Will Brexit be followed by a run on Berlin?

The unique humorous streak running through British society was clear long before Monty Python or pork pies. Nevertheless, the surprise delivered to the rest of the world by the British population on June 23 was enough to wipe smiles from the faces of the United Kingdom's European partners. In an historical referendum on whether the UK should remain in the European Union, some 52 percent of registered voters responded with a clear “no”. Germany's real estate market is well-positioned to make the most of this precarious situation.

Hot on the heels of Brexit: the Brexodus

It is already clear that the growing uncertainty surrounding Brexit is likely to have a significant impact on the British property market. Figures released by the Bank of England show that the volume of new mortgage business in April was lower than at any point in the previous 11 months. Throughout the twittersphere, the term “Brexodus” has already been doing the rounds. Great Britain's industrial and manufacturing companies, research institutions and cultural sector could all suffer in the Brexit aftermath. If a large number of London-based banks are stripped of the “passports” that allow them to trade in the EU, up to 100,000 jobs, and the spending power that accompanies them, could disappear from the Thames and migrate to Europe's other major metropolitan centers. Despite the fact that 13.6 million people live in Greater London, property prices would tumble. The Chancellor of the Exchequer, George Osborne, has already forecast that house prices across the UK could fall by between ten and eighteen percent. In the run up to the Brexit referendum, large numbers of investors admitted that they were postponing their buying decisions.

The City of London could be one of the most heavily affected areas. Over the last few years, a latent property bubble has been developing. A property market slump in the wake of Brexit would be more than enough to trigger this bubble to burst. Prices for condominiums in the City of London have risen spectacularly over the last few decades, and these increases have had little to do with rising wages or surging demand for housing. Price growth has been driven by property speculators, willing to pay ever more absurd amounts for real estate at the heart of London. As a result, demand for housing has been artificially inflated, despite the fact that there has never been a scarcity of supply. Condominiums costing upwards of five-figures per square meter are standard, and prices regularly exceed GBP 20,000/sqm. These apartments and homes are often left empty by their absentee, speculator owners. Pockets of London's most desirable and exclusive boroughs have become ghost towns, a phenomenon referred to as “lights out London.”

Ultimately, Berlin offers a safe and viable alternative to London

None of this has escaped the attention of international investors. Those who have traditionally invested in London are openly considering continental European alternatives, in particular the major metropolitan cities of Paris, Frankfurt and Berlin. Above all, Germany's reputation as a “safe haven” means that the country is ideally positioned to attract buyers. This would give Germany's already booming property market yet another healthy boost. It is already clear that alongside high net worth individuals, an increasing number of middle class international investors from Asia, the Middle East and the United States are buying properties in Germany. In the 18 months leading up to the Brexit referendum, interest from foreign buyers in Berlin's condominium market enjoyed a noticeable surge.

Is Berlin now set for a property price bubble like the one in London? Across Germany, rents and property prices have gained significant ground over the past three to four years, especially in the capital, which has seen growth of between 30 and 40 percent. At the same time, Berlin's residential property market – in contrast to London, Paris or Frankfurt – is still substantially undervalued. In the worst case scenario, we will see a repeat of what happened in Berlin following the massive financial crisis of 2008: nothing. In comparison to the upheavals in Ireland or Spain, Berlin's property prices remained stable and there was no dramatic collapse.