For 2-3 years, the German capital has been on the top of the list of real estate investors with an impact on real estate prices in the most international areas of the city.
With an average property price of 3700 euros per m2 and a growing attractiveness of the city (ranked 3rd best city to live in the world), Berlin offers great opportunities to buy an apartment as a second home or as an investment property.
With current property price levels, what should be the property investment profitability and the areas to choose for a property purchase in Berlin?
What are the best districts of Berlin for a property investment
The population of Berlin is growing at the annual rate of 50,000 people and the city attracts a young population coming from southern Germany, European countries such as France, Spain and far beyond. This contributes significantly to the extremely high occupancy rate of more than 98% and the significant housing shortage in Berlin that will reach 200,000 homes over the next 10 years.
This demographic dynamic means that some districts in the east and south of Berlin such as Prenzlauer Berg and Mitte have become largely internationalized with a new expatriate population, many of whom work in the digital, technology, artistic and creative sectors, the fastest-growing sectors in Berlin. For a property investment, it’s a good choice to target the popular international neighbourhoods such as Mitte, Prenzlauer Berg, Kreuzberg, Friedrichshain or Neukölln.
"As these neighbourhoods are dynamic and pleasant to live in, they represent a high-potential investment because the demand, both for purchase and rental, is exponential and the property supply is very small," comments Anna Kuznetsova from real estate agency First Citiz Berlin.
It is true that some of these neighbourhoods, which were once unknown to a large audience, have become bohemian and very fashionable places of the city, particularly with the settlement of thousands of artists and entrepreneurs of all kinds, many of which come from Nordic countries.
The western districts, relatively unaffected by this trend, have remained more "local" and are also a safe bet, especially for properties located around the main shopping streets of Charlottenburg, Schöneberg and Steglitz.
What tax for a property purchase in Berlin?
The rental income taxes in Berlin is particularly advantageous. The property tax is quite low with less than 150 € for a 50m2 per year. The rental income tax regime offers the possibility of deducting all taxes and housing costs. Another major advantage: the possibility of deducting of 2% to 2.5% of the purchase cost as amortization from the property rental income.
After this deduction, the net rental income is taxed progressively, starting with a first bracket at 14%.
Another advantage: when buying an apartment with a mortgage in Germany, one can also deduct the mortgage interests, which brings the effective tax level close to zero for a property bought partially or totally with a mortgage.
"Financing a real estate purchase in Berlin is definitely a good investment strategy and we are processing for our clients a growing number of applications for property mortgages in Germany," notes Anna Kuznetsova.
How profitable is the investment in a Berlin property?
The total return of a rental investment is the sum of the net rental yield and the price growth. The double-digit price increase of Berlin property prices in the last years is the main driver for property investment in the city, with 9.8% growth in 2016 and 10% growth in 2015. The annual survey of real estate investors in Europe, conducted by PWC consulting firm, confirms this trend and places Berlin as the best city to invest in real estate in Europe for 2018.
With rental yields growth of 2% to 5% in the centre and a price increase of around 10%, Berlin has a total return potential of between 12% and 15% per year. Moreover, institutional and private investors are crowding the Berlin real estate market and have increased the investment volume to 9 billion euros per year, exceeding for the first time Paris (8 billion euros), despite the fact that Paris real estate market is 2 to 3 times more expensive.
Finally, private investors benefit from total tax exemption on the capital gain after only ten years of property holding period.
How to manage your property investment in Berlin?
There was a time when not speaking German was a real barrier for those who wanted to invest and manage a property in Berlin. Since then, thanks to the internationalization of the city, new real estate agencies specialized in supporting foreign buyers and expatriates in Berlin have been established and offer full-service support in English.This made the purchase process and the property management much easier for English-speaking buyers who are particularly active in the city. Some real estate agencies, such as First Citiz Berlin, offer a mortgage loan management service in Germany on behalf of their foreign customers.