UniCredit Bank Austria Real Estate Country Facts:
Austrian real estate market continues to defy the crisis
- Outlook for the Austrian real estate market remains positive
- Market for commercial real estate in Austria proves stable and crisis-proof despite corona-related restrictions
- Residential construction: demand for low-cost rental flats is increasing
- Vienna office market able to cope with changing market conditions in a flexible and unagitated manner
- Shopping centres: retail sector affected to varying degrees
„The outlook for the Austrian real estate market remains positive. Institutional investors from Austria and abroad are carefully sifting through the range of available products. In spite of the signs of market saturation in most asset classes, as well as sharply higher prices for building materials, the construction industry is running at full steam in order to work off the large number of planning permission applications that have been approved“, says Reinhard Madlencnik, Head of Real Estate at UniCredit Bank Austria.
As the real estate sector becomes an increasingly significant ecological consideration in light of the stronger focus on environmental, social and governance (ESG) factors, the availability of affordable development land will be a prominent topic in all urban conurbations.
„In the space of just a year, construction prices have risen by an average of 14 percent – a trend that is set to persist for some time, as builders set about turning the record number of planning permission approvals into concrete projects as quickly as possible“, says Madlencnik. At the moment, asset classes that were not affected by the pandemic – and those that actually benefited from it – are booming, such as land, apartments, logistics and retailers catering to everyday needs. Core office properties are also in strong demand, with solid tenant structures and credit ratings, and stable earnings from offices in prime locations regarded as guarantees of security.
Investments in commercial real estate stable again
The investment market in commercial real estate in Austria is proving to be a comparatively stable and crisis-proof market despite corona-related restrictions. After a decline in the transaction volume in the previous year to approximately EUR 3.3 billion from EUR 5.9 billion in 2019, the market stabilised again in the first half of 2021 and a total volume of approximately EUR 1.6 billion was achieved, which is almost the same as in the first half of 2020. In addition to residential and office, the warehouse and logistics segments were also in high demand last year. More than two thirds of investors came from abroad in 2020, especially from Germany.
„Investors will be under pressure despite, or perhaps because of, Covid-19 to continue finding suitable properties for the ample investment capital at their disposal, which suggests Vienna’s stable office property market will remain firmly in investors’ sights“, says Madlencnik.
In the office category, top yields had already slipped to just under 3.4 percent by the end of 2020, while those for shopping centers increased slightly compared with year end 2020, to around 4.5 percent on June 30, 2021. Overall, the yield curve in the office sector is increasingly leveling off, with top yields for offices in mid 2021 coming in at around 3.35 percent, meaning that a slight downward trend still cannot be completely ruled out.
Housing construction: Economic crisis triggers shift in housing demand
In recent years, housing construction in Austria has largely kept pace with the strong rise in demand for residential space. Driven by significant ongoing pent-up demand, huge price increases in many segments and the ready availability of highly attractive financing, an average of 61,000 new apartments were constructed in Austria each year between 2011 and 2019. By comparison, the average for the three preceding decades was 47,000 units per year.
After a record total for new builds in 2019 that saw around 78,000 units completed, construction activity (and housing construction in particular) waned slightly in 2020. Still, some 73,000 apartments were completed during the year, a remarkable achievement against the backdrop of the worst economic crisis for decades. In 2021, new construction activity in Austria is seen as at least reaching the same level as 2020, if not slightly exceeding it. Various indicators suggest growth in residential construction in 2021, not least the high number of permits for new builds granted in 2019 and 2020 and the above-average number of projects under construction registered by housing associations at the start of 2021.
Top yields for institutional investors for new housing developments in Vienna have declined continuously since 2015. Once again in 2020, the drop in yields continued across the board due to persistently high demand for residential property and significant price increases.
Lack of affordable rental apartments
There have been some gaps in new housing construction in Austria in 2020, particularly in the provision of affordable housing in major urban centers. Given the fall in incomes in 2020, it is safe to assume that the proportion of low income households in the apartment market, and in turn the demand for affordable housing, has increased significantly. In real terms, household income fell by 3 percent which was a steeper decline than at any point in the three decades before. At the same time, housing costs have risen even faster than in previous years. In 2020 rent prices in Austria went up by 3.8 percent per square meter, compared with an average of 3.1 percent since 2013
Vienna office market: solid despite pandemic
After a year and a half there are still no signs of a let-up in the global Covid-19 pandemic. But Vienna’s office property market has benefited from its solid and – still – exceptionally stable fundamentals, with a flexible and unflustered response to changing market. The undiminished interest from investors this year also reflects the continuing attractiveness of the Austrian capital’s office market.
However, against the backdrop of current market conditions, it is likely that the persistent pressure on offices outside the established prime locations will increase further. On top of that, outdated spaces that no longer satisfy the increasing demands resulting from changing forms of use will become uncompetitive, due to the sufficient and in some cases rapidly available supply of high quality office space.
„Generally speaking, it is conceivable that the lessons learned so far from the Covid-19 pandemic will bring about a realignment of the primary focus of available office space and a rethink of common office concepts that place an emphasis on open plan designs, with more sustainable, modern and flexible design options taking center stage“, says Madlencnik.
Office rents in the Austrian capital largely held steady in the first half of 2021. Top rents for class A office space in attractive locations were around EUR 26 / m²/ month in mid 2021. Interest in space in the mid-price category also remains high. Prime yields in the Viennese office sector fell slightly once again during 2020, followed by another marginal drop in the first six months of 2021. At the halfway point of this year they stood at about 3.35 percent for top-of-the-range properties in premium locations.
Retail sector under scrutiny
At present, Austria has 122 shopping centers with a combined gross lettable area of about 2.9 million m². Compared with a year earlier, two new shopping centers have been completed.
Even before the Coronavirus pandemic broke, precious little new space was coming on to the market owing to a range of prevailing factors including fierce competition, spatial planning restrictions and planning application processes. Additional complications during the pandemic have brought added uncertainty, leading many market participants to adopt a wait-and-see approach.
Differentiated picture for the sector
Since the outbreak of the coronavirus pandemic, constantly changing restrictions and shifting consumer behavior have severely tested the retail sector. These developments are reflected in their significant impact on the different asset classes: while retail parks with grocery sector anchor tenants were characterized by a high degree of stability, city center locations and shopping centers had to contend with an anemic fashion retail environment and the effects of the weakened service and entertainment industries. Going forward, the mix of tenants (e.g. the proportion of fashion retail, entertainment and F&B) will be subject to extremely close scrutiny. In addition, effective management will become an increasingly important element of a successful retail concept.
The effects of the coronavirus pandemic were least palpable in the premium segment of established top centers. Rents for these properties are forecast to remain largely stable, albeit with a renegotiation of terms still a possibility in isolated cases depending on how badly the relevant industries have been affected. Due to oversaturation, B and C locations were already under pressure before the pandemic hit, and the situation has only been compounded to date.
Top yields for high end shopping center properties in prime locations are currently about 4.5 percent. Compared with the previous year, this represents only a slight increase of 0.35 percentage points due to ongoing uncertainity surrounding developments in this asset class. No major changes are forecast before the end of the year.
The UniCredit Bank Austria Real Estate Country Facts are available on our homepage.
Enquiries: UniCredit Bank Austria Press Office
Franziska Schenker, Tel.: +43 (0) 5 05 05-51417;
E-Mail: franziska.schenker@unicreditgroup.at