(Bloomberg) -- In a rough-and-tumble corner of former communist east Berlin, Canadian rocker Bryan Adams is turning a downtrodden industrial site along the Spree river into exclusive artist studios.
The units, which combine rough-hewn factory brick and smooth modern concrete, can cost more than 800,000 euros ($920,000) for the raw shell, targeting an elite clientele and reflecting the changing face of the German capital. While the upscale shift has been a boon for international investors, it’s a growing problem for Chancellor Angela Merkel.
Affordable real estate has become increasingly scarce in the country’s big cities. Open houses are overrun, while pleas for housing are desperately taped to lamp posts. The situation has fomented anger among average Germans over concerns about maintaining living standards, sparking protests in Berlin and Hamburg.
“Since 2010, the situation has got more and more fraught, particularly for people on low incomes,” said Wibke Werner, deputy director of the Berlin renters’ association, whose membership surged last year by more than 10,000 people to over 160,000. “The city simply isn’t building enough affordable homes.”
Housing values have already surged 79 percent across the country over the past decade, and the prospect of further growth has lured the likes of Blackstone Group LP, Carlyle Group LP and Warren Buffett. With more international players in the mix, regular folks are getting priced out of the market, deepening the divide between the haves and have-nots. That could push more voters toward the populist Alternative for Germany, which became the country’s biggest opposition party in September elections.
Most Germans rent due to high hurdles for buying. In Berlin, taxes, legal costs and broker fees add about 15 percent to the purchase of a home. While these hefty upfront expenses helped prevent the speculation that fueled the real estate bubble in the U.S. a decade ago, they haven’t deterred investors like Blackstone, which bought 2,500 Berlin homes in May through one of its funds.
To take advantage of overseas interest, Buffett’s Berkshire Hathaway HomeServices formed a partnership this year with Rubina Real Estate in Berlin for its first international franchise agreement. The U.S. firm plans to strike similar deals in Frankfurt and Hamburg.
“In the last 10 years, the proportion of foreign investors in Berlin’s property market has gone from zero to about 15 percent,” said Carsten Heinrich, Rubina’s managing director. “The trend is still rising” as clients from China, the Middle East and the U.S. seek stable returns.
Cash for Kids
The government is trying to respond, pledging 6 billion euros as part of a program to build 1.5 million homes in the next four years. New housing supply is “desperately needed,” Merkel said in a podcast in May.
One of the new measures offers families 12,000 euros per child over 10 years to help buy a home, but critics say the program is likely to fuel further price increases. Meanwhile, a raft of laws over the past five years failed to make much of an impact. The efforts includes a controversial cap on rent increases -- known as the Mietpreisbremse -- which has proved ineffective.
“The political pressure from ordinary people is growing all the time,” said Petra Rohland, a spokeswoman for Berlin’s urban planning department. “The Mietpreisbremse isn’t enough, and the state government has run out of options.”
Berlin’s current shortage of about 100,000 apartments is expected to double by 2030, according to Deutsche Wohnen AG, one of Germany’s largest landlords. The once-divided capital has evolved from a real-estate backwater with vacant buildings and weed-strewn lots into one of Europe’s hottest markets.
Tech companies like online fashion retailer Zalando SE -- which is building a Berlin campus for about 6,000 workers and owns 24 apartments to help accommodate new staff -- are luring people to the city. The population has grown by more than 40,000 annually since 2010. Rents have surged almost 60 percent since 2009, according to consultancy Bulwiengesa AG.
The tension prompted about 13,000 people in April to march from Potsdamer Platz -- the rebuilt center that was once in no-man’s land between East and West Berlin -- to the trendy Kreuzberg district in protest against rising rents. A similar demonstration took place in Hamburg in June. But relief is unlikely.
In the gritty east Berlin neighborhood of Oberschoeneweide, Bryan Adams carved up an old factory hall into 14 modern studio spaces, as part of a new creative hub at a former production complex for electrical components. Icelandic artist Olafur Eliasson owns a hall on the site, and Polish-born sculptor Alicja Kwade bought one of the units in Adams’ development, which can include sleeping accommodations. Only two are currently available, indicating solid demand even for niche properties.
With real estate prices still a fraction of those in London and Paris, Berlin will continue to woo international investors, according to Peter Hoppe, who manages the studios for the Canadian musician and photographer.
“The influx to the city won’t abate anytime soon,” Hoppe said overlooking the Spree from the rooftop of one of the site’s three-story units. “I don’t see signs of a bubble. Berlin has so much strength.”
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