According to Reinhard Madlencnik, Head of Real Estate at Bank Austria: “With investments of EUR 2.4 billion, the Austrian real estate market has achieved a peak value in the first half of the year. Thanks to the low interest rates, real estate ranks highly amongst investors and real estate financing is extremely favourable. As a result, prime real estate yields have already hit historic lows – in the office sector, these have already fallen below the 4% mark.” And Madlencnik adds “We finance good projects with acceptable risk and are thereby also able to offer long terms and take on high volumes. To contain the risks, we recommend that all our customers hedge against rising interest rates.”
Karla Schestauber, real estate analyst at Bank Austria, comments on investor interest: “In the office sector, with relatively little new office space having come onto the market over the past few years, there is already evidence of an increase for the current year and at least 300,000 m² of new space is expected in 2018. On the one hand, this increases the supply of modern offices for investors, whilst on the other these modern premises are continuing to put pressure on older offices in less attractive locations in particular. Competition is also increasing in the retail sector, not least due to online business, and the gap between A and B locations is continuing to widen.”
Demand for commercial real estate reaches new high
A new record high has been achieved in commercial real estate investment in the domestic market, of around EUR 2.4 billion in H1 2017.
Large transactions running into the three-digit million range can explain the very strong results. .
In H1 2017, German investors won back their number one position with a share of well over 50 percent of the commercial real estate transaction volume, followed by Austrian investors with a share of close to 30 percent. As shown by the large transactions, interest in offices was particularly high, accounting for around 60 percent. Residential real estate was also increasingly in demand, followed by retail real estate and hotels.
Prime yields have already dropped sharply
The prime yields expected to be achieved with real estate have already dropped sharply and have reached new lows. In the office sector, the prime yield slipped to just short of 4 percent, with around 4 percent for the shopping centre sector. According to CBRE, retail parks and logistics real estate reported the highest relative yields at around 5.7 percent. The drop in real estate yields can be explained primarily by an increase in real estate prices. This is not the case in Austria alone – according to the ECB, prices throughout the Eurozone have also increased sharply and have reached a new high. The future development of real estate values depends largely on the trend in interest rates.
Residential construction and living costs in Austria
The domestic residential market has remained relatively favourable over the past few years compared with the rest of Europe, although real estate prices and, as a consequence, rental costs, have increased massively with the growing excess demand. However, the price increase in the Austrian residential real estate market tailed off around the end of 2016 and the beginning of 2017 and even levelled off completely in Vienna. At any rate, the trends in prices indicate a stabilisation of the market at a high level.
Living in Austria for an average household is at least “more affordable” than in other similarly wealthy European countries. Despite the price increase, the burden of housing costs for Austrian households, at an average of 18 percent of the available household income, is still well under the EU average of almost 23 percent. It is estimated that a total of over 62,000 new residential properties will be built in Austria in 2017. If the current rate of construction of new housing continues beyond 2017, the excess demand on the domestic housing market will certainly drop. The requirement for building new residential properties would then at least be covered as a country average, although at a regional level, primarily in the urban centres, deficits will remain and will require major efforts in the construction of new housing.
Office market in Vienna: High levels of new construction activity lead to greater competition
The office market in Vienna continues to be one of the most stable markets across Europe. A significant drop in new construction activity for offices over the last few years has enabled the continuation of the stable situation on the office market in Vienna. However, there is already evidence of an increase in new construction activity for the coming year. The Austria Campus and THE ICON VIENNA projects alone will increase the supply of office space in Vienna by over 270,000 m².
Last year, the take-up of office space was about 325,000 m², well above the 2015 level. However, in H1 2017, there were fewer than 90,000 m² newly let, which was significantly below expectations. However, with a favourable economic situation, there is hope that the second half of the year can, to some extent, make up for the weak start at the beginning of the year. Overall, the letting performance this year is still likely to remain below the level of the previous year.
The rents for office space in Vienna have largely remained stable in H1 2017. In the past, rental prices in the premium segment have even increased slightly. As already explained, prime yields in the office sector in Vienna fell slightly again in 2016, followed by another slight fall in H1 2017, so that at the end of H1 2017, prime yields for the top properties in the best location reached a figure of just under 4 percent.
Shopping centres – Only one new shopping centre site will open in Austria in 2018
Austria already has a good supply of shopping centres across all its federal states and appears to have reached a certain level of saturation. More evidence of this is provided by the fact that Austria has a shopping centre density of 315 m² per 1000 inhabitants – a figure well above the EU average of around 238 m² per 1000 inhabitants. The only new shopping centre opened in Austria was in autumn 2016 – the ELI Shopping Centre (around 15,000 m²) in Liezen in the Styrian Enns valley.
The prime yield in the shopping centre sector in mid 2017 had fallen to around 4.0 percent. A stable high demand for commercial real estate – driven by international funds – is faced with a limited supply of property which is barely increasing. This means that the pressure on yields remains unchanged in light of the prevailing situation of low interest rates.
The UniCredit Bank Austria Real Estate Country Facts are available to download on our website.
Enquiries: UniCredit Bank Austria Corporate Communications
Matthias Raftl, Tel. +43 (0) 50505 – 52809