HOUSE-PRICE inflation is a virus that most of Europe has caught from the UK, but one country has remained immune. Germany – for so long a powerhouse economy and with the largest population in Europe – has spent the past ten years channelling its energy into healing the divide between East and West. While prices across Europe have risen by between 100 and 120 per cent in the past seven years, in Germany they have actually fallen. According to Knight Frank’s Global House Price Index, in the last quarter of 2006 Germany was the only European country where prices fell – by 3.6 per cent. House prices are already significantly lower than in most of eastern Europe.

According to Julien Lu, director of the estate agency Imoinvest: “Germany has been on the bottom rung of the ladder in the European investment arena since its 1990 reunification.

“However, now that they have got to grips with this and with German banks starting to introduce investor-friendly mortgages, the market is changing quickly. Private equity funds have also invested billions into the market.”

So why haven’t the British been investing? Well, many have. But there is still a historic reticence – shall we say – about anything Germanic in this country. That is not such an issue for younger buyers, who quite like the idea of a Berlin studio for £21,000. The Irish, with no historic baggage, have already invaded. I heard of one Celtic tiger who owns 600 flats.

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The main reason why German property is so cheap is oversupply. There is an awful lot of old-style communist-era stock with cheap rents that don’t provide a healthy yield, and some postwar buildings are distinctly ugly.

Dietrich Washausen, head of Berlin Property Consultants (BPC), points out that “after the Wall came down, refurbishment of flats in the East was more comprehensive, so they’re are often in better condition and at a much higher standard than in Berlin.”

Only about 40 per cent of Germans are owner-occupiers, with Berlin falling below 15 per cent. The reasons for this are that financing is not as sophisticated as in the UK – although there are changes in this area, mortgages are still difficult to get – and rents are low. German property investors focus on yield (on average, yields are around 6 per cent) and are pessimistic about appreciation.

Tenants also have strong rights. Even if you own the building, it is difficult to get access to a tenanted apartment and, after a year, a tenant is tricky to evict except for nonpayment. I was shown a dozen properties around Berlin, but was allowed to enter only two flats that were empty. Written consent and lots of negotiation is needed apparently, even if you own the place.

Tenants also have a degree of autonomy on the flat. It is not uncommon, for example, for a flat for rent to have no kitchen: tenants might install their own and then take it with them when they leave. There is a surprising degree of loyalty, though, and many Germans pay rent on the same place for decades, if not their whole life.

Imoinvest has sold 170 properties to Britons in the past few months, mostly studios or one-bedroom apartments. Brett Donovan, a researcher in his late twenties, has bought two one-bed flats in Berlin from Imoinvest for about £40,000 each. “I was attracted because it is such a vibrant, youthful city, but also I felt the UK market was superheated and landlords aren’t getting a good return. The best thing, though,” he concludes, “is the security of the tenants.”

FORSALE

The one-bedroom flat, above, in the Charlottenburg district of Berlin is for sale for €97,929 (£69,000) via Imoinvest (020-7845 0700). Studio flats in a lakeside 19th-century conversion, below, in Potsdam, 30 minutes’ drive from Berlin, start at €62,000 (£43,687) through Buy Berlin (020-8315 7517).

FACTFILE

In Berlin, £400,000 would buy a block of 12 one-bedroom flats, yielding 6 to 8 per cent after deductions; a city-centre one-bedroom flat costs from £25,000. City-centre one-bedroom flats cost from £35,000 in Dresden and from £30,000 in Leipzig. Contacts: Imoinvest, 020-7345 0700; imoinvest.com; BPC Berlin, 00 49 (0)30 411 98 39 13, bpc- berlin.com; Blau Gelb Immobilien, 00 49 (0)341 910 48 99, blaugelb-immobilien.com.

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