INVESTMENT MARKET Austria – COORE market beat 2018/Q1 2019

Stefan Csejtei

Jun 2019

TRENDS TOWARDS CORE AND OPPORTUNITIES

Despite Brexit and the readjustment of risk parameters in 2019, we expect similarly strong momentum, supported by a lack of investment alternatives and a sustained zero interest rate until at least the summer of 2019.

Economy

We are in a late stage of the real estate cycle, but at the same time there are no profitable alternatives.

Investors are not unsettled by an inverted yield curve on government bonds.

Gross domestic product growth in Austria is forecast at 1.7% in 2019 and 1.8% in 2020, according to WIFO. Like the European Commission, the IHS expects GDP growth of 1.5% for 2019 and 1.6% for 2020.

For the first time since 2015, real GDP growth is expected to be below 2 %. The economy began to cool in the second half of 2018, and this trend is continuing further away. However, economic growth should stabilize again in the course of the year.

The Austrian HICP inflation rate was 1.4% in February 2019, 0.9 percentage points lower than in November 2018. Energy prices had the biggest impact on the decline in HICP inflation in recent months, albeit all other HICPs (industrial goods excluding energy, services and food) dampened inflation. The core inflation rate (HICP excluding energy and food) was 1.3% in February 2019, 0.4 percentage points below the November 2018 level.

The European Commission expects inflation for Austria to be 1.8% for 2019 and 1.9% for 2020 compared to 2018. The causes are rising wages and strong domestic demand.

Investors focus on office properties, commercial buildings and large-volume residential projects

The focus of investors on real estate in H1 2018 was on retail real estate and residential property. In H2 2018, the trend towards office investments again increased significantly.

In addition, several commercial buildings were again traded on the Mariahilfer Strasse. The heterogeneous distribution of deals reflects the tight supply on the market.

Especially Austrian investors were very active in the market.

The low completion volume of just over 40,000 m2 of office space in 2019, spread across the south and the 22nd district of Vienna, reduces the range of forward purchase deals. In 2020, around 100,000 m2 will be added, including several refurbishments, such as Immofinanz’s new service-oriented myhive offices on the Vienna market. From 2021 the office pipeline is well filled again.

In spite of falling vacancy rates and in contrast to the boom in German cities, office rents followed the stable sideways movement of recent years.

2019 got off to a very strong start with the sale of the T-Center with 134,000 m2 GFA office space to a Korean fund.

Interesting is the comparatively high volume of trade in inner-city commercial buildings 2018 and Q1 2019, which are based on the different future market assumptions for the rental development of buyers and sellers.

In addition, the high demand for land and buildings with high vacancy reflects the boom in the hotel sector. The willingness of some operators to enter into long-term fixed leases based on a positive business development is reflected in the high purchase price claims for land and these vacant properties.

In general, this shows that buyers diversify more locally and to different asset classes and risk classes, so that the composition of the investment volume in the individual quarters depends on the current offer. There is a demand for either core real estate or opportunities with potential through conversion or new asset management.

Yields

In terms of yields, for the first time in years we see a tendency to move sideways at a very low level.

Outlook

We therefore expect a lower volume in 2019, several transactions in the Core + and Value Add office space, generally less in development and more focus on commercial buildings and hotels.

Deals

The first selected transactions in Vienna in 2019 were the T-Center, a commercial building on Mariahilfer Strasse, and medium-sized office buildings such as Gudrunstrasse and “HBF 1” in Gertrude-Fröhlich-Sandner-Straße, a residential tower of the project at the Schweizergarten or the hotel The Townhouse am Rennweg as well as the former seat of the Vienna economic chamber in the 3rd district.

2018 was marked by the large deals in the office area in the Lassallestraße with over 100,000 m2, the Adler and Ameise, the Media Center Marx or the former FourSide Hotel in the Grieshofgasse.

In addition, the DC Tower 3 or the Floridotower that was traded in a portfolio deal.

In retail investment, the Leiner on Mariahilfer Straße was one of the biggest deals. Here, many transactions were spread across the federal states, particularly in the first half of the year.

Sources:

Eurostat

WKO

WIFO

IHS

Austrian Federal Financing Agency

Photo: COORE