At the end of last week the administrative courts of Berlin upheld a new legislation that was introduced on 1 May that made it illegal to let whole properties in the city on a short-term basis. With potential reverberations for cities across Europe, the effects of the ruling will be monitored carefully throughout the continent to gauge their impact.
However, institutional investors are now increasingly seeking out assets in the one area that stands to benefit the most from this new legislation; hotels.
The justification for the ruling in Berlin was that with an ever decreasing supply of available property for traditional rental use and an increasing population (over 1% per annum* with a 2% increase in 2015**) it would be irresponsible for the local authorities to continue to allow private housing stock to be consumed for such short-term, profiteering endeavours (Airbnb Berlin).
Let us look at the primary motivation of the authorities; Berlin is a city of renters (approximately 85% of the city currently rent) so there should be no surprise that legislation is currently stacked in favour of tenants. That is just sensible politics.
The grounding for the ‘For’ and ‘Against’ arguments were broadly entrenched in these basic positions:
For legislation: There is a housing shortage in Berlin. Authorities cannot allow apartments and houses to be misappropriated in these ways, contributing towards an increase in rents by (a much lauded) 56% between 2009 and 2014 (Berlin recorded average annual rental price growth of 6.2% over a three-year period from 2013-2015, arguably when Airbnb was truly more prevalent).
Against: The authorities are unfairly punishing private owners for the government’s failed housing policies that have not built anywhere near enough properties to satisfy demand, denying them the right to generate an income from their property.
For the foreseeable future then, it seems proponents of companies such as 9flats, Wimdu and Airbnb will have to adhere to the new rules or risk the wrath of the authorities wielding a EUR100,000 axe.
For the savvy investor though, this decision creates another opportunity in another real estate segment; hotels.
Hotels are enjoying unprecedented growth in Berlin as a combination of comparatively low prices (the average overnight price of a hotel is EUR80 compared to Airbnb of EUR55), increasing demand from tourists across a wide range of segments (from technology and techno music to architecture and art) as well as the simple desire to visit a major European capital, all contribute to a consistent annual increase in overnight stays that grew by 4.8% in 2015.
Berlin is the capital of the largest economy in Europe and the continents’ third most visited city, behind only London and Paris, yet trades at a fraction of their prices. It has also, much to the schadenfreude of its European neighbours, not yet managed to open up its new airport that will connect it, finally and fully, with the USA, China and other major global economies.
We believe that the Berlin residential market is the best in the world, underpinned by myriad economic fundamentals (supply/demand, population growth, infrastructure investment, job creation, low borrowing costs etc.)
As an investor seeking to make a play in Berlin at a more institutional level – upwards of EUR10m – the heady mix of state-supported demand being created through short-termist legislation and the imminent arrival of an airport that will bring new arrivals from the world’s wealthiest countries, should galvanise in one’s mind that investing into a hotel in Europe’s next mega-city is about as easy a decision to make as you are likely to get.
Fifth Element works within an established network of real estate investment professionals providing access to a range of commercial opportunities including hotels. For more information please contact us.
* CBRE Berlin Hyp Report 2016