In recent newsletters I have explained just how I became a seller, rather than a buyer, in today’s real estate market. Prices for residential real estate in Berlin keep on rising. There is an ongoing shortage of housing in the city, and demand is surging. Even apartment buildings with maintenance backlogs are changing hands for irrationally excessive prices.
Buyers are banking on rental increases in order to justify the high price-to-rent ratios they are paying. And rents are actually increasing, despite rent control legislation. Nevertheless, I advise caution. It is naive to believe that politicians will stand by en masse and watch as rents climb and climb. The Mietpreisbremse will be tightened and tightened until it works. Any serious forecast for the future rental income from an existing residential property simply has to reflect the impact of rent control. Anything else is pie-in-the-sky and self-deception.
Investors are increasingly interested in new-build apartments. Over the last few years, price-to-rent ratios have risen in this sector, too – but with nowhere near the same momentum as in the existing housing segment. Not only have prices for new-builds and existing apartments converged, in many cases the price-to-rent-ratios being paid for existing apartments are now actually higher. An investor recently asked me, “Why should I pay 30-times the annual rental income for an existing apartment building when I can buy a new-build at a price-to-rent ratio of 25?” Of course, it’s often impossible to make a direct comparison. Existing apartment buildings tend to be in central districts, where it is exceedingly difficult to buy anything new, whereas new-builds tend to be located in more peripheral areas.
New-builds, however, have a number of significant advantages. One such advantage is that they are excluded from current rent control legislation. Then there are the modern construction and energy-efficiency standards, both of which speak in favour of new-builds. An investor who used to invest solely in existing properties recently told me: “We have increased our investment in new residential developments in Berlin. We weighed the maintenance and rent control risks we have with our existing properties against the risks and costs of finding the first tenants for our new-builds.” And of course, he added, you need to be sure that your initial rental prices are sustainable when it’s time to re-let.
There is an added advantage for institutional investors. They can buy more new-build apartments in a single transaction than they can when buying existing buildings. But the supply of new-build rental units is limited, as most developers prefer to focus on the condominium market, which offers them higher profit margins. At the same time, the market for all of these expensive condominiums is finite. The fact that premium condominiums are increasingly being sold to international investors is a clear indication that the market is approaching saturation point. Project developers would be well advised to employ a dual-track approach in order to minimise their risks, developing both condominiums and rental units, which they can sell to investors in forward deals.
