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Property demand in Berlin continues to outway the supply making real estate a lucrative investment. The development site is surrounded by a variety of building use and planning permits have been granted for mixed-use developments in the close vicinity, therefore the development will contain a mixed-use of residential, office space, and retail.
Residential
Berlin has seen a population growth of 400,000 between 2021 – 2021 which has contributed to the shortage of over 100,000 flats in the Berlin district (Guthmann, 2023). Friedrichshain in particular has become one of the most sought-after locations in the district, especially for young residents (Berlin Poche, 2022). Forecasts for 2024 predict Berlin’s population will increase to 4 million, which solidifies residential developments as a safe, low-risk asset class within the city-state.
According to Guthmann (2023), Friedrichshain has a population of 138,981 with a housing stock of 77,024 and housing deficit of 6,755. Friedrichshain is predominantly made up of properties built between 1902 – 1920, however there are also many municipal stocks built between 1950 and 1978. Property prices in the district have risen approximately 130% during the past 10 years from €2,660 per Sq. m to between €6,160 - €9,200 per Sq. m depending on if the property is an existing or new-build flat (Guthmann, 2023). However, new build residential apartments in the area are now reaching over €10,000 per Sq. m.
The Need for Affordable Housing
The Housing 2030 Urban Development Plan addresses the demand for new and affordable housing resulting from population growth and suggests a goal of 200,000 new residences by 2030. The Financial Times (2021) states that 85% of people in Berlin rent their homes, while German Estate Agents Homeday confirms that the shortage of rental properties is driving up prices significantly. 17/19 neighborhoods are now unaffordable to the average earner based on the rental burden which states that no more than 40% of a person’s salary should be spent on monthly rent.
Although the Berlin rental market is thriving, the client is advised to individually sell the apartments rather than letting them out for a number of reasons. Firstly, the development aims to be an affordable housing option for residents in the area. The Housing Cost Report 2022 (Accentro) shows that throughout Germany, it remains cheaper to buy a property and live in it yourself than to rent a similar apartment. Secondly, a rented apartment will sell for an average of 20-35% less than an unoccupied apartment (Berlin Poche, 2022). If the client sells the apartments rather than letting them, they will ensure they can sell for the full market value and will have the profit funds available if they then choose to take on another development.
Office Space
The Berlin office letting market achieved a take-up of 133,100 sq. m in the first quarter of 2023, level despite the numerous economic challenges. CBRE state that the office letting market is stable, particularly when compared to the next top five German markets.
In early 2023, the German economy fell into recession. Short-term property and business cycles that are affected by the economy and interest rates should be considered when choosing when to develop. Whilst the country is in recession, it is a better time for the client to purchase the land while costs are relatively cheap. Planning and construction can then take place within the expansion phase of the cycle before selling the properties when the market hits its peak.
In turbulent times such as the recession the country now faces, Berlin’s demand triad of the public sector, technology companies, and traditional corporates proved a safe bank for office space take-up, which together account for around half of the total take-up, making office developments less of a risk.
The Edge East Side Tower is currently being built in East Berlin on Warschauer Strasse and will become the headquarters for Amazon (Exberliner, 2023). This is expected to encourage more tech companies to relocate to the area and create a surge in requirements for modern office space in the area.
Retail
Engel & Volkers (2022) have confirmed that following COVID-19, the desire to shop is slowly returning to German cities with the number of pedestrians visiting high-street shops increasing between September 2021 and May 2022. The third quarter of 2022 accounted for around €3.3 billion, signifying a growth of 87% when compared to the previous quarter, showing the market is experiencing an experiential bounce back due to the lower rents and better lease terms which are encouraging startups and established companies to expand.
The retail space within the development will be used for a ground-floor supermarket as well as a variety of boutique shops, a restaurant, and bars to attract residents and tourists to the area. The development of new urban quarters into mixed-use properties is playing an increasing role in ensuring that German cities remain vibrant (CBRE, 2023).
Sustainability
The Berlin Hyp survey found that ESG issues are becoming increasingly relevant in the real estate industry, with the majority of respondents (53%) confirming that sustainable new construction projects will become particularly relevant. Affordable housing was also found to be a major issue within the city and a clear trend overall toward social responsibility within the sector.
The sustainable building market is expanding quickly. While only 550 German buildings were certified in 2013, by 2018 that number had risen to 1,800 and has continued to rise rapidly ever since. Transaction volume is impressive as well. In 2018, single-asset deals for buildings certified as green accounted for 10.1 billion euros, Certifications like DGNB, BREEAM, and LEED are becoming a must-have in all new developments.
The volume of investment in Green and non-certified buildings between 2008 – 2022 can be seen below.
Amelia O'Hara (RE)
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