Is now the perfect time to sell your Berlin investment property?

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Is now the perfect time to sell your Berlin investment property?

Part two of our three-part guide: The Future of Property Investment in Berlin

In the → first article of our three-part series on the future of property investment in Berlin, we asked whether the recent announcement of a five year rent freeze on top of the other existing restrictions on property owners by the Berlin city authorities adds up to creating a “hostile environment” for investors here…and concluded on current evidence that it probably does.

So is now the perfect time to sell your Berlin investment property? Of course the answer will always depend on your personal financial circumstances and investment goals, but there are some general questions to consider if you are to make the best possible decision for your Berlin investment:

Have you owned your Berlin investment property for over ten years?

This is a pivotal question as an investor, as ten years is the magic period after which you will not pay capital gains tax (profit tax) in Germany when you sell. If you are over the ten-year period, we definitely think you should consider selling, for reasons we outline in more detail below.

If you have owned it for a shorter period, you are liable to pay up to 50% of any profit you make in tax. If you have a mortgage attached to your investment, this is also likely to be fixed for a similar period, and early repayment can result in significant penalties, so that could be a double-penalty for taking an early exit. However, if you have owned the property for a number of years and the rise in property values would still give you a reasonable return after tax, selling may still be something to consider. It all depends on your particular circumstances.

Have Berlin property prices reached their peak?

If you bought an investment property in Berlin ten or more years ago, congratulations – you have owned it during a period of some of the sharpest rises in property values the city has ever seen. While it is impossible to say for certain that prices have peaked, we can see many pieces of evidence to suggest the next ten years will be very different to the last.

While we do not believe there is a property price “bubble” in Berlin due to the systemic shortage of available housing, there are certainly very real affordability issues. German banks are cautious - a good thing in the long run – and are already valuing property for the purpose of lending under what many sellers are asking. Combined with the low growth in real wages, this means that ordinary people looking to buy a property simply cannot raise the finance to do so.

Prices may continue to rise on paper, but the real question is who is left in the market to actually pay them? Buyers from outside of Germany face other limiting factors on their purchase budget – such as exchange rate values and domestic political uncertainty – so we do not see much evidence of these buyers filling the gap.

Is renting out an investment property in Berlin still worthwhile?

As we discussed in the first part of this series, the seemingly ever increasing layers of restrictions on rents, property modernization and renovation are all adding up to creating a situation where continuing to rent out your property on an existing long-term tenancy is becoming unsustainable. If the costs of owning and maintaining a property rise year-on-year while rents do not, there simply comes a point when it no longer makes sense to continue.

Rental yields are not always the most important factor for all investors, who rather are looking long-term at capital growth. However, if the rate of capital growth has now peaked, stagnating or reducing real-term rental yields will have an impact. Relying on capital growth also means relying on the fact there will be someone to buy your investment property when you sell, which means it needs either to be attractive for another investor to buy or available for someone to buy and move into.

What is the difference between selling my property vacant or tenanted?

Despite Berlin being a city of renters, there is a huge demand for vacant property from people who want to own their own home and simply no supply, so the price of a vacant property is 30%+ higher than that of a long-term tenanted one. If your tenant has left or is planning to leave your property in the near future, now would definitely be a great time to sell.

If you bought a property over ten years ago and your tenant qualified for a ten-year period of protected tenancy rights, that will also now have expired and a new owner could – depending on individual circumstances – claim self-usage of the property. Similarly if the tenancy is newer and only the statutory notice periods would apply.

Whatever the circumstances, our advice is always to talk to your tenant about your plan to sell the property and find out what their plans might be. Although the culture in Berlin is still to rent, a small but increasing number of tenants are realizing that buying their property could be a very good idea, and we have a lot of experience in advising and helping tenants to do this.

Also, a surprising number of tenants may be thinking of moving but are financially stuck, so offering a compensation package for them to cancel their current contract can often work well for both parties. For instance, over 50% of sitting tenants in a property of twelve apartments we sold on behalf of an investor opted to accept their offer of compensation so that they could do anything from afford a larger apartment, relocate out of Berlin, or even go on a world tour. Negotiating these kinds of agreements is also something we can help with.

How can Black Label Properties help you get the most from your current investment?

If looking at all these issues and your personal circumstances leads you to agree with us that this could be the perfect time to sell your Berlin investment property, please get in touch and we will be happy to help.

We can review your current situation whether you own a single apartment, an  apartment block, or a mixed portfolio including commercial properties. We can then give you our honest opinion about the value of your investment in the current market and the options you have for getting the best outcome.

If you are a new investor considering coming into the Berlin property market, the next article in this series is specifically for you.