For the last 10 years or so I have been producing an annual review called “John Howell’s Top 10”. This started as a light hearted but serious review of my top 10 favourite investment destinations for the coming year. They were my favourites suited to my personal circumstances. The choice for somebody of a different age, different financial position and different attitude to life could well be different. Berlin is the only destination ever to have come from nowhere in the Top 10 to number 1 in one year.
Ok, so Berlin is unique in other ways that some might say are more important. With the extension of the European Union to Romania it is now at the geographical centre of Europe. Although it is not the capital of Germany, many Germans would, after a beer or three, consent that it is the most potent symbol of Germany – and Germany is the most populous and richest country in Europe. Berlin is also a moving and powerful symbol of the end of the cold war and the reunification of the East and West of Europe.
So it should be a very successful investment location. But it is not. After reunification in 1992 property prices in Germany rose sharply and then collapsed just as quickly. Over the last 10 years your house could have lost 30 per cent in value.
So why do I think that Berlin is a really interesting investment destination? It does not tick any of the boxes on my normal check list. The economy is not doing well. It has been in recession for several years and grew only a very tiny amount last year. There is high unemployment. Property prices have been falling. There is no obvious external pressure that is going to bring about a change. But I do believe that there are signs that this is going to change and that, for the investor who is in a financial position to take a bit of a risk and prepared to take a punt on Berlin as part of a wider balanced portfolio of international investments there is a good chance that the decision to do so would prove very profitable.
Why do I think this? I believe that when the Germans made the incredibly gutsy decision to unify / reunify (depending on your political point of view) East and West they underestimated by miles the difficulties of doing so. They underestimated just how bad the economy of Eastern Germany really was. They underestimated the difference in the work ethic of Eastern and Western Germany and they underestimated the time it would take to put all this right. In short, when they swallowed Eastern Germany, they got a really bad case of indigestion. I believe that (to put it delicately) this is about to ‘pass through the system’. And once they have had a dump they will be unstoppable!
Why do I believe this? In the last year or so we have seen some growth in the economy. Is this a flash in the pan or is it a turn around?
Unemployment has fallen. Property prices in the major cities have risen 10 per cent or so. Once again, are these blips or are they the start of a long term trend?
If they are the start of a long-term trend then you would be getting in to that market on the ground floor. If they are blips then it seems unlikely that the market will collapse any further but you might have to wait a few years for the growth to occur.
Whilst this article deals only with Berlin, the same general argument applies to other cities in Germany, in many of which getting finance, for example, can be easier.
Berlin is a city not only in the past divided between East and West but also divided into very distinctive and independent neighbourhoods. Some of these will do much better than others. Some of them are seriously bad places to think about investing.
Which property is most likely to rise in value? I believe that the biggest gains will come from the older (pre WW2) properties. Berlin has one of the lowest concentrations of old property of any city in Europe. Investors have the RAF and the American Airforce to thank for this investment opportunity. Less than 25 per cent of the city predates 1939. Many of these remaining building are character buildings but in poor repair but there are now developers specialising in the restoration and conversation of these properties.
A number of my clients are now actively engaged in the market in Berlin and Germany and I expect more to become involved in the next weeks and months. My colleague who deals with work in Germany now spends more and more time in Berlin and expects to see this trend continue.
What are the obstacles? Well, the Germans remain one of the last groups in Europe who are still convinced by the argument that it is better to rent than to buy. I believe that attitude will change as is has changed in countries such as the Chez Republic, Hungary, Slovakia and Poland. In the mean time, this gives lots of good middle class tenants interested in the long term rental of suitable properties.
The city owns thousands of properties which it is releasing into the market place. This is both, an opportunity and a threat.
But the most serious obstacle is that my analysis might be entirely wrong. Maybe Berlin is in for another 30 years of downwards spiral. But I doubt it.
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