Is Chicago Just Like Berlin?

We wanted to give you a taste of what’s going on across the pond. (In case you wanted to borrow best practices, invest internationally, or just crave schnitzel.) On a recent trip to Berlin, Germany, your Chicago reporter got to know Deutsche Wohnen, its largest private multifamily landlord.

The company was founded in 1998 by Deutsche Bank to manage its residential holdings, Julian Pinnig tells us, and it went public the following year. A move to become independent in ’06 was followed by a merger with Berlin’s newly privatized multifamily mainstay GEHAG in ’07. Founded back in 1924, GEHAG built up the city when it was starved for housing supply. Many of its buildings are notable for their architecture and still function efficiently. (Some, still in Deutsche Wohnen's portfolio, are UNESCO World Heritage sites, designed by famous Weimar period architect Bruno Taut.) The acquisition of the BauBeCon portfolio in 2012 boosted the firm’s portfolio from 50,000 units to almost 75,000, Julian says.

Last year, Deutsche Wohnen completed the largest real estate takeover Germany has seen in years (think EQR buying Archstone), acquiring GSW Immobilien. The main reason: It’s placing a big bet on Berlin, Julian tells us. The merger upped Deutsche Wohnen’s holdings in the capital city to 108,000 units (about 6% market share), and boosted its total portfolio to 150,000. Around 275,000 people are expected to move to Berlin by 2030, he says, and it's already known internationally as a young and artsy city. (Exhibit A, above.) “Poor, but sexy,” as Mayor Klaus Wowereit has said. Why poor? Big companies didn’t invest in Berlin until recently because of The Wall, so prices have stayed depressed (versus cities like Munich or Hamburg).

So there’s unique upside here (that would be the famous Berliner Dom, meaning cathedral, above), as gentrification rears its well-coiffed head and hipsters continue to flock. (Fun fact: Rather than beards, German hipsters grow Otto von Bismarck mustaches.) Rent soared 8.2% last year and now sits around €8.02/SM. Young renters are generally interested in the center city and like Altbauwohnung properties, which feature high ceilings and notable architecture. (Don’t you feel superficial that Chicagoans just crave pools and rooftop bars?) Though there’s also demand for East Berlin’s taller, more modern buildings, which go up to 10 stories, Julian says. Deutsche Wohnen’s focused on acquiring quality assets across the spectrum, from historical protected sights to East Berlin’s classic plattenbau, modular housing that’s a remnant from the socialist GDR.

Here's your Chicago reporter and her boyfriend at the remnants of the Berlin Wall. Development in Berlin has been extremely limited, but Deutsche Wohnen is dipping its toe in the water with a 100-unit initial project just kicked off in neighboring Potsdam. It’s slow going due to high regulation and sustainability standards, but necessary given the population surge. Julian says the firm has seen increased competition on acquisitions from foreign investors, but some have underestimated Germany’s heavy red tape and high barriers to entry. (Though to be fair, they haven’t experienced Cook County’s property taxes.) For example, you can’t increase tenants’ rents by more than 15% within three years, and soon rent increases won’t be allowed to exceed 10% over the average for the neighborhood, Julian tells us.

For now, the multifamily giant (with an almost €4B market cap) is focused on the integration of GSW and its portfolio, but its eyes are still open for worthy acquisitions, Julian says, which it generally finances with a mix of bank debt and equity. Its core target regions across Germany are major metro areas (sound familiar, Chicago?), including Berlin, Rhein-Main, and the Rhineland, where it's built up a high concentration of units and economies of scale. Another interest is the nursing/assisted living sector (DW currently has 21 facilities), given its demographic advantages and stable profit contributions, Julian tells us. A sailing aficionado, he's glad the weather is warming up so he can get out on the water.

How much of Chicago do you see in Berlin, or vice versa? We’d love to hear your stories about doing deals with the wunderbar folks in Deutschland. Tell marissa.oberlander@bisnow.com