Brexit has brought with it a significant amount of uncertainty both economically and politically for the UK. Growth has been revised downwards and whilst the FTSE has stabilised for now, Sterling has plummeted. This might be good news in the short term for those investing into the UK but the longer term picture is more complicated. What made the UK such a popular investor destination – economic and political stability – has now been wiped away leaving many pondering where next for their capital.
We believe Berlin is going to be a significant beneficiary of Brexit Blues, and here are eight key reasons I believe anyone with capital should be looking to invest in Germany’s burgeoning capital city:
- Berlin, the capital city of Germany, is the largest economy in Europe and the fourth largest in the world. It is underpriced against its own Tier 1 cities (Hamburg, Munich, Frankfurt, Cologne etc.) and spectacularly so against major European capital cities such as London, Paris, Rome, yet their claim to have stable and strong economies to support growth is arguable. The current situation in Germany is akin to London being cheaper than Manchester and Birmingham. It doesn’t make sense and it won’t be this way for long.
- Its population grows by over 1% per annum and it benefits from a higher than average population of young people (nearly 40% of Mitte’s population is aged under 30) creating a dynamic start-up and tech scene that attracted more VC in 2015 than London ($2.2b v $1.7b).
- As the political seat of power for the most important economy in Europe it can be argued it is the centre of European politics, which is not insignificant. But that is conjecture; let us stick to facts.
- The property market has grown consistently by over 10% per annum for the past three years with an average rental growth of 6.3% during the same period.
- The supply and demand imbalance shows no signs of abating with barely half of the required annual apartments being built (20,000 needed and a little over 12,000 completed).
- It is the third most visited city in Europe behind London and Paris with nearly 300,000 people employed in the tourism industry, yet it is the 21st Century industries of Media, ITC, Pharmaceuticals, and the start-up scene that drive it forward.
- University is free for domestic and international students which is encouraging the world’s ambitious minds to explore their own and the city’s wealth of opportunities. With a backdrop of low living costs and a dynamic, international and multi-cultural society, it is a place laced with promise and potential.
- It boasts an increase of nearly 5% in its y-o-y overnight stays from 2014-15 whilst it simultaneously banned Airbnb, increasing pressure on the hotel industry further (see article).
The capital city of Germany is getting an increasingly large share of the airwaves when it comes to discussions on global real estate investment, So, is it too good to be true?
Fortunately not. It is still painfully juvenile in comparison to other established markets such as London, New York and Sydney.
Two fundamentals that highlight this are the fact that finance for international investors is not easily obtained resulting in comparatively low loan-to-value ratios, and, the current standard of management for residential assets is not terribly sophisticated. The latter is certainly improving.
Yet whilst the city may be green in certain aspects of its real estate investment credentials, investments are about looking forwards as well as backwards, and the future for this city has it locked on a course to reign supreme. Imminently.
The reality is, if you truly want to benefit from your investment in Berlin, you have to hold the asset for 10 years. Why? To benefit from their enticing capital gains tax-free incentive (as long as you don’t own more than three real estate assets in Germany).
Furthermore, if you have $100,000 to invest in a property, you may rightly envisage that amount would buy you something worth three or four times that figure via leverage. In Berlin, however, it will only get you up to around $200,000. As an overseas investor if you buy a property under EUR 360,000 you shouldn’t expect much more than 50% in debt (you can get up to 70% LTV over the EUR 360,000 threshold).
But is that such a bad thing? Maybe not. After all, it means the repayments on your loan will not be too high; with 10yr fixed rates available at around 3.25% you should rightly expect to be able to pay off all the debt at the expiration of your fixed term.
If you take into account all of the above, add in the promise (hope?) that within 2-3 years there will be a bona fide international airport (Berlin still does not boast an airport that connects with other major cities around the world including most of the Americas, Middle East and Asia), I believe without question that you have all of the key ingredients for the ultimate investment market.
For property investments entrenched in logic and sound fundamentals, say bye-bye to Britain and buy Berlin.