Berlin moves up on Europe's more lauded capitals

London or Paris; Paris or London? Which of these two is Europe's greatest city?

The debate has gone on for decades, if not centuries, we never get the definitive answer and probably never will. But I'd like to throw in a leftfield choice, the German capital of Berlin.

Right at the centre of the continent – Berlin is 45 minutes from the Polish border, a few hours from Vienna and eight from Rome. It's the home of the German government, the most important in Europe, and is this year on course to attract more international visitors than Paris. It's a city which, two decades after the Berlin Wall fell and following a tumultuous and troubled century, feels more and more as if its time is finally coming. From the café culture, to the iconic buildings of previous Reichs, the seemingly endless art galleries and museums and the old west and eastern centres of the city, Berlin is abuzz with possibilities.

About 3.4 million people live in greater Berlin – less than half the population of London – but this is set to grow with a continued influx of government departments and business headquarters. All this spells potentially good news for property investors who have a little wider perspective than the classic home in the sun with golf course access.

"This is an entirely different sell for overseas property investors. With the home in the sun, the question is always what do you do on the third week. With a city like Berlin there is such variety for those looking to settle and real opportunities to tap into the burgeoning professional rental market," said Alex Upson, a director of Cluttons Resorts which is marketing several major developments in Berlin (www.cluttonsresorts.com).

And the rental market dominates in Berlin. Only 16 per cent of Berliners are owner-occupiers compared with nearly 45 per cent in Germany as a whole and close to 70 per cent in the UK. According to Germany's biggest estate agent, Engel & Volkers, property owners can expect an average rental yield of between 6 and 7 per cent, which means that within 15 years the original investment is paid for. This compares favourably with most overseas property investment which tends to be very seasonal and fashions in holidaymaking.

"Most hope that overseas property investment will financially wash its face. However, Berlin property tends to offer much more," Mr Upson added. This is attracting buyers, according to Nicolas Jeissing, the managing director of Engel & Volkers. He said: "We have seen a lot of interest from foreign buyers such as the Chinese, British and even of late the Greeks. We are currently building about 5,000 units a year and that is far too few for the numbers of professionals coming into Berlin. This is having an upward pressure on rents."

Prices in Berlin are a fraction of those in London and Paris even in the very best areas. Prices are calculated by the square metre which can make comparisons difficult, but with even a very high-end development in the centre the prices rarely rise above €7,000-8,000 (£6,000-£6,800) per square metre. This means that new-build large one-bed or small two-bed flats can be had in the range of €300,000-450,000. Second-hand flats in good but not prime areas of the capital can range from €2,000-4,000 per square metre. Good luck trying to get those sorts of prices in Kensington and Chelsea or just off the Champs-Elysées. However, prices are rising: Engels & Volkers reckons by 7 per cent this year and the central district of Mitte by an eye-catching 14 per cent.

It's in Mitte – on the banks of the river Spree and next to the famous Berliner Ensemble, once the stomping ground of playwright Bertolt Brecht – that Yoo Berlin is being built by Zurich-based Peach property group (www.peachestates.com). The 10-storey building will contain 87 apartments with one to four bedrooms. With interiors inspired by the French designer Philippe Starck, the development will be ready in spring 2013 and brings luxury at well below prime London prices.

"Flats will start at €388,000 and rise to €2.89m for cityscape views. Gardens will also be available for some flats and it's within a short walk of the buzzing cafés and bars as well as the Reichstag and governmental HQ," said Marcus Spielberger, the relationship manager at Peach Property Group.

Another development is the Charleston, located in the bustling Potsdamer Platz, just five minutes' walk from the Brandenburg Gate.

The Charleston was inspired by the great apartment buildings of New York (www.berlin-capital.com). The apartments have the facilities of a luxury hotel with 24-hour concierge, a swimming pool, whirlpool, sauna, solarium and fitness club. Apartment sizes range from 130sqm to 319sqm and cost from €599,000 to €2.19m.

There are downsides to buying in Berlin and Germany as a whole, of course. Buying fees are far higher than in the UK, so bank on between 10-12 per cent of the purchase price. Capital gains tax may be due on any profit and, what's more, tenants have protected rights in Berlin. This means that they can stay in situ as long as they want with increases capped by the city authorities – no more than 20 per cent over three years is the current cap.

However there are ways around such tight tenancy laws. "If you buy a good property in the centre, then there are real opportunities to rent to companies who then house employees. And because this is an agreement involving a business the tenancy laws don't apply," said Tim Bogen, a property specialist at Berlin Capital Investments.

There is also one elephant in the room, the fate of the euro. A general collapse of the single currency could be a disaster for the eurozone economy and anyone investing their sterling, at least in the short term. However, any moves to a eurozone with fewer members centred on Germany could lead to a rapid appreciation of the currency against sterling, leaving investors quids in.

Longer term, though, the key for investors is going to be whether or not Berlin as a city takes its place among the highest echelon of Europe's cities. The odds look better than ever.