BERLIN -- To Berliners, Kurfuersten Strasse, in the district of Schoeneberg, is synonymous with prostitution and the drugs trade. But to Premium Finance Group, a Chinese wealth management company selling 127 apartments in the KU136 Kurfuersten Strasse Berlin project, the area is "very desirable for those with families due to the excellent local facilities."

Shanghai- and Beijing-based Premium Finance Group is one of a number of Chinese wealth management companies that hold regular launch events in China to sell flats in Berlin, helping to make the German capital a growing target for Chinese property investment. On its website, the company claims that Berlin property prices and residential rents have seen annual increases of 10-13% and 8-10% respectively in recent years, and that investors can access the market for just 50,000 euros ($59,540).

Investors are attracted by prices that are substantially lower than in London, a more traditional location for Chinese property investment. For example, an upscale two-bedroom apartment in the prime Mitte district costs roughly 700,000 euros, compared with about 2.8 million pounds ($3.61 million) for a similar property in London's Mayfair.

But the truth about Kurfuersten Strasse is not the only thing that Chinese investors are not being told. Another is that one of the reasons why Berlin property prices are low compared with other big European cities is that the government imposes strict rent controls and has given strong rights to tenants, seriously limiting the prospects for growth in rental income.

In Berlin, landlords cannot increase rents by more than 15% over the course of three years for existing tenants. They are also forbidden to eject tenants in favor of others willing to pay higher prices. Tenants can take landlords to court if these rules are flouted; most such cases end with tenants moving out with substantial compensation from landlords.

Tenants also have the right to carry out property repairs and deduct the costs from rental payments if landlords can be shown to have been slow to act. Similar rules apply across Germany, although the rental increase ceilings vary.

These provisions have kept net rental yields at about 2-2.5% in Berlin, compared with 4-5% in London, where investors have also profited from significant capital gains. Prices have risen by an average of 450% in London over the last 20 years, and by 700% in the central London borough of Hackney, according to Land Registry data analyzed by Lloyds, a U.K bank.

Still, Mark Elliott, a Hong Kong-based associate director of global property agent JLL, said that Berlin rents rose by 15% in 2016 compared with the year before. This is a result of the city's rapidly-growing population, rent increases imposed after tenants have left voluntarily, and new properties coming onto the market, for which initial rents are set at market rates.

Elliott said: "Berlin is a relatively new offering [for JLL in Hong Kong and China] because we were looking to diversify, and the Berlin story is one that appeals to the Asian investor looking to diversify." In June, JLL held a Hong Kong launch for the Luisenpark Quarter, a development of 409 premium apartments in Berlin planned for completion in 2019. The development is close to the Chancellery, the office of long-serving German leader Angela Merkel, in the center of the city.

Chinese investors' confidence that Berlin property is undervalued was boosted in October 2016 when China Investment Corp., a sovereign wealth fund, bought 16,000 rental apartments in Berlin, Cologne, Kiel and Rendsburg. CIC outbid listed German property investors, including Vonovia, the country's largest residential property company, and its rival Deutsche Wohnen.

In its "Emerging Trends in Real Estate Europe Report 2017," the business consultancy PwC named Berlin as the continent's leading city for overall investment and development prospects, followed by Hamburg, Frankfurt, Dublin and Munich. Separately, Germany's Postbank forecast that Berlin residential property prices will rise by 40-50% by 2030.

Value growth

Berlin Property Services, a German property advisory company specializing in Chinese business, said that Chinese investors account for about 20% of its client pool, buying up to four properties each. Co-founder Anne Schneppen, a former journalist, said Chinese buyers tend to focus on the suburbs of Mitte and Kreuzberg, near to China's embassy.

"Many of them seem a bit shocked when I tell them right away that annual net yields from rental collection are between 2% and 2.5% instead of the 5% promised elsewhere, but there clearly is value growth, given that Berlin is still undervalued," Schneppen said.

"Clients often tell us that Germany is a safe and transparent market with political and economic stability, partly due to the Merkel factor, and that Berlin is the metropolis of that haven." Schneppen added that unlike other foreign buyers, Chinese investors take only a few days to seal deals and have usually sorted out the financing themselves.

A female Chinese executive in the information technology sector, who asked not to be named, said that her first purchase in Berlin was a flat for her son, who was attending a local university, but she ended up with several additional properties.

"I travelled to Berlin to stay three days, took part in an orientation tour through the whole of the city, and looked at four apartments before settling for an older building in an 'up-and-coming' location in Mitte that guaranteed value preservation and indicated value appreciation," she said.

"I was so impressed by Berlin that I decided to buy another two to three apartments with existing rental contracts," she added.

Not all Berliners welcome the Chinese intrusion. Rainer Wild, director of the Berlin Tenants' Association, said interest in the city had taken off in 2009, when near-zero global benchmark interest rates made Berlin's residential rental yields seem attractive.

Wild said the resulting pressure on the market has been exacerbated by Berlin's quickly-growing population. "It's a lose-lose situation. The Chinese investors are of course going to affect this to the detriment of the tenants, but on the other hand they will likely suffer themselves from having no knowledge at all about German rent law, which strongly limits the potential for rental yield," Wild said.

Rental costs in larger cities are certain to feature in a German general election in September, but there is no sign that politicians have identified Chinese purchasers as an issue.

Jost Wuebbeke, a researcher at the Mercator Institute for China Studies, a Berlin-based think tank, pointed out that even CIC's purchase of 16,000 apartments had not stirred controversy. This, said Wuebbeke, stands in stark contrast to German politicians' concerns about recent Chinese takeovers of local high-technology companies, including KUKA, a robot-maker.

The main risk to Chinese investment flows into Germany is Beijing's controls on capital investment outside China, imposed to discourage capital flight as the Chinese economy slows. China has implemented a series of measures to curb what it calls "irrational" overseas property investments.

However, Wuebbeke said residential property investment overseas is hard for the Chinese authorities to control because families typically band together to buy homes to avoid breaching individual annual quotas for international financial transfers.