UniCredit Bank Austria Real Estate Country Facts:
The boom in the Austrian real estate market has come to a halt
- The real estate cycle is stagnating at a high level
- The Austrian real estate market is being sustained by static interest rates and a stable labour market
- Demand for commercial real estate continues to be high: The transaction volume of around 4 billion euro falls among the peaks reached in recent years
- Residential construction: An estimated 66,000 units were completed last year — the largest amount of building work for decades
- Vienna office market: After two strong years, new construction suddenly plummeted in 2019, but the pipeline remains well filled
- Shopping centres: Market highly saturated — consequently, the increase in new construction is barely noticeable
"The real estate cycle is stagnating at a high level, but there is still buoyant demand for Austrian real estate. We are seeing an increasing number of Asian and German investors on the Austrian market," says Reinhard Madlencnik, Head of Real Estate at UniCredit Bank Austria. The sought-after asset classes are large offices, hotels and residential properties.
The project pipelines are being tackled systematically and there is flexibility in existing business. Demand in the different market segments is being met to varying degrees, however. While there is enough existing retail space to satisfy demand across Austria, shopping centre optimisation is now well under way. For this reason, the office market in Vienna saw a cyclical decline in new construction projects in 2019.
The Austrian real estate market is being sustained by the ECB not raising interest rates and the labour market remaining stable, with real wages increasing as a result. "We finance good projects with acceptable risk and are also able to offer long-term leases and cope with high volumes," says Madlencnik.
The outlook for the Austrian real estate market is positive. Foreign institutional investors are being held back by insufficient product availability. Due to the impending market saturation in the majority of asset classes, the construction industry will see less demand from the beginning of the 2020s, which should dampen building costs. The availability of affordable land to build on will be the dominant theme in all urban areas.
Demand for commercial real estate still high
"Although Austria's all-time record for commercial real estate investments, which was reached the previous year, was not surpassed in 2018, the transaction volume of around 4 billion euro fell among the peaks reached in recent years," says Walter Bödenauer, Real Estate Analyst at UniCredit Bank Austria. Last year, the majority of investors came from Austria; while in 2017, German investors dominated the market.
In addition to office and retail, the housing segment in particular was stronger than average last year, reaching record levels in both halves of the year.
Investment activity has been somewhat more restrained so far this year, with around 1.8 billion euro being invested in the first half of 2019. This constitutes a slight decrease compared to the previous year. This is due less to declining interest from investors than to the limited availability of suitable investment opportunities.
The prime yields generated with real estate have continued to fall to just under 3.7 percent in the office segment, and lie at around 4 percent in the shopping centre segment. The decline in the yield curve for the individual asset classes is levelling out more and more, however, or has come to a halt altogether.
Residential construction in Austria: Imbalances in the housing market are decreasing
Residential construction in Austria has been having to deal with a high supply deficit in the housing market for a number of years. Nevertheless, an estimated 66,000 units were completed last year — the largest amount of building work for decades. As a result, the current national-average demand for housing was potentially able to be met. There are still large supply gaps in individual market segments, however, especially in terms of cheap rented housing. As the slight decline in the number of households struggling with excessive housing costs shows, public housing has been hugely successful in recent years. Nevertheless, the burden of housing costs has not fallen significantly in the long term, neither in younger households nor in those on the poverty line; both segments are largely dependent on the rental housing market.
Demand for new construction falls below 50,000 homes
The demand for housing varies according to the number of households at any given time and changes in the housing stock. Furthermore, need depends on various aspects of demand that are difficult to capture with statistics, such as the evolution of household size, the demand for second homes or homes purchased for investment purposes. In the past, demand in Austria ought to have been met by building 45,000 to 50,000 homes per year (with an average of 33,000 new households per year over the last thirty years). However, excess demand is likely to have built up over the last decade, which saw little in the way of building work. Despite increasing residential construction, this excess demand has gradually risen due to the strong population growth in subsequent years.
"Demand for housing in Austria is expected to grow more slowly over the next few years. The momentum in building new houses has been slowing since 2017 and is expected to gradually continue falling from the current rate of just under 30,000 households a year to under 20,000 a year in the next ten years," says Bödenauer.
Assuming an ongoing need to replace around 13,000 residential buildings that have been demolished, redesignated or knocked into one, and an estimated 5000 homes that are also used as investment properties, the annual demand for new construction in Austria will fall significantly under 50,000 in the coming years.
Vienna office market: After two strong years, new construction suddenly plummeted in 2019
This year, as in previous years, the market for offices in Vienna in has held its place among the most stable markets in Europe. The continuously high level of investment in commercial real estate in previous years and the similarly high investment volume forecast for the current year underline the great deal of interest that domestic and international investors have in the Austrian real estate market.
In previous years, performance on the rental market has generally outstripped that of new construction, resulting in the stable situation that we are now seeing on the Vienna office market. Since very few new properties came on the market in 2016 (and this looks likely to be the case again this year), the years in which there was a lot of new construction, such as 2017 and 2018, are unlikely have a significant impact in the short term.
The production of new office space in Vienna fell to an all-time low of just under 60,000 m² in 2016. New construction activity picked up strongly in 2017 and last year too, reaching around 190,000 m² and 300,000 m² respectively, including buildings for companies' own use, such as headquarters. A sharp nosedive in new production is expected for this year, and a new construction volume of just over 40,000 m² is currently expected. To a certain extent, however, this value depends on whether projects that currently under construction will actually be completed this year, postponed to next year or, in some cases, whether projects that have been announced for next year may be able to be finished this year instead. Consequently, the overall production volume may change a little by the end of the year.
Rents for office space in Vienna remained largely stable in the first half of 2019. Prime rents for Class A office space in good locations reached around EUR 26 per m² per month in mid-2019.
Properties in Vienna's central business district, city-centre office complexes and well-known business clusters remain in demand, not least thanks to their "desirable postcode". Newer locations—such as "Viertel Zwei" and, especially in recent years, the area around the new main railway station—have also become highly sought-after.
Shopping centres — interest from investors, but very little new on offer
As of 30 June 2019, shoppers in Austria have a total of around 120 shopping centres with a rental area covering approximately 2.8 million m² at their disposal. Only one new shopping centre has been added to this portfolio since last year, and the total rental area has remained almost unchanged. The trend towards changing shopping centre spaces by modernising and/or expanding existing and established sites is continuing.
"One of the reasons why the increase in new construction is barely noticeable is that the market is already highly saturated," says Bödenauer. With a shopping centre density of around 324 m² of rental space per 1000 inhabitants, Vienna occupies one of the top places in the ranking even when compared with the rest of Europe. The EU average currently stands at 259 m² per 1000 inhabitants.
By the middle of 2019, Vienna and the surrounding area had almost 1.9 million m² of retail space. The market shares of the individual segments were around 41.5 percent for shopping centres, around 42.6 percent for specialist retail areas including retail parks, and around 15.9 percent for the major shopping streets in Vienna. The growing importance of online shopping is putting pressure on rental levels, which means that B and C locations are often faced with higher vacancy rates and negative rent adjustments.
"At the moment, national and international retailers are increasingly finding city-centre locations again. Demand is concentrated mainly on shop space on the prime shopping streets. For example, Huawei opened a flagship store on Kärntnerstraße after Apple did, and the Scandinavian fashion chain '& Other Stories' has opened its first Austrian branch," says Bödenauer.
The UniCredit Bank Austria Real Estate Country Facts are available to download from our website.
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