Berlin Residential Investment Market

Berlin Residential Investment Market News Update on Berlin s Rental Housing Market January 2016 Berlin News Friedrichshain-Kreuzberg Uses Right of First Refusal to Override Sale Photo: Shutterstock.com For the first time ever, district authorities in Berlin have prevented the sale of a piece of real estate to a foreign investor by making use of their right of first refusal. The property in question is an apartment building, at Wrangelstraße 66 in Friedrichshain-Kreuzberg, in which a majority of the apartments belong to buy-to-let owners. The building s owners were planning to sell the building to a Luxembourg-based investor. However, the district s Councillor for Building and Development, Hans Panhoff (Green Party), raised what he viewed as serious concerns that Wrangelstraße 66 could become little more than a speculative investment object. District authorities in Friedrichshain-Kreuzberg then proceeded to make use of their right of first refusal. necessary financial muscle to acquire the building on their own. So, in order to stump up the 3.7 million needed to buy the building, they had no option but to seek partners. Right of first refusal doesn t always work Making use of first refusal rights is not always quite as straightforward as it was in Wrangelstraße. Jens-Holger Kirchner (Green Party), Councillor for Building and Development in Pankow, recently attempted to use his district s right of first refusal for a property at Kollwitzstraße 2 and failed. In this case it was because the planned partnership with a local housing association fell apart because the potential partner believed that the proposed price was too high. Purchase only possible with partners The district s authorities were only able to act in this way because they invoked legislation that allows them to protect the neighbourhood s character (Milieuschutzverordnung) and partnered with Gewobag, a communal housing association, and a charitable foundation, the name of which has so far not been disclosed, to buy the property. This is the first time that such a cooperative model has been developed, and sets what Julian Schwarze of the Green Party describes as an important precedent. The district authorities lacked the The background: When a property owner in a designated protected neighbourhood (Milieuschutzgebiet) decides they want to sell a property, local authorities have an eightweek window in which they can block the sale and propose an alternative buyer. As district authorities rarely have sufficient funds available for real estate purchases, they use their right of first refusal to benefit third parties, above all communal and municipal housing associations who are able to take advantage and expand their housing stock. 1

Interview Interview with Alexander Harnisch, Managing Director of DIAMONA & HARNISCH Berlin Still Has Plenty of Potential Herr Harnisch, why are real estate developers currently so interested in Berlin? We believe there are very good reasons for focussing exclusively on Berlin: The city is predestined for the creation of sophisticated and luxurious living space. Berlin has made a name for itself internationally and is attracting large numbers of new residents. As a result of this strong inward migration the city needs roughly 20,000 new apartments per year. This means that the fundamentals are very attractive for real estate developers. Who are your buyers? We serve both German and international buyers. A lot of Germans are currently looking to buy as an alternative to renting. After all, owner-occupiers liberate themselves from the cycle of escalating rental prices. International buyers are more interested in the fact that Berlin, in contrast to other gateway cities, such as New York, London, Sydney or Melbourne, continues to offer attractive property prices and exciting opportunities for development. An added attraction is that it is easy to find tenants for apartments in the city because the supply of housing is low, while demand rides high. At the moment we are seeing a lot of investment, particularly from Chinese buyers, as they acquire second or third apartments in Berlin. DIAMONA & HARNISCH is a Berlin project developer who has been developing sophisticated condominiums in Berlin s best locations since 2008. Alexander Harnisch, Managing Director of DIAMONA & HARNISCH, continues to see strong potentials for the city. the air. The fact that it is impossible to own real property in China 70-year leases, normally for a single apartment are all that is available, also helps. What are the main factors motivating Chinese buyers? Our Chinese clients typically buy apartments in Berlin as investment objects. There are however cases in which Chinese parents have bought apartments for their children, as student apartments to live in while they study at one of Berlin s renowned universities. Once the children have graduated, the apartment can then be let to a tenant from outside the family. We are also seeing an increasing number of Chinese buyers who are relocating to Berlin on a permanent basis. And with good reason: Alongside the comparatively low property prices and high levels of political stability, Chinese buyers also appreciate the high-quality standard of living and the cleanliness of the environment, particularly And can you still find development land in Berlin? For our projects, we are interested in high-quality locations in central districts, such as Berlin-Mitte or Prenzlauer Berg, and superior suburban districts, such as Steglitz-Zehlendorf. The search for suitable development land has definitely got harder, but there are still always strips and wedges of land that we are able to find and develop. 2

Column by Dr. Rainer Zitelmann Maximising Exit Prices Many of the investors who are invested in rental property in Berlin are currently considering their options for profitable exits especially on the back of such strong recent price growth. There are basically three models to choose between: 1. A global sale, i.e. selling a building as a single object. In today s market, it is certainly possible to achieve an attractive price. 2. Converting the building into individual condominiums which are then sold by a professional realtor. In such a scenario, the condominiums are initially offered to their current tenants, who have the legal right of first refusal. Vacant apartments can be sold to owner-occupiers and tenanted apartments can be sold to buy-to-let investors. 3. I will go on to describe a third model, which will allow you to maximise your returns and achieve the highest prices. You convert the building into individual condominiums and, over the next ten to fifteen years, sell individual apartments as tenants move out and they become vacant. The benefits of the third model are obvious: You generate by far and away the highest prices significantly more than with models 1 or 2. This is because the best prices are paid by owner-occupiers for vacant apartments, because investors expect a certain minimum yield and owner-occupiers do not. Admittedly, the third model is not appropriate for everyone, it has to fit in with your liquidity and life planning. If you are looking for a quick release of capital, this is definitely not the model for you. But maybe you are already thinking to yourself, At the moment I don t really need a large sum of money. I wouldn t know where to invest it anyway. The third model is especially attractive for rental property owners approaching retirement or looking to step back from business. People in this kind of situation are not looking for a one-off cash injection, rather they are more interested in regular windfalls over an extended period of time. Of course, with model 3 it is not possible to plan exactly when and how high these windfalls will be, as much depends on the rate at which tenants move out of your apartment building or buildings. This model is also only applicable if you have owned the apartment building for at least ten years. Otherwise, in accordance with Section 23 of the German Income Tax Act (EstG), you will have to pay income tax on the proceeds from any sales. Even if this is not a major issue for you, there is another tax-trap to be avoided: You run the risk of being classed as a commercial real estate trader. If you sell more than three apartments within a five-year period (a ten-year period for those in the real estate industry), you become a commercial real estate trader, a designation which is then applied to all of your properties. In tax terms, this is an absolute disaster. The only exception: If you have owned the real estate for more than ten years. This model is only applicable if you have owned the apartment building for at least ten years. So, as you can see, there are two very good reasons, namely avoiding being classed as a commercial real estate trader and not falling foul of the speculation period, to only use model 3 if you have owned a property for more than ten years. It is also vital that you haven t carried out any modernisation work on the property, as this resets the clock on the five- or ten-year period for commercial real estate trading. 3

Berlin Real Estate Roundtable on 18 th and 19 th April, 2016 in Berlin Intensive seminar: The German real estate tax landscape: Fundamentals and new developments In response to strong demand, this is the 11th time we are running this event with Hans-Joachim Beck. The event provides a comprehensive examination of the fundamentals and an illuminating view of new developments in the German real estate tax environment (case law, administrative practices, legislation, etc.) and is always highly-rated by attendees. It is possible to book each day individually, or both days together. Day 1: 18 th April, 2016 Day 2: 19 th April, 2016 Speaker: Hans-Joachim Beck, Presiding Financial Court Judge Berlin-Brandenburg a. D. / Head of Tax, IVD Speaker: Hans-Joachim Beck, Presiding Financial Court Judge Berlin-Brandenburg a. D. / Head of Tax, IVD Dr. Kai Tiede, Judge at Berlin-Brandenburg s Financial Court Topics: > Current and anticipated tax changes > Income tax > Section 23 Income Tax Act (EStG): Capital gains from private property sales Topics: > Value added tax (I) > Value added tax (II) > Property transfer tax > Inheritance and gift taxes > International tax law Request your programme and additional information by email: info@immobilienrunde.de 4

Market trends by Jürgen Michael Schick, MRICS Perspectives for 2016 2015 was a great year for Berlin s real estate market. And given the way the current year is shaping up, the trend is set to continue. The current optimism is certainly well-founded. Berlin is growing at a rapid rate and the real estate market even without taking the need to house the large numbers of refugees arriving in the city is driven by persistently high levels of unsatisfied demand. The fact that housing construction needs to be accelerated if the growing number of Berliners are to find somewhere to live is beyond debate. However, what needs to be settled are the questions of Where? and How? There is very little available development land in central districts, and Berlin s Senate hasn t so far been that keen on rezoning land for new housing. Changes to land utilisation ordinances, to allow vertical extensions and increased housing density, would go a long way towards providing much-needed new residential space. If these challenges are to be met, there needs to be a political paradigm shift, from a we ll manage it somehow approach to tangible strategies. 2015 was characterised by major political interventions in the rental housing market. It doesn t seem as if politicians are likely to stop interfering anytime soon. A ministerial draft for a second reform of Germany s Tenancy Act is expected to arrive in the first half of 2016 and is set to implement a raft of measures, such as defining standard procedures for the compilation of rent indexes across Germany. In principle, there is nothing wrong with this, particularly as there has never been a uniform or legally watertight method for producing a rent index or determining local benchmark rents. The problem: Initial indications are that the reforms will extend the reference period for calculating local benchmark rents from four to ten years. This will result in old leases having a greater influence on individual rent indexes and lead to lower local benchmark rents. The result of the Tenancy Act reforms 2.0 will be nothing short of a rent index manipulation law, which in reality will bear a very close resemblance to a total ban on rental increases. The new year will also demonstrate exactly what the impact of councils rights of first refusal will be, especially after the precedent that has already been set in Berlin. District authorities hope that the regulation will enable them to prevent luxury modernisations, even though they don t have the financial resources to exercise their rights themselves. This just leads to an absurd stalemate as both the (forced) seller and the buyer have an interest in the profitable management of the property. In contrast, efforts by the federal government to allow extraordinary depreciations for private housing construction are to be applauded. It was recently revealed that this new measure is to be targeted more widely than was previously assumed. If true, this would mean that the temporary financial support will also apply to new-builds in regions in which authorities have enacted caps for rental increases. Provided federal and state governments are able to come to an agreement, the extraordinary depreciation regulations are planned to apply from 2016 to 2019. This could also have a positive impact on the Berlin market, provided the subsidies are not limited to new-builds that cost less than 2,000 per square metre. After all, given the high cost of building land in central locations and rising construction costs, it s not exactly hard to exceed this threshold. Then there s the fact that the minister for economic affairs, Gabriel, recently declared that he supports an increase in linear depreciation, from two to three percent, for the private housing construction sector. He also announced that he is a proponent of a new and far-reaching housing construction programme in Germany. I can only add my voice in support. Let s just hope that his words are turned into actions in 2016. 5

Portrait of a district Steglitz Steglitz between lakes and the S-Bahn ring Photo: Shutterstock.com Steglitz is on the eastern edge of the district of Steglitz- Zehlendorf, and shares its borders with Tempelhof-Schöneberg and Wilmersdorf-Charlottenburg. Steglitz is famous for being the home of Berlin s most frequented shopping street: Schloßstraße. Even as far back as the eighteenth century, the street was known as one of the most important trading streets in Germany. Just beyond Steglitz s eastern borders are the neighbouring districts of Grünewald and Wannsee. Steglitz s appeal is based on its closeness to the city centre, its extensive public transport links and the fact that it takes just a few minutes to leave Steglitz, and the city, behind and head out into the wide green spaces beyond Berlin. Where the Stieglitze fly The name Steglitz has Slavic roots and originated back when the Margraviate of Brandenburg was an important principality of the Holy Roman Empire. Established at the beginning of the thirteenth century, the village, named after the Stieglitz bird, remained relatively unimportant for many years. This all changed in the eighteenth century when Steglitz was able to profit economically from its prominent location on the route of the Reichsstraße. What is today Schloßstraße was once regarded as the most important trade route of its day, running from Aachen through Berlin and on as far as Lithuania, and became the first cobbled street in Prussia in 1792. After Carl Friedrich von Beyme bought the village of Steglitz, he had a manor house built in 1804. The house, at the southwestern end of Schloßstraße, just where the road bends, was known at the time as the Beyme-Schlösschen, today it is known as the Gutshaus Steglitz. Field marshal Friedrich Wrangel moved into the house after Beymes death in 1850, bestowing a second nickname upon the house Wrangelschlösschen and also becoming the source of the name for the Wrangelkiez neighbourhood in Friedrichshain-Kreuzberg. Steglitz developed into a town and was given a further boost with the creation of mulberry tree plantations which served 6

Portrait of a district as the basis for silkworm breeding, or sericulture. At around 1840, the silk trader and manufacturer Johann Adolf Heese took advantage of the situation and turned Steglitz into the centre of silk production in Prussia. The heart of Steglitz: Schloßstraße With more than 200,000 m² of retail space, Schloßstraße is the largest retail destination in Berlin. A number of shopping centres rub shoulders with each other, such as the Forum Steglitz, the Schloss-Straßen-Center, the Boulevard Berlin and Das Schloss. The last of these is by the traditional town hall, Rathaus Steglitz, which has been used by the district council since 1898. Nowadays, this neo-gothic building houses the local authority s administration. The Titania-Palast is another of the district s buildings with a rich history. This venerable old cinema opened its doors in 1928 and its reputation stretched far beyond Berlin right through to the 1960s. The building s cubic design owes a great deal to the New Objectivity movement and was celebrated by critics and the general public alike for its innovative and revolutionary architecture. Up to 1,920 cinema-goers could enjoy films and concerts in the cinema s largest theatre. The cinema became home to the Berlin Philharmonic Orchestra in the period after the Second World War, after the Allies had destroyed the original Philharmonie. Today, the building has become home to a wide range of shops but there is still a cinema here to this day. The entire building was gutted and modernised, and it is unfortunately no longer possible to identify the original large theatre. Water mills, water tower and villas The origins of Steglitz have also become almost impossible to trace. All that remains as a reminder of the importance of water to the district is a single street at the southwestern end of Schloßstraße. Beneath the street, called Am Bäkequell, is the original source of the Bäke. The Bäkefließ was one of the core regions in the Margraviate of Brandenburg, through which enough water flowed to power numerous water mills. Thanks to the density of housing construction, all that are left of the river today are two little creeks which emerge from their underground source a kilometre away and combine to form a pond. There is a cemetery in the eastern part of Steglitz that can trace its history as far back as 1875. The cemetery is also the site of a 42-metre, listed water tower. Originally built at the edge of the cemetery in 1919, the tower became fully encircled as the cemetery progressively expanded. The water Development of rents in /m²/month 12 Berlin 10 Steglitz-Zehlendorf Steglitz 8 6 4 2 0 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Source: immowelt.de/immobilienpreise 7

Portrait of a district tower never had to fulfil the function for which it was designed as, shortly after it was completed, Steglitz was connected to the public water supply system. The Südende neighbourhood, famous for its villas, begins just past the water tower. The first villas were built from 1873 onwards in Steglitz s eastern section. Only a small number of the once impressive villas have survived to this day. Sadly, many of the villas were destroyed during an Allied bombing campaign in the Second World War. It wasn t until the 1960s that development began on these barren stretches of land and the quarter developed a loose ensemble of apartment blocks. Varied rental prices and moderate rental growth Whereas the average rent for the entire Steglitz-Zehlendorf district stands at 8.58/m², the rents tend to increase to the west of Schloßstraße, i.e. in Schildhornstraße and Am Fichtenberg. The area to the west, around Schildhornstraße, is regarded as particularly lively, although it does have some problems with traffic as it is so close to Schloßstraße. Nevertheless, average rents here are around 9.03/m², the highest in Steglitz. Fichtenberg is not only one of the most sought-after neighbourhoods in Steglitz, situated as it is between Schloßstraße and the Botanical Gardens, but also as a result of its elevation in what is otherwise a fairly flat city. In Fichtenberg, tenants have to pay an average of 8.67/m². Rents to the north of Steglitzer Damm, between Albrechtand Bergstraße, are almost a full euro cheaper at 8.01/m². Steglitz s more affordable neighbourhoods also include the quarter around the Stadtpark Steglitz to the south of Steglitzer Damm, where rents average 8.22/m². Both of these neighbourhoods have so far seen subdued rental price increases, largely due to the existing density of housing and the fact that more spacious, outlying neighbourhoods have been gaining in popularity. At the lower end of the market, the neighbourhoods rank almost identically. In this segment, average rents range between 5.93/m² and 6.48/m². At the top end of the market, Fichtenberg leads by some distance with 15.95/m², followed by the area around Schildhornstraße at 14.17/m², the Stadtpark neighbourhood at 12.80/m² and then the area around Albrecht- and Bergstraße. Housing costs, purchasing power and housing expense ratio in Steglitz 4000 Housing costs in /month Housing costs and purchasing power in 3500 3000 2500 2000 1500 1000 29.6 28.7 28.1 Purchasing power in /month Housing expense ration in % 500 0 27.2 Schildhornstraße (12163) Fichtenberg (12165) Stadtpark (12167) Albrecht-/Bergstraße (12169) Source: Wohnmarktreport 2015 CBRE / Berlin Hyp 8

Apartment buildings of the month Low-risk and well-maintained investment object in middle-class Reinickendorf Price: 1,075,000.00 plus 7.14 % sales commission (incl. VAT) Yield: 4.28 % Price per m²: 1,557.00 (Please quote property reference 15100 when placing an enquiry) This apartment building, built in 1974 and situated in the district of Reinickendorf, is in a superior condition for a building of its type. The property s owner has engaged in a programme of regular maintenance. This has included the modernisation of all balconies over the last twelve months, renewal of the building facade and the installation of new thermal insulation in the roof space. Each of the nine residential units is 75m² and they are all fitted with balconies and windows in their bathrooms, allowing plentiful natural light into the rooms. One of the apartments is currently untenanted. There are six parking garages to the rear of the property. The central courtyard also offers parking spaces for three vehicles. The building is equipped with a lift. The building s heating is provided by a modernised oil-fired central heating system. The property is conveniently located close to a range of shops and supermarkets. Access to Berlin s extensive public transportation sy stem is also first-class. Information acc. to energy performance certificate: Year built: 1974; final consumption: 85 kwh; heating type: central heating; energy source: oil; energy performance certificate dated: 02.10.2014, expires 02.10.2024. Mixed-use property with potential for extension in Alt-Tegel Price: 1,500,000.00 plus 7.14 % sales commission (incl. VAT) Yield: 4.26 % Price per m²: 2,568.00 (Please quote property reference 15101 when placing an enquiry) The property, built in 1904, is situated in the district of Reinickendorf, in the north pf Berlin, an extremely attractive part of the Tegel city district. The apartment building comprises ten residential units and one commercial unit. The property has been well-looked after and is in very good condition. There are parking spaces on the rear section of the property, bith outdoor and in garages. A recent feasibility study has shown that it is entirely possible to add floors to the top of the building and erect a new building on the rear section of land. The study identifies an additional 880 m² of potential residential space. Reinickendorf is highly-regarded for its plentiful leisure facilities and its extensive open spaces, lakes and rivers. Information acc. to energy performance certificate: Year built: 1904; final consumption: 194.2 kwh; heating type: self-contained central heating; energy source: natural gas; energy performance certificate dated: 11.06.2008, expires 11.06.2018. 9

Apartment buildings of the month Mixed-use property, suitable for condominium conversion, in Berlin-Neukölln This five-storey, turn-of-the-twentieth century apartment building is located in Berlin-Britz, part of the district of Neukölln. The 13 residential units are accessible via a single stairwell and are divided between the main streetfront building and a single-storey extension to the courtyard. The front of the object faces to the south and the apartments are fitted with south-facing balconies over the building s front garden. The 120 m² unit on the ground floor is currently used for commercial purposes, but could easily be converted into two attractive apartments with garden terraces. Heating is provided via electric storage heaters and a switch to gas central heating has already been planned. The object is not in a refurbishment zone or designated protected neighbourhood. Information acc. to energy performance certificate: Year built: 1900; final consumption: 138.5 kwh; heating type: storage heaters; energy source: district heating; energy performance certificate dated: 15.07.2009, expires 15.07.2019. Price: 1,600,000.00 plus 7.14 % sales commission (incl. VAT) Price per m²: 1,712.00 (Please quote property reference 15155 when placing an enquiry) Credits Dr. ZitelmannPB. GmbH, Rankestraße 17, 10789 Berlin Authorised representative: Dr. Rainer Zitelmann / HRB 130452 B Authorised representative: Jürgen Michael Schick Telephone: 030 / 254 93 167, email: info@berliner-zinshaeuser.de Photos: Dr. ZitelmannPB. GmbH, MICHAEL SCHICK IMMOBILIEN & CO. KG, shutterstock MICHAEL SCHICK IMMOBILIEN GMBH & CO. KG Investment broker, Rheinbabenallee 40, 14199 Berlin 10