A Safe Haven in Stormy Times: The Austrian Real Estate Market
In an international comparison, the Austrian real estate market is perhaps less dazzling, but it is stable and plannable – attributes that are becoming ever more important these days. 2019 was an absolute record year with an investment volume of approx. EUR 5.8 billion, and only the availability of suitable products prevented the EUR 6 billion threshold from being exceeded.
In addition to attractive economic conditions, a high quality of life, security and positive demographic development in urban areas make Austria a favorite investment location. According to Mercer’s Worldwide Quality of Living Survey, Vienna has been the city with the highest quality of life for years. Low interest and vacancy rates, and stable rents also have a positive influence on investment decisions.
The market has picked up speed again
After a weak first quarter due to the lockdown in March, the investment market picked up speed in the second quarter and reached a respectable result until Q3 of the year with an investment volume of approx. EUR 2.5 billion. After initial paralysis and fears of a massive drop in prices, investors quickly regained confidence in the Austrian investment market – this is also proven by the high proportion of foreign investors, who secured approx. 2/3 of the transaction volume.
The leading assets were secure asset classes such as residential, office (core) or logistics. While we assume stable to slightly falling returns for these types of uses by the end of the year, returns for retail and hotel properties will rise. Ongoing transactions and a well-filled and diversified pipeline in Vienna and the second cities promise a stronger second half of the year.
In the office area, noteworthy sales were the Austro Tower to Deka in Q2 2020 for approx. EUR 150 million, and the sale of the MGC Office Park in Q4 2019 for approx. EUR 170 million to Austrian investor Hallmann Holding. In the case of new residential constructions, most tickets > EUR 100 million were secured by German investors as forward deals. ZBI succeeded in entering the market in Q2 2020 with the purchase of the „Wohngarten“ in Geiselbergstrasse, and Art-Invest was able to complete the purchase of „The Metropolitan“ at main station in Q1 2020, after having already acquired the „Kai 100“ at Handelskai in Q4 2019.
International trust is on the rise
The performance of the last few years also reflects the confidence of a growing number of international investors. In addition to the low interest rates and an attractive yield spread compared to Munich or Paris, the liquidity of the Vienna market is one of the main reasons for the increasing investment volume. Numerous large-volume transactions and resales over the past few years are proof of this development.
The demand for the asset classes office, residential and logistics is still greater than the supply.
Until Q3 2020, more than 80% of the invested capital are attributable to these three types of use: Office (around 40%), Residential (around 30%) and Industry & Logistics (approx. 13%)
Adjustments due to COVID-19
Due to COVID-19, there have been slight adjustments in demand. Those investors who have already invested in Austria or even have local teams on site, however, have a marked advantage in ongoing transactions – mainly because of their increased market knowledge, but also because existing travel regulations and uncertainties affect them to a lesser degree. International investors who are about to enter the market are still waiting, for the most part, to see how the current situation will develop. In general, however, there is still excess demand, and competition on the investor side will put pressure on returns in housing, office and logistics.In the office sector, the prime yield is currently approx. 3.4%. For first-class logistics objects it lies at just under 5%. Residential developments are between 3.1% and 3.6%, depending on the location. In the retail sector, retail parks with local suppliers are more resilient and remain stable, with a prime yield of just under approx. 5%. High-street retail and shopping centers, on the other hand, are getting under pressure and will show a slight upward trend in the future, with currently 3.3% (HSR) and 4.2% (shopping centers).
Focus on metropolitan areas
In addition to Vienna, investor focus is increasingly moving to the secondary cities, as well as to strong, regional cities in metropolitan areas with good public connections, positive economic indicators and positive demographics. Numerous transactions (see also table „Selected transactions“ on p. 13) prove the liquidity and attractiveness of these markets. In addition to more attractive returns, investors receive a more diversified product range and, as a result, an optimized allocation.
Recovery after paralysis
As mentioned in the introduction, the investment market recovered quickly after the initial freeze. Apparently decoupled from the current economic data, the market seems geared to generate a considerable investment volume in 2020. This is assuming that we do not have to experience a second lockdown or similarly drastic restrictions until the end of the year. In connection with the restrictive financing conditions – especially of large banks – this would result in a massive slump in real estate investments.The security of future rental income and top locations will continue to have top priority for many investors. For this reason, from today‘s perspective, residential and long-term leased office and logistics properties are the focus of investor interest.
For properties that have a higher risk due to their location, short lease terms or limited third-party usability, the risk premiums will increase in the future.
A Lasting Attraction: The Classical Viennese Apartment Building – the Zinshaus.
The economic crisis triggered by COVID-19 also triggered a change of mind among many investors. It has been true for the low interest rate policy for years, now the attitude is spreading: stability and security of investments are increasingly valued over returns. This feature also causes more demand than supply on the market in 2020, the year of Corona.
With a transaction volume of around EUR 1.8 billion in 2019, next to traditional investors such as private foundations and private investors, there has been an increase in national developers. International developers continue to be deterred by the complex tenancy law and invest almost exclusively in new residential buildings.
Increase by about 10%
For developers, Parifizierung (the appraisal and subsequent subdivision of a building into smaller units), renovation and sales are still very profitable – the price per square meter of apartment buildings rose by an average of around 10% in 2019, compared to 2018.
However, some market observers in 2020 rate the strong activity of developers as a risk. In times of crisis, banks rethink their lending and, above all, their own capital requirements – this adjustment could affect smaller developers, in particular. A further
risk is ascribed this year to apartment buildings with a high commercial share. The trend towards online trading has already affected commercial space in B and C locations in recent years. In the first half of the year we have seen a strong increase in supply, but a falling demand.
The risk of rent loss and vacant apartments – due to a well-filled residential construction pipeline, especially in the federal capital Vienna – is much lower for old “Zinshäuser” than for new buildings. The benchmark interest rate, which is not uncontroversial, nevertheless results in affordable living in old buildings and thus grants a great advantage over new rental apartments on the free market. As a result, investors can usually count on quick re-letting.
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