Sonnenallee, a street in Berlin’s Neukolln district, looks like it comes straight out of an Arab city—so much so that it goes by the nickname “Gaza Strip.” Kebab and bakery shops are advertised in Arabic; men sit in men-only coffee shops and bridal-shop windows showcase glittery, not-so-stylish gowns. But take a random turn, and you’ll find a swath of bars, burger joints and Indian restaurants where hip Berliners announce that they have arrived to urban coolness.

In this gentrifying neighborhood, Israeli investors are hoping to find some of the remaining affordable gems in the German capital’s increasingly competitive housing market—properties they could rent out for a return on investment of about 5 percent, while banking on a spike in property value.

Berlin Inspiration is one of several Israeli real estate companies marketing Berlin properties to Israeli investors. Take, for example, a 94-square-meter (1,012-square-foot) renovated apartment on the Fontane Strasse street in Neukölln that goes for $465,000 (after taxes and fees). The complex is built in classic AltBau style, while the apartment features hardwood floors, plenty of light and a shiny new kitchen. Ten years ago, this property would have probably sold for half of that amount.

According to Gili Waldman, an investment consultant for Berlin Inspiration, Berlin property values increase at a rate of about 10 percent a year. But a property like the aforementioned apartment would go for around $735,000 in Tel Aviv.

“Israelis really look for these opportunities,” she said. “They are the ones who discovered Berlin pretty early.”

It appears that the “golden age” for amateur investors in Berlin has come and gone. Rising costs have made Israeli investors in Germany turn east for real estate bargains. Neighborhoods that were once run-down in a divided Berlin, like Prenzlauer Berg, Mitte and Kreuzberg, are now trendy havens, leaving gentrifying immigrant districts such as Neukolln, Moabit and Wedding among the few neighborhoods where Israelis can still find a studio apartment for $100,000.

According to attorney Sebastian Schuetz, who has served Israeli clients for more than two decades, the golden age for Israeli investing began around 2006, when Berlin hosted the FIFA World Cup, drawing international attention to the city. A year earlier, Berlin’s imposing Holocaust memorial opened near Brandenburg Gate, triggering Israelis’ intrigue. Affordable Tel Aviv-Berlin travel routes facilitated personal and business ties.

But lately, more and more Israelis are looking towards cities in the region formerly known as East Germany during the Cold War era, like Leipzig and Dresden, to make their capital work for them. (Some locals call Leipzig “Hypezig” for being touted as a “new Berlin.”)

“All my clients who institutionally or through private equity buy real estate, they stopped buying five years ago in Berlin,” Schuetz said.

“You have two reasons for this,” he explained. “The first reason is that they see that Berlin is getting too expensive. Second of all, Berlin is quite big, so people who don’t know Berlin cannot handle this. The city of Leipzig is as big as Tel Aviv.”

Schuetz noted that Israelis aren’t the only ones banking on the German real estate market. Scandinavian, Chinese, Russian and Arab investors have also seized on opportunities in the city, intensifying competition among investors.

Janin Viviane Ahnefeld, an attorney who splits her time between Tel Aviv and Berlin offices to serve Israeli clients, recalled that about five years ago, she would work with amateur Israeli investors who sought Berlin property largely because they traced their family history to Germany or sought a second home in Europe. Yet now, she said, “When I look at the client profile I have, the clients became very professional over the years.”

Another reason for this trend is increasing red tape. In the last five years, Berlin’s property tax rate went up from 3 to 6.5 percent. Tenant protection laws render vacant units much more expensive than occupied units. To combat the housing shortage, a recently enacted law forbids property owners from renting out properties as holiday rentals (to secure a higher return). Ahnefeld’s clients are also looking towards eastern German cities for coveted finds.

Companies like Berlin Inspiration help Israelis bypass bureaucratic hassles, get a German loan and organize purchasing groups, particularly so investors can purchase an entire residential complex and turn the units into condominiums—a process known as “parcelization.” Once ownership is transferred, tenants have the right to remain under the original contract for 10 years, although some landlords find workarounds to get them to leave. A grassroots movement in Berlin is seeking to prevent new landlords from evicting tenants in favor of more profitable lease terms and to keep rents from spiking.

With some 40,000 people immigrating to Berlin annually (excluding Muslim migrants), demand is up and supply is down, although rent and purchase prices are still very low compared to other German cities such as Frankfurt and Munich as well as other European capitals. Interviewees noted that the influx of Muslim migrants during the last two years has had little effect on the Berlin rental market, since the migrants mostly reside on the outskirts of urban areas.

While the golden age for middle class Israeli investors may be dying, Sebastian Schuetz believes that investing in Berlin is still a safe bet for those with the capital to do so.

“If you buy an apartment for a reasonable price today, you cannot make a mistake,” he said. “Because prices are going up and prices are continuing to go up.”

Orit Arfa/JNS.org