Overseas investors are pouring money into Berlin’s real estate sector, attracted by the German capital’s burgeoning economy and strong growth prospects.
After a record third quarter, which saw almost $3 billion of capital flowing into the city, Berlin has become the third most popular European destination for cross-border investment in 2017.
High-profile deals included the €1.1 billion acquisition of the Sony Center by Oxford Properties and Madison International Realty – one of the largest single-asset deals in the European property market this year.
Meanwhile, Axel Springer agreed to sell its future headquarters to Norway’s national pension fund for $499 million, and its current office to Blackstone and Quincap Investment Partners for $388 million.
“These transactions highlight the broad base of investor demand for property in Berlin,” says Hendrick Kadelbach, Team Leader, Office Investment Berlin at JLL. “The influx of international capital is resulting in more domestic investors considering selling assets at attractive prices.”
A safe haven
The deals are part of a wider trend of investors flocking to Germany as a whole. The Eurozone’s biggest economy has seen a 23 percent year-on-year increase in cross-border investment, while year-to-date volumes are at their highest point since 2007.
A big attraction for overseas investors is Germany’s sound economic prospects. GDP grew by 1.9 percent in 2016, unemployment is at a record low and wages have increased significantly over the last year.
Berlin, meanwhile, saw GDP growth of 2.7 percent in 2016, making it the strongest growth state alongside Saxony. The city’s population is also expanding quickly and is expected to increase from 3.5 to 4 million by 2035, according to the Cologne Institute for Economic Research.
Rising prime rents, which have risen around 7 percent since the start 0f 2017 to €29 per square meter per month, have further fuelled investor interest.
Kadelbach says: “Germany is generally regarded as a safe haven and Berlin, as the capital, is the first choice because of its positive economic growth and demographics. Investors from all over the world, including the Americas, France, Norway and Asia, are attracted by its stable political environment and dynamic rental growth.”
For companies leasing office space, prime rents, though rising, remain much lower than in London and Paris. Today top rents go above €30 per square meter and JLL estimates that prime rents in the capital will rise to €30 per square meter per month by the end of 2017, driven by the expansion plans of many companies, the robust economy and the positive outlook of consumer markets.
“As prime rents in Berlin increase, the gap between other European capitals could narrow over the long term,” says Kadelbach.
Challenges to overcome
One of the biggest challenges for Berlin will be keeping up with the city’s phenomenal growth. It still doesn’t have a proper international airport and space is scarce.
Even though the number of projects under construction has more than doubled over the past 24 months, most are unlikely to be completed before 2019. What’s more, just 115,000 square meters of the space due for completion by the end of this year will come onto the market, with three quarters already secured for occupation. Consulting firm Bulwien Gesa estimates that the city needs around 1.6 million square meters of additional office space by 2020.
Yet so far the influx of investment has had a positive impact on Berlin’s real estate. Kadelbach says older buildings are benefiting from the capital expenditure of international investors, and more foreign developers are entering the market to create high-quality assets.
Another potential concern is the German economy could be at risk of overheating. The economy is expected to expand by 2 percent in 2017 and 2.2 percent in 2018, leading to fears it could tip over into an inflationary cycle.
But Kadelbach thinks there are lots of reasons to remain optimistic about the future of Berlin’s real estate market. “We believe that the positive trend will continue as the city is still growing and developing since reunification less than 30 years ago and has very positive fundamentals,” he adds.