THE POLITICAL CONTEXT OF REAL ESTATE
DEVELOPMENT:
CENTRAL CITY REBUILDING IN BERLIN
Elizabeth Strom
University of Alabama at Huntsville,
USA
Abstract
Real estate supply and demand appear to be largely
market forces, but in fact they are shaped by public
policies on the local and national level. Berlin is an
example of a city whose central city property market
has been heavily influenced by policies growing out of
the extraordinary circumstances attending German
reunification. Both the local state and the federal
government have taken steps that have either intentionally or inadvertently impacted the demand for and
supply of property; often the various arms of the state
have acted at cross-purposes in pursuing their goals.
Demand for commercial real estate has been
the new interest in Berlin accompanying
the decision to make it the capital of united Germany.
Federal subsidies designed to encourage investment in
the former East Germany have further fuelled
demand. The supply of central property has been
shaped by the political and legal issues surrounding
privatization of the state-owned holdings in the city’s
eastern half, and the unclear policy goals of the various arms of local and national state responsible for
land disposition.
Introduction
supply of and demand for centrally located property
Long on the fringes of real estate development
activity, since Germany’s reunification Berlin has
become one of the most active markets in Europe.
Key nodes on the western and eastern sides of the
former Berlin Walt arc now dominated by building
cranes as an array of investors and developer from
around the world, most of whom woutd never have
previously considered working in Berlin (or even in
Germany), have bought up land and proceeded to
create the kinds of office and shopping centres
already common in other cities but newer before
found here.
The property boom that restructured central city
land use patterns from 1990 to 1993 was
interpreted in the popular press as the market’s
response to Berlin’s improved locational advantages
(Grillo 1991; Knecht 1992; Linsenmeyer 1991).
Little effort has been made, however, to
understand the dynamic relationship between
consumer demand and public policy in shaping the
pushed by
in Berlin. This article attempts to fill that research
gap. I4ly goal is to analyse the policies of local’ and
national government that shape the property
market and hence urban development. The various
arms of the state whose actions have an impact on
the real estate market are discussed, and the
consequences of their policies are assessed.
Ultimately it becomes clear that the shape of
central city Berlin in the next century is today being
determined as much by an array of contradictory
public policies as by newly unleashed real estate
market pressures.
Private Real
Property and the State
professionals are likely to see the real
market as any market in which supply and
demand determine price. Among social scientists,
however, it has long been acknowledged that
Real estate
estate
3-
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4
property has special characteristics that make it
different from other commodities (Fainstein 1994;
Kivell 1993). The very notion of real estate as a
freely-traded commodity is relatively new, and
required the creation by states of legal norms that
recognized the rights of ownership. Even once
property rights are assured, real estate value
remains a function of the desire of people to locate
where it happens to be, and such a desire is
generally determined by the availability of publicly
provided amenities. The state’s regulatory tools
further shape markets: building codes influence the
cost of construction and therefore potential returns;
zoning restrictions increase or decrease the
potential value of a site by stipulating uses,
influencing the environment, and regulating
density.
The importance of the public sector in
determining the parameters of real estate markcts
takes on greater importance when the statc has a
more direct control on the supply of and demand
for property. Even in polities in which public
market interventions are avoided, the state
accumulates sizeable holdings in the course of
performing its normal functions. In some cases the
state uses land policies more explicitly in pursuit of
larger policy goals. Public land banking, in which
the public sector owns and controls development of
property beyond what is required for its own use,
has long been a planning instrument in the
Netherlands and Sweden (Heidenheimer et al.
1990). Nearly ever)’ nation has some tradition of
seizing and owning land with the aim of improving
property values (for example through urban
renewal-type programmes) or of controlling
speculation either through outright ownership or
’right of first refusal’ provisions {Heidenheimer et
al. 1990; Savitch 1988). Great diversity
characterizes the methods and extent of public
intervention in real estate markets, but certain
common characteristics can be identified. Private
buyers and sellers are still the principal actors, and
the rules regulating their behaviour have emerged
over the past two centuries as the trading of real
estate has become a recognized and legally
protected component of capitalist societies. The
case of contemporary Berlin, however, deviates
from at least some of these underlying principles.
Economic Conditions and Real Estate
Markets in Divided Berlin
West Berlin
The aftermath of the Second World V’ar led to a
division of Berlin into East and V’cst, with the
city’s centre bisected by the new border. West
Berlin was treated as the de facto eleventh federal
state of V’est Germany; West German laws on
property ownership applied and real estate was
traded privately like any other commodity. The
former commercial, cultural and administrative
centres had, hov-ever, been largely destroy-ed
during the war; the remains were located primarily
on the Eastern side of the city. New commercial
real estate investment was therefore concentrated
around the Zoological Garden train section and
along the Kurfiirstendamm, expanding what had
been a busy retail district into a new, albeit modest
city centre.
Real estate development in West Berlin little
resembled development in other German or other
western capitalist cities. Isolated within East
Germany, West Berlin’s economy was not, on its
own, sustainable, and only by the grace of generous
and
comprehensive subsidies from the federal
government did the city survive. Subventions
supported and ultimately shaped every conceivable
economic activity. Employees received a ’hardship
alloN%-ance’ to live in the city, and airlines were paid
to keep flying there. West Berlin producers
received tax allowances on the goods they made
and West German companies could claim
allowances on products purchased from Berlin
firms. Developed in the 1960s, when primary
(manufacturing) cmploy-rnent was still assumed to
be the backbone of any region’s economy, the
Berlin subsidies were most beneficial to firms
turning out light manufactured goods, such as
processed foods and cigarettes, for transport back
to West Germany (Campbell 1990).
The Berlin subsidies largely sheltered the city
from the shedding of manufacturing activity going
on in other advanced metropolitan areas. At the
same time, the advanced senice sector that has
come to lead in other cities never took root. Only
one of Germany’s top corporations remained
headquartered in Berlin after the V’all was erected.
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5
Table 1.
Employees in selected economic sectors per thousand residents,
1987
Source: Pfeiffer et at. (1991).
’
Others may have kept production facilities in the
former capital but their command and control
activities, along with the demand for business
service these activities generate, were moved
elsewhere. As a result, on the eve of reunification
the city had an employment structure different to
other similarly sized German conurbations (see
Table 1). Business services were relatively
underdeveloped in Berlin; the remaining private
sector service workers were primarily providers of
consumer services. A higher percentage of service
workers in Berlin were employed by not-for-profit
organizations than in Frankfurt, Hamburg or
Nlunich (Pfeiffer et al. 1991).
This discussion of the West Berlin economic
structure and the subsidies that supported it is
relevant to an analysis of real estate development
today for two reasons. First, the primary consumers
of central city office space are corporate
headquarters and business services firms. In Berlin
such enterprises were rare; the demand for office
space was therefore very low. The average monthly
prime office rent in Berlin remained a modest
Dl’4125 per square metre (or approximately $15)
throughout the 1980s, a time in which rents in
other large cities were rapidly increasing. with
demand so limited, Berlin experienced little of the
office construction boom that has, for better or
worse, transformed Frankfurt, London, and NewYork (Dangschat 1993). West Berlin’s centre has
thus retained a relatively tow density, and
downtown development policies were never as
politically salient as conflicts over residential area
renewal (Bockmeyer 1994; Karapin 1994).
Second, the local development sector was shaped
by several decades of subsidy and shelter from
market winds. There was a building industry in
West Berlin, but it was oriented towards the
construction of a subsidized product under
conditions of low competition. Construction costs
in Berlin have traditionally been 15-25 per cent
higher than elsewhere in Germany (Hohensee
1994), a differential only partially explained by the
city’s physical isolation, and one that has barely
begun to erode now that the Wall has fallen.
Construction of social housing, which benefited
from federal taxwrite-offs as well as generous local
incentives, was the mainstay of the Berlin building
industry; even commercial developments enjoyed
low-intercst credits and other advantages.
Speculative commercial development undertaken.
by well-capitalized and internationally reknowned
developers was not a feature of the Berlin.
landscape. In sum, although in principle a modem
capitalist city, West Berlin’s real estate market was
little like those in other metropolitan areas.
Developments since the fall of the Wall and
reunification must be evaluated with these special
features of the urban landscape in mind.
Managing this unusual local economy was the
city-state government, a hybrid of state and local
institutions. Berlin was governed by a local
parliament, whose majority party (or parties) chose
an executive. The executive, called the Senat,
included a mayor who presided over a cabinet of
2
some dozen ministers (each called a Smator).2
Each Senator was fairly independent in running his
or her department; the mayor, considered ’first
among equals’, lacked the authority to cstablish a
programme within which all department heads
were required to operate. Berlin was subdivided
into districts (Be::.jrke), «-hich carried out some of
the functions of traditional municipal governments,
such as the approval of building plans, but lacked
independent rcvenue sources and could be
overridden by the Senat. Administered by an
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’
&dquo;
6
elected council and
play
a more
movements
an
executive, Blnrirl’e began
to
important role as the growing citizens
of the 1970s and 1980s demanded
greater access to policy-making (Karapin 1994).
The structure of government has remained intact
since reunification, with East Berlin’s districts
added to those of West Berlin. The political
institutions and personnel that had managed the
divided city were, after 1990, charged with
managing the new metropolis.
East Berlifi
Whereas urban planning even in thc
most
dirigiste
capitalist nations involves intricate negotiation
between public authority and economic power, in
the socialist world land and building materials were
essentially a state monopoly. Only the scarcity of
resources stood between state officials and the
realization of their plans.
Thus was East Berlin’s centre rebuilt according
to socialist principles: dominant uses were public
and symbolic, w ith broad streets and plazas and
striking monuments (Flierl 1991). Like the Charta
of Athens disciples who so shaped post-war development in West Berlin, East German
planners also strove for a segregation of functions,
with new housing complexes springing up along the
city’s previously undeveloped edge and pedestrian
zones separated from streets; but new housing was
also built within the city’s centre, and new
apartment buildings were erected along important
public areas such as the Alexanderplatz. The
that were built, whether for housing or
government functions, utilized those industrial
building techniques promoted by Kruschev and
spread throughout the GDR: ’The new motto for
city and housing development was: better, cheaper,
faster!’ (H3u0ermann 1995: 4).
The extensive war-re~ated damage suffered by
the city’s centre gave socialist planners
considerable open space with which to work. In a
few memorable cases, remnants of Germany’s past
that the war hadn’t eliminated, such as the City
Palace (StadtsddojJ), were razed. uluch of what was
built in East Berlin’s centre was designed to send a
message to the west, as eastern and western
planners engaged in a cross-border competition
structures
that has left some implausible landmarks on both
sides of the former BVa11. A line of high-rise
apartment buildings on East Berlin’s Leipziger
Street, for instance, was built in answer to a West
German publisher’s high-rise office tower,
standing a few blocks away across the Wall, which
beamed
news headlines eastward on an electronic
message board. An important principle of citybuilding was the erection of a single, dominant
structure that would come to symbolize the city
with its commanding presence: in East Berlin that
structure was the 1969 TV tower, looming over
300 metres high and visible across both haloes of
the city (Flierl 1991).
Private real property had existed, and was in fact
widespread in the GDR, with individuals owning
homes and even multi-family apartment buildings.
Although ownership of existing housing was
tolerated it was hardly encouraged: rents were
controlled to the point at which a building owner
could barely meet expenses, and building materials
were difficult to obtain. The buying and selling of
property was severely limited. An increasing
percentage of the housing stock was found in newly
constructed apartment complexes owned and
managed by state-run housing companies.
Commercial property was almost entirely in the
hands of the state, one of its official organs, or a
state-controlled production conglomerate. The
nature of the East German economy had not
encouraged construction of much office space;
most needs of the state and its enterprises had
been accommodated in pre-war office buildings.
A further discussion of.East Berlin governance
and planning practices, which were entirely
replaced by West German and West Berlin laws
and practices upon unification, is no longer
relevant to subsequent developments in united
Berlin. Central city development in the eastern part
of Berlin, however, has been influenced by those
legacies of socialism that cannot easily be shaped to
conform to western, capitalist standards. First,
Berlin’s eastern ‘dov-ntov-n’ lacks the infrastructure
for a service-based office economy even more
dramatically than that of the west. Second, central
city real estate at the time of reunification was
predominantly in public hands, making public
sector land policies a dominant force in inncr city
development.
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7
Table 2. Prime
rents
for West B erlin/Berlin
by sector, 1988-93 (D~1 per square
~B’ofe:a Prior to 1990, West Berlin industrial properties were almost all
Source: Weatherall Green & Smith (1994).
After the Wall: Real Estate
in the new Hauptstadt
owner
metre per
month)
occupied.
West German economy surged following
reunification, but nowhere as dramatically as in
West Berlin, where East Germans with
The Roots of real estate demand
Deutschmarks pushed consumer demand;
The demand for East Berlin real estate, especially
according to one real estate analyst, 40 per cent of
the demand for office space in Berlin came from
in the city centre, manifested itself even before
local companies looking to expand (1B lülIer 1991).
currency union and reunification provided a firm
Firms from West Germany and beyond,
legal basis for real estate transactions. Westerners
particularly those providing consumer and business
negotiated lease and intent-to-purchasc
agreements with private owners, housing company . services, sought Berlin offices. ’I’he major German
banks, previously excluded from doing business,in
managers, communal officials and Social Unity
West Berlin, were quick to establish a presence,
Part}~ (SED) functionaries - anyone who might
and some 50 international banks (according to a
have the authority to lease or sell propery banking specialist in the city’s Department of
throughout 1990. (Some transactions were later
Economics and Technology) opened offices in the
declared invalid.) West Berlin prime rents rose
ea~ponentialfy; property owners saw their portfolio
city, the prelude to establishing official ranches
under German law. The expected real estate boom
values double overnight (Der Spiegel 1992). The
itself generated demand, as international legal and
intensity of demand, especially for prime office
brokerage firms specializing in property
space, led observers to refer to a real estate ’gold
rush’ (Muller 1991) in 1990-91; by 1993 it was
transactions also required office accommodations.
Some companies decided to locate regional or
clear that the rush had ended (See Table 2), and
divisional headquarters in Berlin, which often
reccnt surveys report that average office rents in
involved buying land and building new office space
Berlin fell an additional 30 per cent from 1993 to
as current supply was inadequate. Most
1994 (Siiddeutsclle Zeillmg 1995). Real estate sales
prominently, Daimler Benz decided to locate their
prices reflected similar trends. It’s harder to get
reliable averages for real estate sales priccs since
new senice divisions, Debis, in Berlin, and Sony to
build a new European headquarters next door.
there are far fewer transactions and more
Both firms were sold large pieces of the now
conditioning variables. According to the Ring
Defiis<fier4Ial’ler, a real estate industy group,
centrally-located Potsdamer Platz at below-market,
prime industrial land prices rose from DA 1460 per
prices to realize their goals.
in
1992
metre
in
1989
to
before
DM1,050
square
Finally, a demand emerged for speculatively
developed office and retail space. Speculative
falling again to DVI550 in 1993; primc office land
in the western centre is thought to have doubled in
development was new for Berlin, and actually a
value between 1988 and 1992, from D1I12,000 to
fairly recent practice throughout Germany.
German real estate had, compared to AngloD:~124,Q00 per square metre (Jones Lang woolen
American practice, remained conservative for
1993).
The cxplosive property market in Berlin was
several reasons. First, owner occupancy has in the
driven by several kinds of demand. ’I’he entire
past been the rule for larger German firms; even
Development
.-
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-
_
8
today 44 per cent of office spacc in Germany is
owner-occupied (Grillo 1991). Real estate
processionals note the preference of German
businesses for owning their own space as a cultural
peculiarity, but in fact depreciation allowances
make
ownership financially attractive. Second, the
German finance system has
discouraged
speculative building. Banks typically demand loan-
.
to-value ratios of 60 per cent, thus requiring
substantial equity contributions, and lenders have
legal recourse to the borrower, which means that a
speculative developer could be ruined if a single
project were to fail (Goodman and Nienaber 1992).
Finally, the structure of the German real estate and
banking industries makes speculation less common:
there are far fewer developers than in the US or
the UK and they are unlikely to raise money
through public offerings. The situation that pushes
speculative building in these other countries cash-rich real estate professionals who need to
keep working - is largely absent in GermanyBanks have longer-term and closer relationships
with their clients, at times taking an equity position
themselves in projects.3 There is less chance that
banks «-ill be caught throwing money at
questionable projects given their familiarity with
the market.4
The ’gold rush’ mentality, how ever, has made
speculative development a key component of
Berlin’s transformation. The early euphoria of
reunification attracted many French, American and
British investors and developers who had never
been active in Germany before, as well as large
investments funds from West Germany. They have
been willing to pay exorbitant prices for the
prestige of building in the centre of the new capital.
Local builders have been either unwilling or unable
to compete in such a high-stakes market.
Moreover, the lines between own-use builders and
speculative developers have been blurred, as
companies constructing their own headquarters are
adding additional rental space. The three
conglomerates building at Potsdamer Platz Daimler Benz, Sony and Asea Brown Boveri have all formed development subsidiaries: Sony has
teamed up with American-based developer Gerald
Hines and ABB with the West German Roland
Ernst to develop and rent out their speculative
projects. These trends have contributed to a Berlin
downtown real estate market atypical for Germany,
both for the prevalence of speculative building and
the dominant presence of foreigners.
Today, as a result of this building boom, the
supply of office space exceeds demand. A 1993
government report found 9.7 million square metres
of planned office space on record, although only 2
million square metres had received approvals; most
projects were still early in the conception stage,
with expected completion dates towards the end of
the decade (Senatsunvalttl11gfiir Stadterrtmickhrtrg
Imd Umweltsclwtz 1993). In the meantime, the
euphoric projections of 1991-92 have proven false.
Germany has been in the throes of deep recession,
with the eastern states, whose growth is essential
for the future of Berlin, suffering double-digit
unemployment. Even with the move of the capital
proceeding according to schedule the take-up for
office space is not expected to exceed 250,000
square metres a year (Weatherall Green & Smith
1994); experts therefore predict a glut of prime
office space and continued decline in rentals rates,
which may lead to bankruptcies for those projects
built on very expensive land or in marginal
locations.
Public policy and real estate demand. The
initial rush to locate in Berlin was in part driven by
the desire of firms to participate in what would
become a growing market for consumer and
business services; Berlin was well-positioned to
serve not only Eastern Germany but the rest of
Eastern Europe. No doubt for many firms,
however, public policy decisions were important
considerations as well. To. increase investment in
Eastern Germany, the federal government offered
an array of subsidies. Most significant for the real
estate sector is the 50 per cent tax write-off for
investment costs on any commercial or residential
development, a benefit available through 1996
(Senata’en1’alluiig fiir lviriscliaft find Tedl1101ogie
1993). This tax allowance has increased the
popularity of investment funds through which highincome indivduals can reduce their tax burden by
investing in real estate projects throughout the
former East Germany and Berlin - an estimated
DV’I7 billion was invested in 1992 (The Economist
1993) and DM20 billion in 1993 (Der Spiegel
199~)5 through such funds. These generous tax
write-offs, which top any similar tax subsidy
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9
programmes offered by the Federal
Republic, have
density of buildings can influence both supply and
demand in complex ways. In Germany, elaborate
planning laws have put brakes on growth even in
indeed contributed to the speculative building
boom in the new states. Critics maintain that too
many projects built with these funds are overpriced
and poorly conceived, as their developers and
investors are more intent on benefiting from the tax
breaks than designing marketable projects (Der
Spiegel 1994).
Of even greater interest to many corporate
planners and real estate investors than public
subsidies was the question of the location of the
national capital (HauBermann and Strom 1994).
The Bonn government was to decide in 19911
whether to move to Berlin; the relocation of the
seat of government would have an enormous
impact on the demand for property in Berlin’s
centre. Not only would government ministries
themselves occupy some 800,000 square metres of
space:
capital cities are the logical gathering points
for political parties, interest groups and trade
associations for which contact with the government
is essential, an estimated 100,000 office jobs (Stadt
Bonn 1990). It was in anticipation of this demand
that many developers came to Berlin.
’
boom markets such as the Frankfurt of the 1980s.
These measures come to shape property markets:
on the one hand building limits prevent individual
owners from realizing maximum returns on their
property; on the other hand such limits increase
the value of that built space that does exist. The
ambivalent relationship between property interests
and government regulation is well-described by
Fainstein (1994), who shows how loosened
government controls in New York and London in
the 1980s facilitated the overbuilding that
contributed to the property market crash of the
1990s. Those cities that earned the wrath of
developers with their anti-growth measures during
boom years have shown the greatest price resilience
during the recession.
German planning law (the Bundesbaiigesetz) and
its administration in Berlin
sets out a
multi-stage
building approval process involving city officials,
Be::.irk government and public participation.
Planning law recognizes the right of the public
sector to
prescribe land uses, densities, and design;
cities will
develop new general land use plans
periodically and more detailed building plans in
anticipation of new development. NVhen planning
guidelines have been determined in advance,
Supply of prime real estate
Impact of regulatory policies. Public policies
have, then, certainly contributed to the demand for
central city real estate. But their impact is perhaps
greater in determining its supply. It has already
been pointed out that the built environment of
Berlin is the product of subsidies, socialist
planning, and Cold War power struggles. The end
of division and Cold War has rendered much of the
urban landscape obsolete; how it is refitted to suit
the needs of a capitalist world city and political
capital is highly dependent on political decisions
made locally and nationally.
The supply of developable land and of built
space are subject to the influence of local
governments through planning regulations
(Heidenheimer et al. 1990). Zoning ordinances, for
instance, regulate the type of uses that are
permitted in certain areas, which then limits the
supply of land available for any particular kind of
development. Further regulations on height and
building applications can be reviewer for their
conformity to such plans (Kunzmann 1984).
Existing plans for Berlin were rapidly rendered
obsolete by unification: more than would normally
be the case in Germany, public planning officials
have therefore had to rely on negotiation with those
who have acquired property to meet public
planning goals. The most effective way to achieve
these goals would be, no doubt, to negotiate these
points as part of a land sales agreement, but (as is
discussed below) the divisions of responsibility
_
between different levels of government and
functional departments within government have
impeded such coordinated approaches to land
disposition and planning. This leaves Be--irk and
city officials only piecemeal policy levers with
which to realize urban development goals. Officials
have been able to maximize the effectiveness of
these levers largely through the tacit threat of
delay: should the government choose to explore
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10
every applicable review in evaluating a developer’s
plans, the approval process could last for years.
Builders have an interest, therefore, in cooperating
on those issues most salient to public agencies.
’I’his point was made during countless interviews
with Bezirk building officials, and acknowledged as
well by developers, although such conditions would
never be stated explicitly in the course of
negotiations. Said one Bsirk official, who asked
not be identified, ’We have a form of passive
resistance: we say, make these modifications and
you’ll get your plans approved in a timely way. If
you [apply to build in a way unacceptable to the
Be::irk] then we’ll reject you
... and this could drag
for two years. Of course this isn’t how I’d state
it officially, but in conversation you can make this
on
clear’.6
’
City officials have used their negotiating pow ers
with varying success to achieve a set of planning
and design goals that influence real estate
development in the central city. Hoping to prevent
the monofunctional office deserts that so often
mark American downtowns they have insisted that
a minimum of housing be included within central
’
city commercial areas. The recently approved city
land use plan (F13<fiennui=uiipplan) requires 20 per
housing in core commercial areas, and this
figure was also used in a planning document
cent
published by the Building Department to serve as a
general guideline for the eastern business district
(Senats~~envaltung fur Bau- und Wohungswesen
1992). More controversially, the city government
and especially its Building Director have crusaded
to maintain uniform design standards that conform
to what is called a traditional Prussian style,
marked by low-rise (five to six storey) stone faqade
7
buildings built around traditional city block.’
Although in some cases officials have negotiated
directly with developers to ensure that projects
meet these guidelines, a favoured method of
arriving at compromises with developers has been
the use of planning and architectural competitions.
Here, a number of architects are invited to submit
their ideas (based on guidelines set by public
authorities) for the area, and a jury consisting of
other architects, city officials, and at times the
investors themselves chooses a winning plan that
will be realized. The competition, the terms of
which are regulated by public law and the
operation of which is ovcrseen by the publiclychartered Architect’s Chamber, has a long history
in Germany (I3ecker 1992). Seldom has it been so
prolifically employed as it has in Berlin in the
1990s, and critics have maintained that it has
become a devise used by public officials unable to
agree on a vision for the city, but unwilling (or
unable) to slow the pace of new development as
such a consensus is built. By making it appear that
disinterested architectural ’experts’ are in fact
planning the city, the constant parade of
competitions lends legitimacy to the rapid
reshaping of the urban fabric by profit-oriented
developers (Sewing 1994).
Berlin’s planning policies have thus had both a
direct and an indirect impact on the supply of
prime real estate. The aversion to high-rise
construction and, less significantly, the inclusion of
a modest housing component in most commercial
projects limit the amount of office space that can
be built in any one area. That building approvals
involve at times lengthy negotiations with public
officials is one factor that has prevented projects
from quickly reaching the market. As a result,
those projects that have (often due to high-level
political support) moved quickly to construction
enjoy near-monopoly rents. The drag on
development may, however, prove a blessing,
keeping the expected glut of office space off the
market for several years, by which time the local
economy may have generated enough jobs to fill
them.
Impact of land disposition policies.
Government also shape the supply of real estate
when they are themselves property owners. As
owners of significant amounts of real estate, the
federal and local governments should thus be
important players in the development of a local
property market, and would be expected to have a
more crucial role in property development than
would public sectors in more typical cities, where
the state’s leverage is limited to enforcement of
planning regulations. In Berlin, however, the
division of land disposition responsibilities between
local and federal government, and the erratic
cooperation between departments within each level
of government, have prevented the emergence
of an effective, comprehensive development
policy.
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11
In Berlin the
disposition
of city-owned property
is, in principle, straightforward. It is the Finance
. Senator who sells and leases public land; the price
is determined
by appraisal.
In
reality, sales policies
complicated by the complex, legally binding
land use planning process, which gives both district
and city government some control over what can be
built anywhere in the city. As no investor is
are
interested in buying property without the assurance
that the intended development is legally feasible,
negotiations involving other relevant agencies will
usually precede the sale of a parcel.
In West Berlin, land disposition for economic
development had not been a controversial policy
area (housing construction policies had received far
more attention). The Department of Economics
and Technology worked with businesses to identify
sites for expansion or relocation, with the Finance
Department and affected Be--irke also playing a
role. The limited demand for industrial land, and
the close ties between elected officials, bureaucrats
and local businesspeople (often nurtured by shared
party membership) made this a fairly quiet policy
domain, with only the occasional environmental
challenge shedding light on its operation. Such
alliances hays been sustained since reunification in
spite of the changed land use environment, and
even today the Department of Economics and
Technology is largely concerned with securing lowcost land for manufacturing. What has changed
dramatically is the environment in which land use
decisions are made, as new actors and restructured
market forces push competing development claims
to the fore.
That the equilibrium of land use politics in
Berlin has been thrown by unification and the
unfamiliar real estate pressures it has brought in its
wake is clear when one considers the case of
Potsdamer Platz. In the Spring of 1990, just
months after the fall of the Wall, Berlin’s Social
Democratic mayor, along with the Senators for
Building and Housing and for Finance, announced
their intention to sell land at Potsdamer Platz to
Daimler Benz, which had decided to build the
headquarters for their new service subsidiary,
Dcbis, in the city. According to official statements,
Daimler’s chief executive officer, the politicallyconnected Edzard Reuter, had approached high
city officials in the summer of 1989 in search of a
,
site for this new development. Of thc sites offered,
Reuter preferred Potsdamer Platz because of its
size and historic signi6cance.8 The breaching of
the Berlin ivall in November of 1989, according to
official accounts, occurred after verbal agreements
had been made. In spring 1990 a sales contract was
drawn up; as is customary, an appraisal was done
by the Department of Building and Housing, and
the sales price set at D~I1,505 ($900) per square
metre; a price that, even before the decision to
relocate the capital, seemed to many too modest.
Opponents of this deal among the SPD’s Greens/
Alternative List coalition partner, whose Senator
for City Development and Environmental
Protection had never been consulted about this
important project, complained to the European
Commission that the below-market land costs
constituted an unfair subsidy to Daimler. The EC
concurred, and forced Daimler to nearly double
their acquisition costs.9
A similar process occurred when Sony expressed
interest in building their European headquarters in
Berlin’s new centre. Top executives met with the
mayor and several senators, and agreed on the sale
of an adjacent Potsdamer Platz site for similar
purposes. A year later than the Daimler deal, the
appraisal set the land value at DM3,270 per square
metre, still a good deal less than the price of
properties either to the west or to the east. Once
more the Greens/Alternati~-e List, by now no
longer part of the governing coalition, appealed the
decision to the European Commission, but this
time the deal was upheld, partly because Sony had
agreed to preserve an existing, historically
significant structure and to build a museum.
Nonetheless, a year later Asea Brown Boveri was
asked to pay nearly DvBI12,000 per square metre
for the last large vacant parcel at the Potsdamer
Platz (Paul 1993).
The political salience of these transactions
indicated that the politics of land disposition had
changed since the fall of the Wall. To some
commentators these deals represented a new, postWall Berlin, in which growth-obsessed politicians
would act as the vanguard for international capital
(KrNtke 1991; Hoffmann-Axthelm 1990). In fact,
the deal-making style seems very much in character
for a Berlin political elite that had not yet grasped
the significance of the changes it was experiencing.
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12
The city-state’s fragmentation had always been
moderated by the abundance of public resources
and the lack of competition for development
opportunities. Suddenly the informal style of deal-
making
was
subject
to
public scrutiny,
as
high-
stakes investors, internationally prominent
architects, and national politicians turned their
attention to Berlin. Some aspects of federal
planning law have themselves proven too inflexible
to accommodate such an unstable situation. For
example, the legally-required use of appraisal to
determine sales price has proved unsatisfactory in a
situation of rapid market flux. Appraisals are, after
all, based on comparison of comparable
transactions, but in 1990-91 there was nothing to
which the sale of Potsdamer Platz could be
compared. The city’s pricing policy, intended to
ensure even-handedness, will actually give Daimler
and Sony advantages when they market their rental
space, since they have paid considerably less for
their land than investors along Friedrichstralie, just
two subway stations away.
In the former East Berlin land disposition is far
from straightforward. Control over public land is
shared by local and national authorities as the
massive holdings of the former German
Democratic Republic are liquidated. Property that
had previously belonged to the state-controlled
conglomerates and the ruling Socialist Unity Party
is under the jurisdiction of the quasi-private
national holding company, the Trerrlrarrrtsarrtalt
(fHA). The THA has determined which real
property is essential to the functioning of the
business; that property is sold as a package to an
investor. Surplus real estate is turned over to the
Treuhand subsidiary, the Tretlhand
Liegemclrafigesellschafi (TLG) for development and
disposition. Real estate that had belonged to the
central state organs, including military and security
agencies, is under the control of the federal
government through its Financial Directorate
(Obetjillallzdirâtioll). The La?zd Berlin is
considered the legal successor to the city of East
Berlin as well as to the property within the city
once owned by the state of Prussia, and thus
controls substantial amounts of property as well.
The final legal player is the Deutsche Reichsball1l, the
long-distance train company from pre-war
Germany as well as the DDR. Recently merged
with the West German Bzjndesbahn and privatized,
it controls property throughout the city.
Confusion is perhaps inevitable when so many
public agencies with very different goals must find
ways to share responsibility. The
Obetji1ta1tzdirekti01t has, ever since the decision to
seat of government to Berlin, been
with securing properties for
concerned
primarily
federal government use, and secondarily with
defusing the speculative pressures that would make
later acquisition of further parcels prohibitively
move
the
expensive.10°
The TLG, responsible for many key sites in
downtown Berlin, had been set up to liquidate its
holdings as quickly as possible for the highest
possible returns. The agency has been criticized for
acting without consultation with local authorities (a
practice that proved counterproductive when local
authorities withheld planning approvals from new
owners, motivating THA managers to work more
closely with local governments), and for driving up
the cost of real estate with their high starting prices
for offered properties. The Treuhand argues that
prices are set by independent appraisals, and
indeed it’s hard to find evidence that their prices in
general are out of line with other selling prices.
According to their own statistics, they sold or
transferred to municipal ownership 677 Berlin
properties between 1991 and 1993, with an average
price per square metre of around DM700. As the
Ring Deittsclier Alakler reported that average prices
for industrial land were DN1400-550 per square
metre in 1993, and some of the ’1’LG’s properties
in the city centre have fetched much higher prices,
their transactions don’t seem to be unusually high.
Of course, given the extent of their holdings - an
cstimated 15 per cent of the property on the market
in East Germany (Liegenschaftgesellschaft der
Treuhandanstalt mbH 1992 a and b) - they are
undoubtedly influencing the rest of the market.
Whatever their influence on price, the Treuhand’s
decision to sell off large parcels in a short time
frame has constrained the city’s planning options.
In areas like Friedrichstral3e and Alexanderplatz,
where Besirk officials and some v-ithin the city’s two
planning agencies might have chosen to promote
gradual, small-scale growth, the sale of block-sized
parcels to well-financed developers has all but
determined the future shape of these areas.
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13
.
Even within the city-statc of Berlin there are
conflicts about how public holdings should be
exploited and there is little consensus about the
goals of development policy. Promotion of
industrial employment conflicts with the need to
expand the space available for office development;
both are at odds with the imperative to construct
more housing and to preserve open space. Each
policy goal is supported by a different city agency,
backed by an array of interest groups. Such
conflicts, of course, exist in all cities, but Berlin’s
political system, with its diffusion of decisionmaking authority, offers no centripetal force
capable of forging a policy consensus.
Privatization policies. A subset of land
disposition policies of special interest in formcrly .
socialist polities is the restitution of socialized
property to its former owners. All formerly socialist
states trying to reduce state holdings have had to
decide whether to honour the claims of presocialist owners, in a sense turning back the clock
on property relations some 40 years. In many cases
real property has been treated differently than
other forms of property, as the claims of former
landowners whose property was confiscated by
communist regimes often carry great emotional and
political weight. In Hungary, for instance, the
Independent Smallholders party organized
exclusively around the platform ’Return the Land’,
and pushed their coalition partners to adopt a
policy in which landowners could claim restitution
even though claimants of other forms of property
had to settle for compensation (Bartlett 1992).
Across eastern and central Europe conditions
differ. Foreigners are barred from making claims in
the former Czechoslovakia (Bonker and Offe
1993).~ Poland’s draft regulations contemplated
returning only small holdings to previous owners,
and barred restitution or compensation to former
owners who had received even token compensation
for their property in the past (Goodman and
Jostmeier 1993).
In the German case the treatment of property
handled through elite negotiations between the
government of the Federal Republic of Germany
and the German Democratic Republic in the
spring of 1990, and subsequent court challenges,
and was therefore less subject to public input than
in other post-socialist politics. The position of the
was
West German officials, in keeping with their party
ideologies and the strong backing for private
property that is part of the Federal Republic’s
Basic Law (Article 14), was to allow former owners
to reclaim their property. Only in those cases where
restitution w as impossible would compensation be
offered as a substitute. This is the principle
adopted in the Unity Treaty, and some 1.4 million
claims for the return of property were filed with
German authorities after unification (Landesamt
zur Regelung Offener Verm6gensfragen 1993).
The impact of property restitution claims has been
geographically uneven, as areas already developed
before the creation of the GDR are subject to more
claims than those more recently built up. There are
estimates that in central areas of Berlin, up to 90
per cent of the buildings may be subject to
restitution (Haul3ermann 1995).
The Unity Treaty does anticipate some broad
exceptions to the restitution rules, and subsequent
legislation and court decisions have clarified which
properties are exempt from restitution. For
instance, nearly one-third of all East German real
property was taken by the Soviet occupation
authorities between 1945 and 1949; according to
the Unity Treaty, those whose property was taken
during this period have no claim for either
restitution or compensation. 12 Both the treaty
writers and the German Constitutional Court,
which upheld this policy in a decision of April
1991, put forward involved legal arguments
justify ing this treatment of 1945-49 property
expropriations (Doyle 1992). It seems clear,
however, that exclusion of this property from the
restitution and compensation laws was made on
pragmatic grounds. First, the Soviet Union stated
strongly that its actions during the occupation
should not be retracted. As the approval of the
USSR was needed for German unification to be
carried out, and as thousands of Sovet soldiers
continued to occupy East Germany during the
unification negotiations, antagonizing the Soviet
authorities did not appear to be in anyone’s
interest. Secondly, given the scale of the 1945-49
expropriations, no doubt many West German
policy-makers w ere relieved to have an excuse not
to have to take on the burden of giving it all back.
Further exceptions also complicate the situation.
If a property is occupied by someone who had
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14
acquired it fairly under the laws of the GDR,
former owners are entitled to compensation but not
restitution. In anticipation of such a provsion,
there was a flury of sales activity in the last months
of the GDR, as long-time occupants sought to
become legal owners (Der Tagesspiegel 1990).13
Property that is part of a complex development,
such as a housing settlement, obviously can’t be
returned; claimants to these parcels receive
compensation. To make the issue of property
restitution more complicated and emotionally
charged, property claims can be made back to
1933, allowing those who lost property under the
Nazi regime to sue for its return. ‘I’his provision,
which merely extends West German law into the
East, primarily affects former Jewish owners, most
of whom are dead and whose heirs live abroad. In
practice, this often leads to a number of competing
claims for a given site, especially one located in a
city centre: one may find a Jewish owner, a ‘brown’
(Nazi period) owner, and a ’red’ (GDR) owner all
with claims to a parcel. As any issue related to the
Nazi legacy raises the emotional pitch of policy
debate, efforts today to sort out competing property
claims have become not only legally complex but
psychologically painful. It is as though the ’ghost of
German history has suddenly arisen in the middle
of the cit~’ (Hauliermann 1995: 15), inserting itself
into otherwise arcane debates about deeds and
inheritance rights.
The decision, at least in principle, to honour
restitution claims of former property ow ners has
become a major factor shaping the property market
in East Berlin. First, some investors, particularly
those from outside Germany, find the complicated
requirements most daunting and have been
reluctant to invest. 14 The many developers and
corporations who sent out ’scouts’ or established
small presences in Berlin just after the fall of the
Wall may have lost enthusiasm when it became
clear what was involves in acquiring land. Some
investors have attempted to circumvent these
problems by identifying claimants and forming
investment partnerships with them.
Friedrichstraf3e, the pre-war commercial centre, is
lined by projects under development by
partnerships featuring well-capitalized developers
and claimants
to
the
underlying real estate.
Through alliances with property hcirs, often forged
by local, well-connected lawyers specializing in
such matchmaking, German and foreign investors
have been able to ensure the acquisition of
development rights for the most central parcels,
when local officials have leaned towards other
projects.15 It is this market in property claims as
much as the restitution policy itself that has shaped
the central business district of eastern Berlin. One
can at least fantasize that the return of former
even
owners or their heirs and their 50-year-old
property holdings could have promoted an
interesting recreation of a past era of real estate,
where family-owned businesses and modest parcels
the basic units of development. The trading
of property claims, however, has merely accelerated
the perhaps inevitable concentration of property
ownership into multi-block parcels cleared for
mega-developments. In addition, the vagaries of
property restitution have, to a far greater extent
than public planning regulations, created a
bottleneck in the land disposition and development
process. The small number of properties that could
be freely exchanged commanded exorbitant prices.
Considering the dismal physical condition and
infrastructure provisions in even the commercial
centre of Friedrichstral3e, the office rents and
property prices, in comparison to West Berlin and
other German cities, were high. 16 Only the acute
shortage of exploitable land, largely due to property
uncertainties, can explain the market in this case.
were
Conclusion
The unusual case of Berlin, whose property market
has been recreated within a brief timeframe, can
illuminate the myriad, contradictory ways in which
the policies of different arms of the state can, often
unintentionally, shape the conditions governing
private investment decisions. The supply of and
demand for real estate in this city are indeed a
function of private business location decisions, but
on closer examination many of these market forces
can be understood as the outcomes of government
policy. The demand for real estate just after the fall
of the Wall reflected consumer demand-led
economic growth (itself in part due to the
government’s decision to allow East Germans to
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15
exchange their nearly worthless currency at a onefor Deutschmarks). In addition, tax
credit programmes designed to encourage
contradictory framework that makes development
possible and determines its contours.
to-one rate
investment in the new states, and the decision to
move the seat of government, increased Berlin’s
appeal as a site for commercial real estate
development, especially for builders of high-quality
office space.
But the city’s experience can scarcely be
understood as merely a boom market where
demand has been encouraged by state action. To
an extent not usually found in capitalist cities, the
state is the de facto owner of a significant amount
of centrally located Berlin property. It is those
policies formulated to manage and dispose of
property that best reveal the contradictory
intentions of different levels and different
functional arms of the state. The federal
government has shaped downtown real estate
through its restitution policies and its own
relocation needs: while encouraging demand
through macro and structural economic policies it
has contributed to a bottleneck of supply that has
had a clear impact on prices. Most strikingly at
odds have been the urbanism goals of local
planning officials and the land disposition policies
of the other city agencies and the Trcuhand (along
with federal restitution policies). As local planners
have cultivated an (admittedly contested) vsion of
their ideal city based on the urban patterns of an
earlier era, officials charged w ith land disposition,
responding to other imperatives, have set
conditions that make the realization of the
planners’ vision impossible. That the city
government has not succeeded in resolving internal
conflicts has further reduced its capacity to use its
land holdings and its planning powers to shape
Acknowledgements
Thanks to Margit Mayer for her helpful comments.
The research for this article was conducted under
a fellowship granted by the Berlin Program for
Advance German and European Studies of the
Social Science Research Council and the Free
University of Berlin. Conclusions and errors are
the author’s own.
.
Notes
1
2
3
This practice characterizes all of German industry,
and is well described in Hall (1986).
The recent bankruptcy of the Schneider real estate
4
firm (and the disappearance of its owner) reveals the
greater tendency towards speculative investment in
Germany. No doubt the repercussions of this
spectacular failure will make banks even, more
cautious.
5
It’s not clear how much of the difference represents an
increase in investment and how much the differences
in
sources.
6
Author’s interview with Bezirk
official, 14 May 1992.
7
8
development.
The nature of modem real estate development,
with its large international development firms and
its penchant for large-scale speculative projects,
has certainly been an important factor in
determining Berlin’s urban landscape since
German reunification increased the value of central
city Berlin property. Market demand has, howcver,
only ensured that there is interest in a certain kind
of property; the market alone cannot transform the
built environment. The conflicting responses of a
fragmented state have provided the sometimes
Berlin is officially a city-state, combining state (Land)
and local functions within a single administration.
The exact number has varied as departments have
been consolidated and new ones created.
9
These design guidelines have unleashed a debate that
has spilled beyond the confines of the architectural
community into the popular media. For a summary see
M&ouml;nniger (1995) and Goldberger (1995).
Son of Ernst Reuter, West Berlin’s mayor during the
years of the Berlin blockade and beyond, Edzard
Reuter is said to have a personal commitment to
Berlin.
Daimler never actually paid the entire difference; the
Senal was able to use an EC regulation that allows
subsidies to help offset economic hardships to justify
putting DM53 million of the required purchase price
towards the purchase of an adjoining site. The
DM13,620 per square metre paid for an adjoining site
casts further doubt on the adequacy of the sales price
set for the city’s Potsdamer Platz holdings Der Spiegel
(1993).
10
The areas around the new government centre have in
1993 been named ’Development Area’, a legal
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16
designation that gives local authorities leverage over
property transactions and allows any speculative gains
to be claimed by the public authorities.
11
This is now a source of tension between Germany and
the Czech Republic, as it prevents Sudetenland
Germans who live in Germany from reclaiming their
12
13
Czech property.
The Treaty does require the Bundestag to provide
some kind of ‘burden sharing’ (Lastenausgleich) to those
dispossessed during this period, but there is no
requirement for this compensation to reflect the value
of confiscated property; nor could the state reasonably
be expected to underwrite the hundreds of billions of
marks that would be required to pay each claimant
market value.
There was, and is, much controversy about this run on
the property registration agency, with some claiming it
represented ’regular people’ trying to ensure their
security on the eve of a difficult transformation; and
others claiming it represented the last effort of party
officials, taking advantage of their remaining privileges
to ensure themselves some advantages under the new
regime. Most likely both views contain elements of
truth.
14
15
16
Largely anecdotal information must suffice to support
this claim, since it’s difficult to survey those who did
not invest in the new states. A survey of 17 Japanese
companies in Berlin offered unclear property rights as
a primary reason they and other Japanese have not
invested further in Berlin and the new states (Japan
Berlin Study Group 1993).
For example the city was prepared to award a
Friedrichstra&szlig;e parcel to the Bertelsman publishing
house; the company had chosen its architect and was
ready to begin construction when a partnership of
three property heirs and the American insurance firm
Equitable Life surfaced with their own plan. The
partnership automatically had preference in this case.
They offered to sell their land to Bertelsman for
DM30,000 per square metre (three times the
appraised value), but Bertelsman instead cancelled
their project (Tagesspiegel, 11 September 1991 : 11).
In Frankfurt, for instance, top rents in 1991 were
DM80-85 per month; some properties in East Berlin,
on the other hand, were getting DM90-100 at that
time (M&uuml;ller 1991; Weatherall Green & Smith 1994).
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