A burgeoning ROI in Berlin: A Tranio client’s experience with residential real estate in Germany
Within the course of three years, one Tranio client experienced an inspiring uptick in the yields of his Berlin real estate investment. Between 2018 and 2020, the market value increased by 28%, and the property began to turn a profit immediately after its commissioning. Meanwhile, with each passing year, the rental rate grew at a rate 2.3 times faster than market real estate prices.
An investment in their daughter’s future
Tranio’s clients were a family that wished to buy an apartment in Berlin for their daughter, Marina, who was studying at Berlin’s Humboldt University. The family was not yet sure whether Marina would opt to stay in Berlin after graduation, but they were optimistic that housing prices in Berlin would continue to climb, and that the apartment would generate profits regardless of the duration of her stay.
To get the process started, Marina’s parents opened a German bank account, and deposited into it the budgeted real estate purchase price. It bears noting that the total estimate included not only the cost of the property, but also broker and notary fees, as well as property transfer taxes. In Germany, it is often a safe bet to set aside an extra 10% of the sale price to cover these costs.
The family was not rushed in choosing the right apartment as Marina had been living on campus at that point. This was good as the clients were particular with their preferences, wishing to find a new apartment of at least 60 sq.m with a balcony, and they did not wish to purchase a ground-floor unit. Marina already knew the city well and preferred Berlin’s central districts of Charlottenburg, Prenzlauer Berg and Mitte for their solid infrastructure and beautiful parks.
Finding new housing in the centre of Berlin is quite an undertaking, and demand for housing exceeds supply: Berlin has ranked first or second for European metropolitan property investments in PwC’s Emerging Trends in Real Estate report since 2016.
Selecting a unit in a planned development in Mitte
Tranio scoured the market for apartments that fit the bill, and came up with several promising options to present to the clients. Two months into the process, units went up for sale in a new residential complex in the Mitte borough, between Potsdamer Platz and Alexanderplatz, which was set to be commissioned in 2020.
Not only did the project feature units that fit the clients’ demands perfectly; the developer also happened to be a trusted partner of Tranio’s, which has built over 1,000,000 sq.m in Berlin, Hamburg, Munich and other major German cities since 1991.
The residential complex in Mitte comprises 557 apartments in 12 six-story buildings, an underground car park and an exclusive, verdant courtyard for the residents. The property is located near two U-Bahn stations and a primary school, with two city parks and the Spree River nearby.
Marina selected an apartment measuring 71 sq.m for 479,000 euros. With the help of Tranio real estate and legal consultants, the parents purchased the property in Marina’s name, and set up a payment structure under the purchase and sale agreement whereby the payments would come in instalments based on the completion of each phase of construction, so as to protect the investment from development risks. The first payment — 30% — was made in 2018 once the earthwork had been completed, while the last 5% was paid in 2020, following the completion of facade work and the commissioning.
The yield quickly gathers steam
The complex was constructed on schedule, at which point Marina acquired a furnished apartment with designer interiors. She opted to rent the property out at that point, rather than moving in herself, and found a renter immediately.
We helped Marina come up with a lease agreement for 6- to 12-month rental periods — a rental term that is common in Berlin due to the number of students and business travellers who come to the city for temporary stays. The fact that the apartment came furnished and that the rental cost included utilities, and that medium-term leases involve less red tape than long-term leases, all ensure ongoing interest in properties such as this one.
Meanwhile, Marina also stood to benefit from a mid-term lease agreement: first, this provides her with flexibility in case she decides eventually to reside in the flat herself. Second, it is considerably simpler under German law to periodically increase rental rates on medium-term arrangements. Likewise, it’s easier to evict a problematic tenant from a medium-term lease than from a long-term one.
Given rental trends and the housing shortage in Berlin, new tenants in Central Berlin can be found quickly, ensuring apartments rarely stay vacant for long. The government estimates that some 200,000 units would be needed to quell the housing shortage in the city. Mid-term lease demand tends to stay steady or increase each year given Berlin's popularity among students and business travellers as 50,000 new residents move to Berlin annually.
A management company is responsible for finding tenants, managing tenant relations, facilitating utility payments, and maintaining the property, simplifying matters for Marina.
And it has paid off handsomely; her apartment generated a 3% yield net of the utilities, management, insurance and tax costs in the first year of lease.
Increasing returns on apartments
The prices of the new developments in Mitte increased by an average of 28% between Q4 2018 and Q4 2021, as a result of which Marina’s apartment is now valued at upwards of 600,000 euros. Rental rates in Mitte are climbing even more quickly than the real estate prices: according to Guthmann, new apartment rental rates increased by 64% during the same period.
Furnished apartments in the new development project in Köpenick, Berlin