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Tuesday, August 9, 2016

Berlin after Brexit: Still at the Top of the List

By Nicolai Baumann (Berlin) and Inga Schwarz (Hamburg)

With or without Brexit, Berlin remains at the top of national and international investors‘ list of commercial real estate investment markets.

Most, or all, foreign investors have kept Germany’s capital in their focus for a number of years now. They love the Berlin success story of the recent past. They are fascinated by Berlin’s urbanity, its international character and its dynamic marketplace. They are attracted by the possibilities that the city offers to its residents, visitors and the economy. They see change, creativity and the citywide desire to discover and try new things.

And the figures speak for themselves. Berlin’s population rose by almost 6% in the past five years. Currently, some 3.52 million people live in Berlin, and official forecasts predict an additional rise of 266,000 by the year 2030. Furthermore, Berlin is Germany‘s No.1 tourist destination. In 2015, a record 30 million overnight stays were tabulated in Berlin, and that number is also on the rise. Last but not least, Berlin is Germany’s start-up capital. In 2015 more than 42,000 new enterprises were registered, equating to 121 start-up companies per 10,000 residents or more than 115 registrations per day. This level is unmatched anywhere in Germany.

Accordingly, Berlin’s international character is highly attractive to young people and enterprises seeking to move from the U.K. to an EU country following the Brexit referendum.

Although Berlin’s residential rents have risen noticeably over the past few years, the overall rent level remains comparativiely low. Moreover, the academic landscape, with some 175,000 students, is an important pillar for further economic growth, as are the low office and location costs in comparison with international markets. A high quality of life and a vibrant cultural scene, which is second to none in Germany, complete the overall package. Young urban hipsters and millenials from across the globe have been drawn to Berlin for a number of years now, making English a language spoken in almost any local supermarket.

Pull factors that draw investors to Berlin: The city and its economy are growing, the standard of living is high and the local real estate markets only know one direction – up.

Take-up in the Berlin office market reached a historical high of 9.15 million square feet (msf) in 2015; and with 4.41 msf of office space taken up in the first half of 2016, the capital’s office market is on course for a strong second half. Meanwhile, the office vacancy rate is currently at 3.9% and will decrease further. Why? Berlin is in demand and we are in a landlord’s market these days. This trend is underpinned by the rise of class A central business district (CBD) office rents. They are currently at €26,00 per sq. m per month and will continue to increase, as there is continuing demand and no rise in supply in sight. The residential, retail, industrial and hotel sectors are growing in similar ways. Therefore, it should come as no surprise that, backed by strong leasing markets, Berlin’s commercial real estate investment sector has been on a high lately. In 2015, record investment volume of €8.2 billion was achieved. Foreign investors contributed more than € 4 billion of that total, representing a 49% market share. In the first half of 2016, foreign investors increased their market share to 60%.

Simply put, international investors love Berlin. While they have the entire German market and all of its possibilities and stability in their scope, Berlin will remain the top investment target. As the U.K. and EU work out the terms of Brexit, demand for investment product will rise further – across all real estate asset classes. With class A supply limited and becoming even tighter, investors will need to raise their visors to avoid missing out on opportunities.  Developable assets located outside the CBD will come into focus, and investors‘ appetite for development projects will increase further across all of the region‘s commercial real estate sectors.

Nicolai Baumann is Avison Young’s Head of Office Leasing in Berlin
Inga Schwarz is Head of Research Germany with Avison Young 

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