Ich bein ein property investor:
is now right time to buy in Berlin?

The Irish Times - Thursday, November 26, 2009


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Twenty years after the fall of the Wall and after two property bubbles, prospects for the Berlin market are steady, Irish developers operating there tell DEREK SCALLY

IN THE property business, everything is a matter of perspective and the bursting bubble around Europe has put Berlin’s property market in a whole new light.

The reputation of the German capital has swung between two extremes in recent years: what was once a steady, if unspectacular, investment location became, almost overnight, the darling for hordes of European investors following the Pied Piper of media hype.

As Irish, Danish and Icelandic investors piled in, prices began to rise and the natives got restless.

But nothing unusual lasts long: speculators were sent packing with the credit crunch, returning the market to Irish investors and developers who got in early and were clever enough to change with the times.

Today around half a dozen Irish operators in Berlin are evolving with the market, developing ambitious projects aimed not at foreign investors but at the German domestic market.

While the rest of Europe fizzles, the crisis has separated the investor men from speculator boys and made Berlin’s solidity more attractive than ever.

“We’ve had people coming to us who invested in Bulgaria, Spain, Britain, everywhere, and the only market where property is still worth what people paid for it a year or two ago – even a little more – is Germany,” says Adrian O’Sullivan, managing partner of European Property Investments (EPI).

Based in Berlin and Limerick, the company has evolved in the last five years from selling to managing properties as well as investment funds.

“The confidence in 2005 was incredible, nothing was too big for Irish investors,” remembers O’Sullivan. That Celtic Tiger confidence gave the Irish a head start in Berlin, he says: where the Germans saw problem sites, Irish people saw opportunities. But there was another extreme, too.

“When we did syndicates we’d have people calling up, sending cheques in the post without even knowing us,” he said, happy those days are gone.

Today his company has many deals on the go, but the headline project is a 20-storey office block and hotel complex on a site near Alexanderplatz, in the eastern city centre. Bought with 90 Irish investors in 2006, the economic crisis caused the original German financing to fall through; a new German bank stepped in, France’s Accor group agreed to occupy the hotel and the development is on course to open in a year’s time.

Today EPI has moved into consultancy, joint ventures with partners and operates property funds with equity stakes in almost all its investments.

It is also running an income generator fund, with a mix of residential and commercial properties in Berlin and Munich, with a minimum investment of €50,000 and a projected 6 per cent return.

What the German property market offers hasn’t changed in recent years. It’s the same modest, steady prospect as always, a far cry from promises of 20-30 per cent elsewhere, but more attractive than ever in these more sober times.

“The Irish are slowly coming around to that,” says Adrian O’Sullivan of EPI. “We’re not going to get 12-14 per cent returns but more likely a 6 per cent return, plus a growth on the sale price.”

Modesty characterises every link in the property chain in Berlin, starting with developers: where their Irish counterparts were looking for margins of 30 per cent and above, German developers are content with 10-12 per cent.

In Berlin, prices remain modest with the average apartment purchase price last year up to €130,000, from €125,000 in 2007. As prices tumble elsewhere, average prices in Berlin for residential and business units have fallen just 4 per cent year-on-year.

There are two golden rules in Berlin’s property market. The first: bring time as well as money to the table. Growth is steady but slow, and the taxman will penalise anyone trying to flip a property in the first decade after purchase.

The second: location is even more crucial here than anywhere else. The city always had an unusual structure as a collection of villages, but wartime destruction and Cold War division has left the geography even more out of whack. It’s still very much a bipolar city with two areas offering the most robust safety net for investors: the Mitte and Prenzlauer Berg areas of the former East and the south-western neighbourhoods of the former West.

In the last year, city property authorities have recorded a rise of up to 20 per cent to €600 per sq m (€56 per sq ft) for sites in Mitte/Prenzlauer Berg, slowly converging with the average western price of €800 per sq m (€74 per sq ft).

Denis Madden knows Berlin well: he lived here in the 1990s and now commutes between Ireland and the German capital as director of the German Property Centre. He says few Berliners are sorry to see the departure of the investors from Ireland, Denmark and elsewhere. “The agreement here was they were driving up prices and making the market kaputt,” he says, with recent surveys showing sale prices and volumes returning to 2006 after a foreign investor-fuelled spike.

Three projects typify the changing face of Irish property developers in Berlin.

The first is in the trendy neighbourhood of Prenzlauer Berg, where Declan Morrissey of Fetherd’s MGM Kapital is working on a second development of 39 townhouses after the first 23 were snapped up. Like other serious Irish developers over here, Mr Morrissey is using connections built up over recent years to “go native”: working with, and selling to Germans.

“We felt we were getting into good partnerships with Germans and we always felt the property we bought was solid at a solid price that was a multiplier of the actual rent,” he said. “Since the World Cup, you can see Berlin blossoming,” he says. “There’s more confidence around. This crisis seems to have almost passed them by.”

Further south on Alte Jakobstrasse, a group of Cork developers has already sold eight of 12 apartments before construction is completed on their new residential development.

Perhaps the most ambitious Irish project in Berlin at the moment is “The Garden”, a €125 million residential and commercial project located at the former East-West Berlin checkpoint on Chausseestrasse, near the new headquarters under construction for Germany’s secret service, the BND.

Developer Barry Leddy says that, in a city where over 80 per cent rent, new Berlin confidence combined with an influx of new Berliners, cultural attitudes are changing towards property.

“Their ideas on home ownership are moving more to international norms,” says Mr Leddy, who is working with his brother Glen – they are sons of Irish developer Michael Leddy.

“What we’re seeing is a sustainable growth in areas that were once peripheral in the old order and are now central. It’s a unique opportunity for infill sites that, for historical reasons, were not built on.”

Like fellow Irish developers in Berlin, Leddy is targeting the domestic German market: being able to meet German customers’ demanding standards means he is confident international demand will follow.

Some 20 years after the fall of the Wall, and after two speculative bubbles, prospects for the Berlin property market are steady and positive. Crucially, the city’s property prospects are literally an open book.

After learning their lessons in the past, all information about the development of the local property market is available to the public online. Anyone who does their research, rather than buying on the basis of trust, can be fairly sure of avoiding a pig in a poke.

“In Germany you have good data: every sale, every apartment, every site, every house has to be recorded with the authorities,” says Denis Madden. “In Ireland, with property data, we’re looking in the rear view mirror, with often a huge time lag between the sale and the data.”

Declan Morrissey sees Ireland and Berlin on a economic see-saw: as Ireland falls, Berlin rises.

“When I went to Berlin six years ago it was doom and gloom, now it’s that way in Ireland,” says Declan Morrissey. “But there is a world out there where things are progressing, and life goes on in Berlin.”

Buying in Berlin

Minimum tax breaks on rental income, quick resales, and domestic mortgages

Statutory filing of all sale information into city-run databases with price information and trends open to all

Established rental culture with strong laws to protect both landlord and tenants; apartments that are roomy enough to be homes, encouraging long-term tenancies

No Irish-style uplift in prices for sites with planning permission

Cautious risk-assessment by banks, no 100 per cent mortgages