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October 14, 2015

It’s taken 25 years for the euphoria of post-reunification Berlin to translate into long-term opportunities in its property market – but now the hopes of the 1990s are finally coming to fruition

In 1993, when political leaders and citizens were riding high on the possibilities of what could be, when Germany’s capitalist West reunited with its former Communist East, the city’s mayor Eberhard Diepgen said: “We want Berlin to emerge from German reunification as the nation’s workbench.”

Yet despite the optimism nothing much happened for a long time.

“Back in the early nineties many people, myself included, were convinced that the Berlin market was about to take off in a big way,” says Rüdiger Thräne, Regional Manager, Berlin at JLL. “It turns out that we allowed ourselves to be swept along by the general euphoria. The city lacked healthy structures and, most of all, purchasing power, neither of which can materialize overnight.”

Once the initial euphoria of reunification had waned, the property market failed to keep pace with political change. Many of the city’s early investors learned the hard way – they had bet on the prospect of an economic development which failed to happen for many years.

Plans fall short

Around 100 major construction projects were launched immediately after the wall came down but they were not enough to carry the property market along. Potsdamer Platz, for example, where Daimler (the manufacturer of Mercedes cars) was a major developer. Sony was another major investor at Potsdamer Platz, and German companies were under a lot of pressure to build in Berlin, irrespective of the economic merits of such projects. Many of these investors subsequently suffered big-time losses on the sale of their investments.

The next few years saw a lacklustre property market before the 2008 financial crisis hit. Although Berlin recovered relatively quickly, it was only two or three years ago that the city developed its own momentum supported by young start-up companies.

New era of innovation

“Berlin has clearly developed a pull factor and more people than before believe in the city’s economic future,” says Thräne. “This pull is positively reflected in the city’s demographics.”

Berlin currently offers a lot of attractive jobs and some 150,000 people are expected to move to Berlin over the coming three years alone, which will provide additional support for the property market.

Rents also remain far below levels in comparable international cities – a factor that is driving a lot of activity both in the local office and residential markets. The latter alone was worth eight billion euros last year.

“It’s taken Berlin a long time to get to this point,” says Thräne. “However, the wait was worth it, seeing that this time around development is supported by a more solid footing and is funded with equity in a much more sustainable way. Sovereign funds and other major investors have brought stability to the market. Rents are now at a very reasonable level as can be seen from the average residential rent of nine euros per square metre, which is far lower than in Munich or Frankfurt.”

This combination of factors is enticing more international capital. New numbers from JLL show that 50 percent of buyers in Germany are now foreign compared to 20 percent in 2014.

As the nation’s biggest city, Berlin real estate takes the lions’ share of cross-border dollars. And this is likely to increase further thanks to a few key infrastructure projects in the pipeline.

Infrastructure improvements

The addition of a new international airport will provide an additional boost to property development. “Accessibility is the key consideration when major international companies choose their locations. This is why they now have their German branches in Frankfurt, Munich and Düsseldorf. This will change profoundly once Berlin benefits from direct flight to and from the world’s major centres. Even more jobs will be created locally and even more money will be invested in Berlin.”

Better air connections will also help to open up the city to a whole new set of visitors. “Most importantly, the new airport will bring more tourists to the city; at present the poor flight connections discourage many South East Asian visitors from adding Berlin to their European itinerary.”

As celebrations to mark 25 years of reunification get into full flow across Germany, this time round, Berlin’s optimism for the future has much more of a solid foundation.

 

Rüdiger Thräne

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