A Report for an Investment Client From Turkey Seeking To Invest in Residential Property in Berlin or Cape Town

Executive Summary

The report is for an investment client from Turkey seeking to invest in either Cape Town or Berlin residential property. This report aims to provide insights into the cities’ real estate markets to ensure that the investor makes informed decisions. The report analyzes the economic growth, interest rates, globalization, political stability, cultural and language factors, and regulatory frameworks in real estate markets. The reports find that the main factors affecting real estate in Cape Town include economic, social, political, and interest rates. The economy of South Africa is relatively slow, the political climate is relatively stable, and there are reforms put in place by the government to increase the growth of the real estate sector.

In contrast, Berlin’s economy and real estate have improved with a very stable political environment. The report also analyses the quantitative and qualitative data such as total returns, income returns, and capital growth. The findings show that residential estate in Cape Town performed better than that of Berlin concerning total returns. However, Berlin has a high demand for real estate, providing investors with an opportunity. The report concludes that the cities have pros and cons, which the investor must consider before investing.

Introduction

The international real estate market has become a preferred investment opportunity for international investors aiming to diversify their investment portfolios. The Berlin and Cape Town Markets have been influenced by different political, economic, and social factors that have affected the cities’ demand and supply of residential properties. To help the investor make informed decisions, exploring the effect of economic growth, political stability, interest rates, and globalization on the real estate markets in Berlin and Cape Town is essential. Identifying the cultural and language factors and regulatory frameworks that affect the real estate markets is essential. Analyzing quantitative and qualitative data such as income returns, capital growth, and total returns is also essential. The findings will give investors insights to ensure that they make informed decisions.

Structure and operation of the international real estate markets

The Cape Town and Berlin international real estate markets are influenced by the respective countries’ economic, political, and social factors. Economic growth and interest rates are the main factors affecting the real estate market in Cape Town (Davids and Georg, 2019). According to South Africa’s GDP Annual Growth Rate (no date), the economy of the Country has been relatively slow, with an average annual GDP of 2.42%. The interest rates, on the hand, are high, estimated at 7.75, with both having a huge ripple effect on real estate.

The political climate in South Africa is stable except when they are expecting an election. The last election did affect the market due to land reform issues, legal uncertainties, and expropriation without compensation. However, the government has put in place reforms such as the relaxation of laws on land use and zoning (Hull, Babalola, and Whittal, 2019). The government has also offered financial incentives such as reducing taxes, which has increased the growth of the real estate sector (Land reform, no date).

In contrast, Berlin has seen growth in its real estate market with high demand and property prices. The economy recorded GDP growth of 3.3% in 2021, above the average 0f +2.9% of the Country. However, the growth of the economy has led to challenges, such as the need for more affordable houses. The challenge of gentrification is also rampant, and areas such as Kreuzberg face hyper-gentrification (Kindermann et al., 2021). The political environment has been very stable, making the city favorable for international investors.

Globalism has significantly impacted the Berlin and Cape Town real estate markets. In Cape Town, globalism has increased foreign investment from countries such as Asia and Europe and thus encouraging the growth of the real estate sector. The strategic location of Cape Town makes it an excellent choice of destination for global businesses. Another impact of globalization is the increase in diverse people and cultures in the areas, which has led to a high demand for real estate that addresses their needs. Globalism has also led to technological advancements that have enabled access to quality data that can help investors make informed decisions.

In Berlin, globalism has increased the population and the emergence of international companies, especially in the central areas. The effect has been a high demand for residential and commercial real estate (Löhr, 2023). Globalization has led to improved technology, making it easier for investors to undertake research and make informed decisions on real estate investments. However, globalism has led to an increase in foreign investors (Buettner and Krause, 2020). The result has been high real estate prices that are difficult for locals to afford.

Regarding investment strategies, the Rand is weaker than the Turkish Lira, meaning properties are more affordable for Turkish investors in South Africa. On the other hand, the Euro is stronger than the Turkish Lira, which means that properties are expensive for Turkish investors in Berlin (South Africa GDP Annual Growth Rate, no date). Regarding cultural and language factors, in both Berlin and Cape Town, the culture is diverse, which can impact the choice of property, showing the need for collaboration with locals who understand the culture. Regarding regulations, the tax laws in Cape Town are complex and need a tax professional’s help (Chatterjee, Czajka, and Gethin, 2020). In Berlin, the government has put in place regulations when buying rental properties, including acquiring permits and sticking to the laws on rental control.

Several factors affect market efficiency in real estate. According to Keogh and D’arcy (1994), market maturity, data transparency, and market liquidity are the main factors affecting real estate. Regarding market efficiency, both towns have seen changes, with Berlin having an increase in housing demand, especially from international investors. This has led to concerns about market efficiency, with some indicating that the prices may need to be more valued. In addition, the market is relatively young and needs more transparency, meaning that investors may find it challenging to make informed decisions.

On the other hand, real estate in Cape Town is growing and has greater transparency and market efficiency. To increase transparency, the government has introduced Real Estate Investment Trust which requires high reporting and disclosure standards. Furthermore, the market has had a surge in institutional investors, leading to increased market efficiency and liquidity. Despite the improvements, affordable houses in Berlin still need to be improved. In Cape Town, the market relies heavily on foreign investors, which can lead to instability when there is a global recession.

Analysis of the Berlin-Cape Town housing market

Quantitative Analysis

MSCI data from previous years regarding total returns show that the residential real estate in Cape Town performed better than that of Berlin. For instance, the total return for the Cape Town Residential real estate was 10.5%, while that of Berlin was -5.5% in 2021 (MSCI South Africa index, no date). Income return data shows that the Berlin and Cape Town real estate markets have been the same for several years. The income return was 4.3% and 4.0% in Cape Town and Berlin, respectively. The MCSI data shows that the capital growth for Cape Town has been more than that of Berlin in the last few years. In 2021, the capital growth was 5.7% and -9.4% for Cape Town and Berlin, respectively (MSCI Germany index, no date; South Africa index, no date). Similarly, the capital growth was -6.6% and -2.1% in Berlin and Cape Town, respectively.

Qualitative data

Regarding political and economic stability, South Africa has experienced some instability in previous years, such as corruption and social unrest. However, the Country does have a reasonably stable government. In addition, Cape Town attracts tourists, providing a good source of income for the city’s economy (Rogerson, 2020). In contrast, Berlin is the center for international business and boosts a stable economy and government. The Country’s economy is the largest in the continent and is well known for exports and manufacturing (Schreiter, 2020). However, the investor should note that Germany is part of the European Union and can be affected by political and regional economic changes.

In terms of the legal framework, Cape Town has a well-established legal framework. It governs property transactions as indicated in the South African Property Sector Code, which seeks to ensure transparent and fair property transactions, including leases, transfers, and sales (Naidoo, 2021). The code also highlights that property professionals maintain specific ethical guidelines and standards. In terms of taxes, property owners are supposed to pay different taxes such as property tax, income tax, and capital gain tax (Chatterjee et al., 2020). The South African Revenue Service is tasked with administrating and collecting taxes associated with property transactions.

Similarly, the German Civil Code is the legal framework governing property transactions in Berlin. The German Civil Code has regulations for leases, ownership, and property transaction (Buettner and Krause, 2020). The legal framework also highlights the guidelines for real estate agents and other professionals participating in property transactions. In terms of taxes, property owners are expected to pay taxes such as capital gain tax, property tax, and income tax on rental income (Löhr, 2023). The Federal Ministry of Finance is in charge of the German tax system.

Regarding professional services, real estate in Cape Town is well established, with several agents and companies dealing with project management to help investors. In addition, financial advisors and legal professionals can offer guidance on investments and property transactions (Turok, Visagie, and Scheba, 2021). However, access to information and transparency could be better than in other markets making it difficult for investors to make informed decisions (Naidoo, 2021). Although there are government agencies and industries that issue information on the property market, the information is not always accessible. It is not always presented in a user-friendly format.

On the other hand, Berlin has a high level of transparency and access to information. Due to the fact that the city is the center for international business, several resources such as government data, market reports and industry research are available to investors (Davids and Georg, 2019). As a result, it is easier for them to conduct research and make informed investment decisions. Many professional services in the city are well-informed (Schreiter, 2020). They include real estate companies, international law firms, and financial institutions that issue different reliable options when consulted.

Regarding public/private infrastructure investments, Cape Town has an excellent public transportation system, including trains and buses. Significant ongoing infrastructural developments include the new cruise terminal and expansion of the International Airport of Cape Town (Teffo, Earl, and Zuidgeest, 2019). The city has a relatively good planning policy, the Spatial Development Framework, which aims to deal with spatial inequalities. In contrast, Berlin’s public transportation system is well-developed. Buses, trains, and subways always go through d expansion or improvement (Raffer, C., Scheller and Peters, 2022). The city is very committed to sustainable development, that is evident in the present policies that encourage the use of renewable energy sources and reduce the emission of greenhouse gases

While deciding to invest, it is essential to note that both markets have natural hazards. Cape Town is more likely to face wildfires and drought (Cole et al., 2021). Conversely, Berlin has a high likelihood of flooding (Fekete and Sandholz, 2021). The investor should also consider the risks associated with the hazards and ways to deal with them, such as insurance or different investments.

Recommendation

Based on the analysis of the property market in Cape Town and Berlin, I recommend that investors invest 60% of the total investments in Cape Town and 40% in Berlin. The allocation considers the favorable economic conditions in the environments, institutional characteristics, differences in legal frameworks, and public/private infrastructure investment. Cape Town has massive potential for capital growth since the market is quite a state, and the tourism sector is fast growing (Davids and Georg, 2019). The natural environment can also attract investors keen on sustainable development (Rogerson, 2020). Although there has been economic and political instability in the past, the Country generally has a stable economy and government.

On the other hand, investing 40% in Berlin ensures strong protection from political instability if Cape Town while ensuring the exposure of the strong economy of Berlin and international business opportunities. This is because the city has a stable economy and government and continues to be a hub for international businesses (Schreiter, 2020). The city is very committed to sustainable development and has excellent new technologies that can attract investors interested in technology. The high access to information and transparency makes it easier for investors to get and analyze data before making decisions. However, the city faces the challenge of high property demand, increasing prices, and reducing the rental yields in return (Naidoo, 2021. In addition, the city faces high competition among investors, which may affect the likelihood of profit.

Therefore investing 40% in Berlin and 60% in Cape Town helps strike a balance between the likelihood of higher returns in Berlin and a more secure and stable investment in Cape Town (Chatterjee et al., 2020). Investing more in Cape Town allows the investor to take advantage of the lower property prices with higher rental yields while diversifying their portfolio with a small investment in Berlin. Diversification can help mitigate risk (Schreiter, 2020). In addition, both markets have favorable conditions for investments in real estate, making them both lucrative options for investors.

Another critical factor is the real estate market in both cities. Although the two cities have had an increase in property value, the market in Cape Town has seen significant growth, with some areas having a price increase of an estimated 20% annually (Davids and Georg, 2019). This shows that the demand for residential property is high in Cape Town (Schreiter, 2020). This makes it a better market choice for investors than Berlin, whose market is growing at a slower pace.

Conclusion

Based on the report’s analysis, Cape Town and Berlin have unique advantages and disadvantages in the International real estate market. In Cape Town, real estate is majorly affected by economic and political factors, with interest rates playing an important role. Conversely, Berlin has a rapidly growing economy that has led to a high demand for residential properties. Investments in both cities are different; the Rand is weaker than the Turkish Lira and thus making properties in Cape Town more affordable. Conversely, the Euro is stronger, making properties expensive for Berlin investors. In terms of market efficiency, Cape Town has high transparency and growth of market efficiency. In Berlin, on the other hand, there is growth but a need for more transparency, making it difficult for investors to make informed decisions. The quantitative data from MCCI shows that Cape Town real estate performed better than that Berlin concerning income returns, capital growth, and total returns. Therefore, although both cities have good opportunities for real estate investment, there is a need for the investor to evaluate the advantages and challenges carefully.

References

Buettner, T. and Krause, M. (2020) “Fiscal equalization as a driver of tax increases: Empirical evidence from Germany,” International Tax and Public Finance, 28(1), pp. 90–112. Available at: https://doi.org/10.1007/s10797-020-09610-9. 

Chatterjee, A., Czajka, L. and Gethin, A. (2020) “Estimating the distribution of household wealth in South Africa,” WIDER Working Paper [Preprint]. Available at: https://doi.org/10.35188/unu-wider/2020/802-3. 

Cole, H.D. et al. (2021) “Managing city-scale slow-onset disasters: Learning from Cape Town’s 2015–2018 drought disaster planning,” International Journal of Disaster Risk Reduction, 63, p. 102459. Available at: https://doi.org/10.1016/j.ijdrr.2021.102459. 

Davids, A. and Georg, C.-P. (2019) “The cape of good homes: Exchange rate depreciations, foreign demand and house prices,” SSRN Electronic Journal [Preprint]. Available at: https://doi.org/10.2139/ssrn.3349815.

Fekete, A. and Sandholz, S. (2021) “Here comes the flood, but not failure? lessons to learn after the heavy rain and pluvial floods in Germany 2021,” Water, 13(21), p. 3016. Available at: https://doi.org/10.3390/w13213016. 

Hull, Babalola, and Whittal (2019) “Theories of land reform and their impact on land reform success in Southern Africa,” Land, 8(11), p. 172. Available at: https://doi.org/10.3390/land8110172. 

Keogh, G., and Darcy. C (1994) “Use and investment markets in British Real Estate,” Journal of Property Valuation and Investment, 12(4), pp. 58–72. Available at: https://doi.org/10.1108/14635789410069980.

Kindermann, F. et al. (2021) “Learning about housing cost: Survey evidence from the German house price boom.” Available at: https://doi.org/10.3386/w28895.

Land reform (no date) South African Government. Available at: https://www.gov.za/issues/land-reform (Accessed: April 25, 2023).

Löhr, D. (2023) “Impacts of property taxes on planning and settlement development—Germany as a living lab,” Modern Economy, 14(03), pp. 231–249. Available at: https://doi.org/10.4236/me.2023.143014. 

MSCI Germany index (no date). Available at: https://www.msci.com/documents/10199/d76361cb-d5a5-4185-97ce-ec5e3dd5bf2e (Accessed: April 25, 2023).

MSCI South Africa index (no date). Available at: https://www.msci.com/documents/10199/8b485176-b3d0-4cc3-ba59-3b3435e42f0a (Accessed: April 25, 2023).

Naidoo, R. (2021) “The South African Municipal Valuation Standards for property rating,” The Future of the African Real Estate Sector: What Next? The 20th Annual AfRES Conference [Preprint]. Available at: https://doi.org/10.15396/afres2021_027.

Raffer, C., Scheller, H. and Peters, O. (2022) “The U.N. Sustainable Development Goals as innovation drivers for local sustainability governance? examples from Germany,” Public Sector Economics, 46(4), pp. 459–487. Available at: https://doi.org/10.3326/pse.46.4.2. 

ROGERSON, C.M. (2020) “Covid-19 tourism impacts in South Africa: Government and industry responses,” GeoJournal of Tourism and Geosites, 31(3), pp. 1083–1091. Available at: https://doi.org/10.30892/gtg.31321-544.

Schreiter, K. (2020) “Introduction,” Designing One Nation, pp. 1–9. Available at: https://doi.org/10.1093/oso/9780190877279.003.0001.

 South Africa GDP Annual Growth Rate (no date) Trading Economics. Available at: https://tradingeconomics.com/south-africa/gdp-growth-annual#:~:text=GDP%20Annual%20Growth%20Rate%20in,the%20second%20quarter%20of%202020. (Accessed: April 25, 2023).

South Africa Interest Rate (no date) Trading Economics. Available at: https://tradingeconomics.com/south-africa/interest-rate (Accessed: April 25, 2023).

Teffo, M., Earl, A. and Zuidgeest, M. (2019) “Understanding public transport needs in Cape Town’s informal settlements: A best-worst-scaling approach,” Journal of the South African Institution of Civil Engineering, 61(2), pp. 39–50. Available at: https://doi.org/10.17159/2309-8775/2019/v61n2a4. 

Turok, I., Visagie, J. and Scheba, A. (2021) “Social inequality and spatial segregation in Cape Town,” The Urban Book Series, pp. 71–90. Available at: https://doi.org/10.1007/978-3-030-64569-4_4. 

Appendices

Figure 1: The GDP of Cape Town and Berlin:

Figure 2: Investment in real estate in Berlin and cape town