Constructing the crisis : the impact of subsidies on the Berlin office market, 1989-2002

Abstract

Following the reunification of Germany and prior to the much debated and twice postponed decision to relocate its capital to Berlin, events were set in motion that resulted in a roller coaster ride for investors in real estate and in particular for those interested in office space. Demand was expected to increase exponentially. Investors, both domestic and foreign, believed the transfer of government would create excessive needs both for the various ministries and political parties but also for national and international businesses thought likely to move to Berlin along with the government. This paper traces the history of events putting a special focus on the various governmental incentives designed to encourage investment and influencing real estate investment decisions on the part of the several different investment groups. Differentiating between incentives necessary for the private market to operate (planning legislation) and others promising concrete financial rewards (tax laws), the paper describes the causes and effects of the city's resulting real estate crisis, including the political and financial scandal of the Berlin Bank Association. The comparison of real estate cycles in different German cities between 1989 and 2002 demonstrates the fatal consequences of too generous and too long-lasting governmental subsidies for the Berlin real estate market. The evolution of the Berlin office market is a classic case of market-based decision making being overcome by tax-driven decisions and producing a crisis that in all probability could have been avoided had market conditions alone been allowed to determine the outcomes.