The Austrian real estate market has been characterized by steady growth over the last decade, driven by a strong economy, low-interest rates, and increasing demand from both local and foreign buyers.
The COVID-19 pandemic was the first disruptor to this stability, although the Austrian government has been very generous with subsidies to support the economy. Furthermore, due to a provision of the Austrian Civil Code, no rent had to be paid by lessees if the rented premises could not be used during lockdowns. The hope for a new normal was challenged in 2022 by additional disruptions, as the market now faces several further challenges, including a shortage of affordable housing, high inflation, rising construction costs, the impact of rising interest rates, and new regulations (many ESG-related) that need to be adopted by the industry.
According to data from the Austrian National Bank, the average price of apartments in Austria increased by 50% from 2015 to 2023, with Vienna being the most expensive city. The demand for real estate in Austria is mainly driven by urbanization, migration, and gains in disposable income, leading to a shortage of affordable housing in some areas.
With house prices and rental rates steadily increasing, in 2021 the government introduced measures to address this challenge by adopting a cap (indexation-stop) on rental costs. However, this does not apply to all leases, as the Austrian lease regime is quite complex. As of April 2023, an indexation of the rent by 8.7% is anticipated. The government was discussing a rent increase cap for 2023 to protect lessees. The conservative and the green party eventually agreed upon (further) housing subsidies (Wohnbeihilfe) in the amount of EUR 225 million instead of a cap. Housing and heating allowances in the amount of EUR 450 million had already been granted in 2022 due to the dramatic increase in gas and electricity prices. The Austrian legislator also recently introduced the Bestellerprinzip for rentals. As of July 1, 2023, the party ordering broker services will have to pay for the agents’ fees. This should provide further financial relief for renters.
Rising Interest Rates
Another challenge is the impact of rising interest rates on the real estate market. Low-interest rates have been a key driver of the growth in the market, and the significant increase in interest rates has already resulted in a slowdown in investments. Additionally, stricter lending criteria have been introduced, making it more challenging for buyers to become eligible for a loan. Investors expect price reductions in all asset classes.
The real estate sector is considered one of the major energy consumers and carbon polluters in the EU. ESG principles are therefore an increasingly important consideration in the industry, particularly with the introduction of the EU Taxonomy Regulation and its delegated act which already provides concrete details on how buildings must be built to conform with the taxonomy. The Regulation aims to improve transparency and comparability by providing investors with a clear understanding of sustainable activities and promoting disclosure of such. This helps investors to make more informed decisions.
ESG compliance has a direct impact on property value, market demand, and the attractiveness of a particular building for tenants. Investors (and tenants also) have for some time asked for ESG-certified buildings. In Austria, the most common ESG certifications are OeGNI (Austrian Society for Sustainable Real Estate), DGNB (German Sustainable Building Council), and LEED (Leadership in Energy and Environmental Design). The environmental aspect of ESG focuses on reducing energy consumption, minimizing waste, and improving the overall sustainability of buildings. The Austrian government has implemented various policies and regulations to encourage the development of energy-efficient buildings and the use of renewable energy sources, for example by introducing simpler procedures in the Condominium Rights Act. The social aspect of ESG focuses on creating safe, healthy, and inclusive communities. This includes ensuring access to affordable housing, creating spaces that promote physical and mental well-being, and supporting local communities. The governance aspect of ESG in real estate focuses on ensuring transparency, accountability, and ethical behavior in the management and operation of real estate assets. This includes having clear policies and procedures in place for managing risks and conflicts of interest, as well as promoting diversity and inclusion in the workplace.
Sustainability and ESG will therefore play a major role in future transactions and will transform the entire industry. Finally, sustainability issues are also becoming an increasingly important argument in court proceedings when it comes to the refurbishment of buildings.
By Birgit Kraml, Partner, Wolf Theiss