUR 15 per square metre. Suddenly, what was an unprofitable project can (appar-ently) be made to pay off. However, developments frequently have to be cancelled for a number of reasons, for instance because municipal parking space requirements have been overlooked. And economic feasibility calculations often underestimate the significant person-nel and maintenance costs involved, which means that such calculations are often overly op-timistic.

Some vendors even advertise with false statements such as: “Mietpreisbremse rent controls do not apply to furnished apartments”. Hans-Joachim Beck has already refuted this common misconception. The Mietpreisbremse (rental price brake) applies to all existing apartments, the only exception is for new-builds. It also applies to furnished apartments. Although a furni-ture surcharge may be added to the local comparable rent (the basis for calculating permissi-ble rent increases), this is only two percent of the current market value of the furniture per month.

Dramatic increases in price-to-rent ratios

In addition to property developers, the Berlin Real Estate Roundtable also featured several presentations from institutional investors who are active in the compact or micro-apartment sectors. HanseMerkur Grundvermögen is one such investor, targeting investments in com-muter cities, where demand for micro-apartments is especially high. Their motto for analysing micro-locations: “Centrality beats image”. Of course, they would never invest in develop-ments in underprivileged areas, but, apart from that, they place less emphasis on a specific location’s image, instead prioritising short distances to amenities and public transport services. Price-to-rent ratios for serviced apartments and student apartments are converging with those of more traditional forms of housing, but, according to HanseMerkur, they are still lower by around two years’ rental income.

This price differential is necessary because operating costs and the costs of the increased wear and tear caused by a high tenant turnover are far greater than with more traditional forms of living. Michael Vogt of Mondial Kapitalverwaltungsgesellschaft, which has in the past been particularly active in the student apartment segment, is therefore sceptical. Price-to-rent ratios have now risen to such a level that his company has not invested in the segment for almost two years, preferring to look abroad, where prices are lower. “We simply refuse to buy student apartments at 22 to 24 times net annual rental income, which is what many current sellers are asking for. We know that, being realistic about the higher operating costs and ten-ant turnover in the sector, it would be impossible to generate the levels of returns that our in-vestors expect”, explained Vogt. However, he has observed that prices are now starting to fall slowly, and project developers are realising that the price-to-rent ratios that can be achieved in the sector will never be as high as those for more traditional forms of housing. If prices were to correct, he would certainly buy again – he already has EUR 150 million of investor capital in the pipeline. His idea of a good location is quite simple: “Either 15 minutes to university or to a fashionable neighbourhood”.

Another investor, Oliver Grossmann of AviaRent Invest AG, who has launched his second micro-apartment fund, also illustrated just how far prices have risen: “When we launched our first fund in 2012, we were able to buy at a ratio of 17 times net annual rental income. Today, we frequently get offers in top cities at price-to-rent ratios of 23 to 25, and even in B and C cities, we are often quoted 20 to 21 times net annual rental income.

Berlin Residential Investment Market


Preemptive purchase right: Berlin’s Senate seeks legal clarity

Berlin’s Senate wants Berlin’s Superior Court of Justice to rule on whether district authorities can generally exercise a preemptive purchase right in areas with condominium conversion bans. In doing so, they are appealing against an earlier decision issued by the Berlin Regional Court. In April 2017, the Regional Court had declared that the preemptive purchase right may not be exercised where a plot of land contains buildings that comply with the stipulations of the land-use plan. However, the written justification for the decision, which is based on Section 26 of the Building Code, has only recently become known and could also be relevant for other cases. The Berlin Senate announced that it hopes to create clarity with this test case.

The specific case involved three parcels of land with apartment buildings in Berlin-Schöneberg. These were sold to a private investor by the Institute for Federal Real Estate (BImA). However, authorities in Tempelhof-Schöneberg had registered their preemptive purchase right, setting the market value significantly lower than the originally agreed selling price. The investor filed a complaint, which was upheld in the first instance.

Leading real estate experts have long criticized the way preemptive purchase rights are exercised in Berlin. According to them, municipal authorities often use the threat of preemptive purchase rights as a means to exert pressure on investors to accept agreements with wide-ranging restrictions. If Berlin’s Superior Court of Justice confirms the judgement of the Regional Court, municipal authorities will no longer be able to exercise their general preemptive purchase rights.

Schönefeld is booming, even without the new airport

While Berlin Brandenburg Airport (BER) recently attracted negative headlines again and is unlikely to open before 2021, the southeast of Berlin is enjoying continuous growth. Berlin-Schönefeld is experiencing a veritable building boom in the residential and commercial sectors. The driving forces behind this upturn are Berlin’s continuous growth and the area’s good transport connections and coveted quiet location on the outskirts of the city. Due to local geographic conditions, there is also no risk of aircraft noise once BER does open.

One of the most important local players is the developer Bonava, which has been consistently buying and developing land in the area since 2012. The company has now completed 362 apartments and houses, and demand remains high. In another project, 152 rental apartments are to be built and a further 400 to 500 units are in the pipeline. In addition to Bonava, other developers are also active in the area. The community is complemented by a school, a swimming pool, a shopping center, hotels and restaurants. Schönefeld currently has around 15,000 residents – rising to 35,000 in the future.

The infrastructure around the airport functions smoothly and is well used even without the new airport. The logistics real estate developer SEGRO has meanwhile fully leased its Berlin Airport Park, which is located directly at BER. Furthermore, SEGRO is planning to extend the 54,000 sqm area considerably from 2018 onwards.


Two rental apartment buildings in attractive Schöneberg location

These two, five-story rental apartment buildings have already been subdivided into condominium units. The street-front buildings are fully let. They contain 26 residential units, with total living space of around 1,461 sqm, plus two office/practice units totalling around 141 sqm. There are also 10 car parking spaces in the interior courtyard. The apartments vary in size from 33 to 72 sqm and are rented for an average of EUR 6.86/sqm per month. These two, well-maintained buildings were built in 1908 and 1958, respectively, and are in good condition. The buildings’ lofts have not yet been converted into residential units. The properties are located in a beautiful side street in the coveted district of Schöneberg, between Grunewaldstraße and Winterfeldtplatz.

Price: € 5,500,000 plus 7.14% sales commission (incl. sales tax)

Yield: 2.7% ACTUAL

(Please quote property reference 51317 when making your enquiry)

Fully-let residential development in Dresden

This new, five-storey residential development is currently under construction and will be handed over to its new owner as a turnkey property. The rentable living space of around 1,055 sqm is divided into 42 residential units, ranging from 19.85 to 44 sqm. Many of the units feature balconies and terraces. On the ground floor, there are eight covered parking spaces. An elevator ensures barrier-free access to all apartments. Heating is supplied via district heating. The seller is responsible for the initial letting. Full occupancy, which is expected at the end of 2017, results in annual net rental income of approximately EUR 180,000, with individual rents of between EUR 280 to EUR 630 per unit/month.
The property is located in Dresden-Löbtau, an extremely popular residential district thanks to its direct proximity to the city centre and the TU university.

Price: € 3,900,000 plus 7.14% sales commission (incl. sales tax)

Yield: 4.6% ACTUAL

(Please quote property reference 51543 when making your enquiry)

Developable land plus multi-family house in Bernau, just outside Berlin

Now available: A 386-sqm multi-family house, together with a 3,322-sqm parcel of developable land with approximately 1,000 sqm of existing buildings. The multi-family house, which has heritage protection status, contains three period apartments and was extensively renovated in 2000. Heating is supplied via a gas central heating system. The property is fully-let. This offer also includes the adjacent property, which is located to the rear of the multi-family house. The structurally sound, existing buildings provide a total of approximately 1,000 sqm of space, which could potentially be extended to add a further 2,000 to 3,000 sqm of residential and/or commercial space. The property is about 250 metres from the nearest commuter rail station and the town centre. Bernau, which has 37,000 inhabitants, is a town just outside Berlin’s city limits. Berlin-Mitte, and the central commuter rail station at Friedrichstraße, can both be reached in roughly 30 minutes thanks to a direct commuter rail line (the S2).

Price: € 1,400,000 plus 7.14% sales commission (incl. sales tax)

Price per sqm: € 1,010

(Please quote property reference number 51606 when making your enquiry)