We are seeing substantial positive changes both within the real estate and the rental market. This warrants an in-depth analysis to understand the forces that are creating a positive investing environment.
Market summary
Due to sustained population growth, increasing job security and economic growth, rental prices are on the increase. In 2012, a 13 percent increase in asking rents occurred across all sectors within Berlin.
Median asking prices for single units and apartment buildings are also rising at levels unseen in at least two decades. The fastest increasing sector is found in the lower market segment which saw price increases of 56 per cent from 2011 to 2012! The backbone behind property appreciation is partially due to a growing confidence in the rental market and the economy as a whole.
Rental development in Berlin
Berlin saw median asking rent increases of 13.8 per cent from 2011 to 2012. Higher quality apartments are leading the way with an annual average increase of 16%. In areas such as Friedrichshain-Kreuzberg the increase was much greater at 26.5%. Even in areas with low population growth and lower quality apartment units, there was still an increase of 8.7% which is higher than
the inflation rate of 2.17%.
What is behind these increases? The driving force is a lack of supply. There were 3,519 new apartment units approved for construction in 2012. These will only satisfy one-fifth of the migratory demand. The cite-centre is in highest demand and units here could be rented many times over again.
As rental rates increase, long-term tenants tend to stay in their older and cheaper units as they realize that they can no longer get as much area with the same rental dollars. This is one reason why there has not been as much rental growth in the lower segment but increases in the luxury market.
As construction catches up with the demand, we should see a shift in rent increases among the lower segment as well. 
Purchase price activity in Berlin
Besides rental rates, Berlin property prices are also on the increase. The median asking price for apartment buildings rose more than 17 per cent from €1,149 to €1,349 m2. Apartment buildings have now crested the €1,000 per square meter mark throughout all of the districts in Berlin.
It is interesting to note that the highest rate of Berlin property prices increase is coming from the bottom 10 per cent of the property market. From 2011 to 2012, we saw median prices increase from €481 to €749 m2. The more luxurious properties are seeing a slower appreciation rate at only 7% with the mean price coming in at €2,727 m2.
We are also seeing a rise in demand for owner-occupied units. The demand is not only coming from local residents who are looking to take advantage of increasing prices and low interest rates but there is also a fair amount of interest coming from of international investors. This is an area that has seen the largest price increase at almost 20 per cent over the previous year. We are now looking at a median price per square meter of €2,258 for individual apartments.
Where can investors find the highest rate of return?
With rents increasing in the high-end market but Berlin property prices increasing in low-end apartment buildings, where is the highest rate of return? By comparing per meter rental rates with asking prices and calculating a gross yield, the evidence indicates that purchasing apartment buildings in the lower market segment will provide an investor with the best overall yield.
This investment strategy not only provides a stable yield right now but also opens the door to future rent increases as the lower market catches up with other sectors.