The European real estate market, and in particular the market in Berlin, has been very energetic recently mostly as a result of the low-interest policies of central banks. While the prices have risen dramatically, there is already some chatter about the overvaluation of the real estate. Investors are dropping in from the US and Asia to make deals. Interestingly, it is not only the major German cities that are enticing to investors, the medium-sized cities of Germany are also seeing an uptick in activity.

Berlin is currently regarded as the top of “Europe’s real estate market with the best investment opportunities” according to Price Waterhouse’s recent study. Hamburg came in second with Dublin at three and Madrid in fourth. Munich (rank 11) and Frankfurt (Rank 16) are still in the Top 20.

“Berlin has excellent fundamentals and an extremely low price level,” said one of the investors. In just the first three quarters of 2014, there were a total of 2.9 billion euros in property deals in Berlin. And of all those deals, half of them involved foreign investors.

“The German real estate market continues to pull the enormous interest from institutional investors to be” the study says. Given the increasing competition and the interest in the middle level cities of Germany,  price sensitivity will become more and more a focus. “Even in 2015, there will be an unchanged global capital flow into the European real estate market,” says Jochen Bridges of PwC. “This will drive up prices and curtail the supply.”

The main driver of this development is the low-interest rate policies of central banks. Investors are increasingly looking for investment opportunities that offer a degree of security while still yield a return. “Cities like Berlin or Madrid will benefit primarily from the system pressure of investors,” says the study.

While Germany is in the forefront of real estate activity now, this is not the case for other European countries.  France in particular falls by the wayside. Only 38 percent of investors expect that they can increase their profits in France in 2015. A year earlier it was almost 50 percent. For Germany, investors expect to see 48 percent at constant profits. Ireland’s market, however, has investors weighing in at 78 percent that expect to increase their profits and 69 percent of investors expect the same in the peripheral countries.

The source of the real estate funding appears to be from sovereign wealth funds and pension funds from Asia and North America. With 56 percent of the investors surveyed expect an increase in American capital to Europe, they believe that more money will flow from Asia, as much as 68 percent.

Not only have the rankings changed among investors in recent months, but also the type of property. Initially, the activity was mainly commercial real estate demand, now the trend is towards residential property:

“About two-thirds of investors surveyed had already invested in residential real estate, including those who had previously only invested in office properties. Of those that were previously not investing in residential real estate, 15 percent will consider future investments in this field. “

Germany is Europe’s largest investment market for residential real estate. In the big cities, the building permit numbers in 2014 increased by 17 percent over the previous year. Overall, the construction of approximately 285.00 dwellings was approved in 2014 in Germany, 5.4 percent more than in 2013, according to the Federal Institute for Building, Urban Affairs, and Spatial Development. How the early March rental price break will affect the investment in this area remains to be seen.

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