From vacancies on the residential market to the Lehman crisis to nearly full occupancy on the office space market: In nearly 20 years as Managing Director of Engel & Völkers Commercial Berlin, Rackham F. Schröder has experienced numerous records and trend turnarounds. How did the milestones that have shaped the capital’s real estate market come about – and where will the journey lead?
Transaction volumes at a new record level of 19.0 billion euros – slowdown in price increases –transactions down by -9%. This is how Berlin’s 2018 real estate market, analysed in mid-February 2019 by the appraisal board for real estate values “Gutachterausschuss Berlin” (GAA), can be described in a nutshell.
Real estate expert Rackham F. Schröder is taking the current sales records, especially on Berlin’s residential and commercial property market, as an opportunity to look back. “The development of purchase prices, as shown by the GAA from 2000 to 2018, also reflects the history of the city,” says the Berlin native, who was born in Wilmersdorf. “Few people expected the drastic changes that the Berlin real estate market has undergone over the last 20 years.”
“Berlin is currently experiencing exceptional growth in terms of population, purchasing power and the job market. But when I joined Engel & Völkers in 2001, the market was completely different,” recalls Rackham Schröder. Berlin was struggling with a recession and negative net migration. “The vacancy rate was 7.5 percent – currently it is 1.1 percent. Instead of thinking about ways to increase the value of their property, many owners were more concerned with the question of whether vacancies would continue to climb. Looking at today’s purchase prices for residential and commercial buildings, it becomes clear that the average value has increased nearly fivefold,” says Schröder.
Until 2004, the Berlin market for apartment buildings was predominantly local to regional, and the majority of buyers were Berliners. “Even more than today, these were semi-professional buyers who did everything themselves,” Schröder recalls. “A few international investors from Denmark, Italy and Spain already recognized the undervaluation of Berlin real estate at the time. But the big turnaround did not start until 2004, when the largest municipal housing company GSW was sold and Cerberus entered the market.”
In 2004, the Berlin Senate approved the sale of GSW to the US financial investor Cerberus and Goldman Sachs’ Whitehall Fund. The investor consortium acquired about 65,000 flats for 405 million euros, assumed GSW’s debt of around 1.56 billion euros and undertook to invest around 450 million euros in the portfolio.
A glance at the purchase price development shows that the four property classes residential and commercial buildings, apartment buildings, condominiums and detached and semi-detached houses were still at a relatively equal level in 2004. “It was at this point that the segments went on separate trajectories – by 2005 at the latest, residential and commercial buildings were picking up speed, as were apartment buildings,” says Rackham Schröder.
“Purchase prices in the residential and commercial building segment rose by around 50 percent between 2004 and 2007. Here we witnessed never-before-seen increases and assumed that we had initially reached a plateau,” describes the real estate expert. There was also an enormous rise in the number of sales and the customer base became increasingly international.” In 2007, 2,905 buildings changed hands – currently the number is 1,026,” says Schröder.
“Lehman was a shock for everyone – nothing was possible at all for a time,” the Managing Director of Engel & Völkers Commercial Berlin describes the effects of the Lehman Brothers’ bankruptcy, the tenth anniversary of which was in 2018. International investors suffered from major problems in their home markets and initially withdrew from Berlin.
As a result, the purchase prices for residential and commercial buildings as well as apartment buildings fell. However, the slump was cushioned comparatively well by local investors.
“Although we saw major declines in sales after the crisis, our situation did not reflect the general market upheaval,” reports Rackham Schröder. “A good 90 percent of our customer base ‘changed’ immediately afterwards – but sales revenues remained stable at about half of what they were before. This was largely thanks to German players, who acted conservatively and with a sense of proportion.”
Berlin’s economy picked up again in the following years, and as early as 2013 the Chamber of Industry and Commerce predicted that the city’s economic growth would exceed the national average by 2030. Prices also rose relatively quickly on the real estate market.
“At the same time, prices for apartment buildings lagged behind those for residential and commercial buildings, in which a large revenue share comes from commerce. From 2014, and at the latest by 2015, office rents shot up to such an extent that residential and commercial buildings went on their own trajectory, ultimately making them more valuable than pure residential buildings,” explains Schröder.
“Exploding office rents in recent years have meant that the average purchase price of a commercial and residential building has increased by more than four and a half times since the early 2000s,” says Rackham Schröder. As a result, many customers who were previously only looking for investments in the residential segment have reoriented themselves in favour of commercial properties. The heated political climate naturally also plays a role on the housing market, he adds.
The Berlin market expert also predicted further value gains in 2016. “Office space vacancies had fallen to a low of approx. 3.5 percent – down from 10 percent. At the same time, office rents were rising. The migration balance, which has been positive for years, led to a strong demand for flats in the first phase and for offices in which new residents can work in the second.”
In 2018, the Berlin economy continued to develop positively overall. The population and number of employed persons continued to increase. Today, there are hardly any vacant flats or offices left. The supply of residential and office space lags far behind actual demand. Low interest rates and ready capital contribute to a continuing rise in rents and purchase prices.
On the customer side, skyrocketing prices in Berlin have led to more institutional investors and family offices operating on the market. “But even well-financed prospective buyers increasingly have to accept compromises when selecting properties, both in terms of expected returns and preferred locations,” comments Rackham Schröder.
The E&V Managing Director can confirm that the upward momentum on the Berlin real estate market is slowing down, as verified by the GAA in February: “If you follow the price evolution, it becomes clear that the highs have already been reached for existing real estate. The next plateau is approaching – now is the time to sell.”
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