Tourists, hipsters, everybody is welcome. Party like it’s 1945.” That’s the slogan of the underground political group Hipster Antifa Neukölln, founded last summer in Berlin in reaction to increasing resentment toward foreigners, who have been accused of gentrifying the city. Europe’s trendiest capital is attracting tourists and affluent expats, as well as property developers such as renowned private equity group Blackstone.
It has also caught the attention of Beirut-based Real Capital Holding, which started investing in the city-state’s real estate in 2008. By end of May 2013, it was managing 65,000 square meters (sqm) distributed over 21 properties, and it just made its first exit, telling Executive that it achieved a 24 percent annual compounded internal rate of return on the sold property.
The chairman of Real Capital Holding is Karim Salameh, who earned early accolades as manager of Eagle One by Bank Saradar, Lebanon’s first-ever property investment vehicle, akin to a real estate investment trust. His partner in Real Capital Holding is Karim Sinno, who was an active player in the Lebanese property investment market during his 10-year tenure at Middle East Capital Group. Real Capital’s properties are acquired through investment vehicles registered in Germany and capital gains are thus subject to German tax jurisdiction.
While Salameh and Sinno invest their own money in each of the vehicles, they have a handful of investors — a majority of whom are from Lebanon — joining them in their European endeavor, and some properties are acquired for specific clients.
Why Berlin? Having come to the realization in 2007 that Berlin was significantly underpriced relative to other cities in Europe, the partners investigated this arbitrage further and eventually decided to back their conviction with capital. The price per square meter in central Berlin fetches $4,000 today versus $13,300 in Paris and $12,440 in London, according to property database Numbeo. The price is even lower than the average in real estate distressed Madrid, $5,800.
The undervaluation of real estate in Berlin is correlated with the city’s socioeconomic profile and its relatively high rate of unemployment; it is also rooted in the last century’s division of the German capital into the free but insular and economically underpowered West Berlin and the communist-ruled East Berlin and its hinterland.
Private real estate ownership in East Germany was a burden because the state mandated below market rents and landlords had virtually no rights. “The old Communist East suffered a lot from the communist regime with very low wealth creation and bad economic foundations, so the prices of real estate and of goods were very cheap. It is a unique moment in history where [we can] arbitrage the difference of the status of Berlin as the capital of a Western developed country and… as the capital of an almost bankrupt Eastern European country,” says Salameh.
Profiting from history
From an office behind Beirut’s National Museum, Salameh and Sinno have been eyeing commercial and residential properties in several districts of the German capital; to date, Real Capital Holding has invested in eight of Berlin’s twelve districts. While the firm acquired its first property in 2008, that was the only investment it made that year, and none were made in 2009.
The kickoff for their investment spree began in 2010, when eight properties were acquired followed by six in 2011 and five in 2012. They completed the acquisition of a commercial property of over 11,000 sqm in the first quarter of this year. They have not sold any investment yet and intend to hold them for around seven years. With intent to hold the properties for an average of seven years, the partners are targeting an annual internal rate of return of 14 percent.
For many years, Berlin and German real estate markets had little to offer investors seeking the high returns that other European, Middle Eastern, North African and Asian markets could provide. The combination of a stable population, a low rate of construction activity, a financial sector that required double-digit down payments and extensive protection of tenant rights led some German property investment advisors to observe that real estate price movements were as exciting as “watching paint dry”.
But stronger price movements in the German real estate market in recent years have some worried. Multi-billionaire investor George Soros warned last October, “[There is] a serious danger of a housing bubble developing in Berlin.”
Real Capital’s Salameh is not concerned, though, as Berlin still offers property valuations significantly below those found in many other European cities and decades away from the price levels seen in Paris and London.
Will Real Capital Holding start prospecting other European cities that have seen significant downward pressure on real estate prices? “Not at this time,” he says, as he fears that it might take a long time to adjust to a bottom. While he might look at other German cities to exploit upwardly trending urban real estate prices, he sits pretty in Berlin.