2022-10-24 | The Berlin real estate market. A market analysis.
Beforehand: Each year we publish a short market report and an outlook for the coming year. You can view our 2021 report (only in german language) here: https://blacklabelimmobilien.de/berliner-immobilienmarkt-eine-aktuelle-bewertung/
As you can see, we were way off on interest rates and the rapid rise. But the rest of the points are still very relevant from today’s perspective, despite the many events since July 2021.
The Berlin real estate market. A market analysis.
Market prices of today
Prices are stable in the new-build segment, Berlin around 7,000 € per square meter upwards and Potsdam around 6,000 € per square meter upwards. These prices remain stable and will even increase slightly due to high construction costs, slow bureaucracy, long planning processes, energy requirements and general inflation.
Even in Berlin’s traditional suburbs, we see new construction prices starting at 5,000 € per square meter, and these will not fall due to the high construction costs. One square meter costs: approx. 3,000 € pure construction costs + approx. 500 € planning costs + approx. 500 € financing costs + approx. 500 € per residential area of land = 4,500 €. The developer’s margin is usually about 15 % of the total investment (divided between the planning phase, marketing phase and construction phase, on average about 3 to 4 years). In total, the developer “earns” about 675 € per square meter divided by 3 to 4 years, minus his costs for staff, rent, etc. So, as we can see, you can’t produce housing for less than 5,000 € at all. Even if land prices fall slightly. If developers do not finish or cannot build at all, other better and more creditworthy developers will take over. In case of doubt, the developers rents out and then sells again after the recession.
You are certainly familiar with the current rental price trend if you are reading this text. In short: rents are rising sharply because many prospective buyers can only rent and there are too little decent rental apartments.
There are two different submarkets in old buildings. A: empty flats for owner-occupiers and B: rented flats. These are in turn divided into (energetically) refurbished and not refurbished. Prices per square meter are therefore very different. The cheapest are the unrenovated and poorly rented flats in old buildings. Even in Berlin, you can buy a flat there for around 2,500 € per square meter. The most expensive flats are those in prime locations that are completely refurbished and ready to move into. These can even be more expensive than new-build flats, depending on location and furnishings. We currently have prices of up to 15,000 € per square meter for these flats. These prices are also being realized.
The prices for flats in older buildings are developing very differently. There is an oversupply of tenanted flats. There we see price reductions to 2021 between 20 – 30 %. Anyone who could sell such a flat in 2021 with a yield betweeen 1 – 2 % will have to offer a yield of 4 – 5 % today to find a buyer. The assumption is that no owner-occupation is possible in the next 10 years and the rent is practically not to be raised. Exceptions confirm the rule.We also see price corrections for the good flats that are available for occupation (but not in the top locations), from currently approx. 10% on average to 2021. The reason is that interest rates are four times higher than in January 2022 (1 % and today 4 % +).
Anyone who wants to buy a “used” flat or detached house in 2022 can finally negotiate the price realistically again after many years, or they can wait and see. Those who still want to sell in 2022 should lower their prices and adjust them to the interest rate level. Good real estate agents are more in demand than ever to realize this for you.
In this video Achim Amann explains the current market situation for real estate in 2022 and explains what international clients should pay attention to when buying or selling a property in Berlin.
Market prices of tomorrow
We are just seeing the start of the downward price correction. Both cannot go up and stay up: interest rates and purchase prices. We already predicted this before the rise in interest rates began; price increases like those in previous years have already failed to materialize across the board in 2022.
What now follows is a considerable downward correction for real estate in Germany; we expect prices in Berlin and Brandenburg to fall by 10-20% on average. However, we should look very closely at the individual segments of the market. As a buyer or seller, please do not panic now, but analyze your personal case carefully. Talk to experts.
There is no such thing as “the property market”, but rather many different market segments, which in turn are very fragmented.
Example: The market for apartments for owner-occupation in old buildings on Paul-Linke-Ufer, vs. the market for flats as capital investments in old buildings on Kottbusser Tor. In the statistical measurements, these segments fall into the same grid. But of course this is not correct. The type of usage of the property is not recorded. Also, the Kottbusser Tor and Paul-Linke-Ufer locations are in completely different demand, although they are less than 500 meters apart.
Nevertheless, prices in both locations are now falling or have already fallen. Even if all other reasons are in favor of price increases, if buyers cannot afford the high interest rates, the buyers must leave the market. This leaves only a few cash-rich buyers in the future to meet more offers in the market. There are already more offers than in 2021, and the number of sellers will continue to rise. We are also only at the beginning of this development, which should take a few years depending on the economic situation.
Why do sellers sell despite a worsening market?
Because the prospect of lower interest rates in the short term is not realistic and we even expect interest rates to rise further in 2023. Keywords: Inflation and war. Also, some sellers must sell, because they either are starting a new phase of their lives or cannot afford the follow-up financing. Since 2011, many have benefited from interest rates that have slowly fallen to below 1% and have been able to finance cheaply. In the coming years, these will at least double or even triple for follow-up financing, depending on the repayments to date. Debt costs money again.
„Higher interest rates are here to stay“, says Deka chief economist Kater (Quelle: welt.de)
So when we talk about a price correction of 10-20%, we divide this into bad properties (if you can say that at all), where we calculate up to -30%, and good properties of max. -10%. If you now conclude that the average is 20%, you are mistaken. There are far fewer good offers than bad ones. If you want to be properly advised here, you should contact professionals.
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What does this mean for you as a seller?
Our top 10:
- Lower the price now rather than waiting until the other sellers do, otherwise you would have to go down even more to find a buyer.
- Look for cash rich buyers and fast, smooth transactions.
- Are you realizing profits from the past 10 years? Then you have made enough profit even if you go down in price now compared to the year 2021.
- What kind of buyers are you targeting? Owner-occupiers, capital investors? What is important for each group of buyers?
- Market access to good buyers has never been more important. Good buyers are not only on the property portals but trust reputable experts. Use good estate agents who know what they are doing.
- Check out international buyers, they often analyze the Berlin market much better than buyers in Berlin.
- Check the expected additional costs for the energy transition and possible costs for the buyer before you go into the market.
- Pay even more attention than before to the perfect collection of documents. Buyers and their banks value this a lot.
- Can you sit out the market correction for 5-10 years and rent out lucratively? If so, this is a good option for you as a seller.
- What will you do with the profit from the purchase price? Do you have alternative forms of investment?
What does this mean for you as a buyer?
Our top 10:
- Check with your bank how much housing you can afford in the current interest rate environment before you start searching.
- Define how long you want to use the property, is it an investment or do you want to use it yourself?
- Consider risks such as job loss, divorce, death, etc.
- If you want to use the property yourself, compare the financing rate with the alternative rental rate. Please do not compare the annuity rate with the warm rent.
- Prices will fall less in good locations in Berlin and Brandenburg than in bad ones. Be realistic in your negotiating position.
- Use the network of professional brokers. They can offer you off the market properties.
- Secure yourself with long term financing. Do not speculate on low interest rates in the next 5-10 years.
- If you buy a capital investment, do not expect high increases in value, but pay attention to the positive cash flow and your liquidity.
- Check and budget for high energy costs, additional investments and refurbishment costs before buying.
- Check alternative places to live even more than before. There are currently very good offers in smaller towns in the suburbs of Berlin
And the most important thing for buyers: make a purchase decision. Because not making one is almost always more expensive than making one, even in this current market!