After 2014 turned out to be another strong year for the Berlin property market and German real estate in general, the new year now brings a lot of questions with it, including whether the German real estate boom is sustainable.
In light of a weakening economic outlook in Europe, renewed concerns about a Greek exit from the Eurozone (Grexit), a falling oil price, deflation fears as well as political uncertainty in Russia and the Middle East, many investors and experts will have their doubts.
Clearly, all those factors could well dampen consumer and investor confidence in Germany, however they are not necessarily negative for the German and Berlin property markets. On the contrary, we do see the following positives:
1. Low interest rates: interest rates will have to remain lower for longer. The European Central Bank (ECB) may well end up having to engage in quantitative easing (QE), as seen in the US and the UK previously. Low interest rates will definitely be positive for activity in the housing market, as mortgages remain more affordable than ever.
2. A weak Euro: weak growth prospects in the Eurozone – especially when compared with the brighter outlook for other major economies such as the US or the UK – have led to a depreciation of the common currency. Strategists at Citigroup expect this trend to continue, with the Euro – in their view – likely to hit the 1.15 USD level in 2015 (vs. 1.18 currently). However, a weak Euro would rather be a positive for German real estate, especially considering growing interest from international investors, for whom German and Berlin property will appear more affordable.
3. Foreign investor interest: renewed concerns over Grexit could well lead investors, especially from Southern Europe, to look for safe havens for their money. Moreover, German commercial real estate appears to be increasingly popular, especially with Chinese investors, according to Jones Lang LaSalle.
4. German property prices remain relatively low: although some appear to be concerned over the formation of a bubble in the German real estate market, prices actually remain relatively low when compared with other countries. Even cities like Munich, Frankfurt and Hamburg appear more affordable than Paris, Zurich or London. In addition, German property remains significantly cheaper in smaller, second-tier cities (e.g. Leipzig, Dresden), and even Berlin property prices are still way below other major German cities.
Needless to say, there are also factors which could slow down or end the positive developments seen in the German property market over the last few years.
First, the new regulation aiming at tightening rent controls by capping rent increases in cities with a supply shortage. This new bill (Mietpreisbremse) is expected to be implemented at the federal level throughout 2015.
Secondly, the Berlin property market has already seen the introduction of restrictions for holiday rentals, which means that certain Berlin landlords will no longer be able to rent out their buy-to-let porperty as a vacation home, and will, instead, have to look for less profitable longer term tenancy agreements (leaving the flat empty for more than 6 months can also get them fined).
We conclude that, whilst regulation is getting tightened in order to address the growing supply shortage in major cities, the macroeconomic environment continues to look favourable for the German and Berlin property markets. Investors may no longer be able to expect the returns seen over the last few years, but German property does remain an attractive and sound long-term investment.
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