25.03.2014
BUWOG & EHL Real Estate Group present Vienna Residential Market Report 2014
New leasing and residential acquisition remain expensive, but affordable
The times of rapid increases in rents and housing prices are over for now. 2014 and subsequent years will be defined by moderate, continuous price increases. As explained by real estate provider EHL and residential firm BUWOG when presenting the new edition of the "First Vienna Residential Market Report" prepared by both companies, the increases in rents and housing prices will lie largely in the inflation rate.
The price level reached due to the price increases of the last few years is largely safeguarded due to the continuing strong demand, however. "Vienna is one of the fastest growing metropolises in Europe", says Sandra Bauernfeind, director of the residential unit at EHL. "With population growth of approx. 15,000 to 20,000 people per year, there are certainly not going to be any declines in price".
For 2014 Bauernfeind forecasts rent increases of 2 to 2.5 percent for 2014, for privately owned flats 3 to 5 percent. The increase in the benchmark rents from EUR 5.16 to EUR 5.39 as of 1 April is largely irrelevant for flats in which rents are privately agreed. "The rise of the absolute benchmark rents will not have any notable consequences".
General economic development has had noticeable effects on market activity, however. The weak economy and only slight rise in income have led to a disproportionately strong increase in the demand for more affordable market segments. This is where Bauernfeind finds a social problem: "Here is a demand that the market is simply unable to cover, and outside the subsidised segment it won't be possible to create additional residential space at these prices either.
Structural surplus demand requires better conditions for residential developers
As yet the strong demand for flats has not led to a significant increase in supply. This means that at about 6,000 the number of building approvals remains largely unchanged compared to 2013, and the increase in the number of subsidised residential units from 4,730 in 2012 to 5,648 has only influenced the market situation to a fairly limited degree. The supply of additional flats is far from able to cover the demand arising from the average annual population growth of 15,000 to 20,000 persons and continuing decline in average household size.
The consequence: in Vienna there is a classic sellers' market now and for the foreseeable future. "There are more flats than ever being sold during the construction phase", says Andreas Holler, who is responsible for project development in BUWOG management, "and a significant share of our projects is already sold in full on completion".
The low level of supply is due primarily to the difficult underlying conditions under which residential developers in Vienna operate and which prevent an adequate increase in the supply. "Simpler and faster zoning procedures would probably do more to relieve the residential market than an increase in the volume of subsidies", Holler says. "And the fact that practically every bigger project is now fought through some citizens' initiative also delays construction, causes other appreciable expenses and, as a result, ultimately contributes to the increase in housing costs".
Another impediment is the delay in the reform of the building code (i.e. required parking, easements for built-in lifts, chimneys, attic extension, among other things). This is to bring about a revival of construction activity, particularly in the city-centre, for which there is particularly strong demand and in which new residential space can be created through exploitation of the gaps between buildings and the development of existing properties. "Even if no miracles can be expected, the rapid reform of the building code would certainly be an important impetus", says Holler.
Despite these tough framework conditions, there has recently been a series of attractive, medium-sized projects that have come on the market. There is very good demand, particularly for locations outside the “Gürtel” that have good transport connections in the direction of the city centre. BUWOG is especially active in this segment and is developing residential projects at Vienna Central Station in Gombrichgasse (10th district, 80 flats), in Universumstraße (20th district, 50 flats), and in Missindorfstraße (14th district, 25 flats).
The large-scale urban development projects will only provide relief in the medium term, most of them beginning in 2016 and in subsequent years. The two biggest projects are Seestadt Aspern and the premises surrounding the future Vienna Central Station.
• Seestadt Aspern is the biggest urban development area in Europe. By 2028 flats for about 20,000 people will be built on a space of 240 ha, which corresponds to the districts of Josefstadt and Neubau combined. 2,600 flats will already be completed in 2016.
• The second important urban development area is the region surrounding the future Vienna Central Station in Favoriten. 5,000 flats will be built there by 2015, with the first flats ready for occupation this year.
Trend toward sustainable residential construction continues
The development in building sustainable and ecological residential properties is very positive. Low-energy buildings have already become standard in new construction; at a minimum the quality of new BUWOG buildings is low-energy and often meets passive house standard. "Customers are extremely sensitive when it comes to operating costs, thus for competitive reasons it is obvious for us to adopt a pioneering role in this regard", Holler explains.
Decline of subsidy volume and fragmented tenancy law create serious social problems
The central problem is the continually widening gap between the housing costs for households who have already rented a flat and for persons who now plan to rent or purchase a flat. More than 75 percent of the existing rentals are accounted for by flats owned by the city of Vienna or non-profit organisations or flats that are subject to rental restrictions and most of whose costs are clearly below market prices, some even just EUR 3 / sqm and below. Those seeking a flat now, however, must pay at least three times as much, also for flats of just average quality.
"Ultimately, this means that the strong protection of existing tenants privileges flat owners and those eligible for access and those seeking flats foot the bill", explains Michael Ehlmaier, managing partner of EHL. "And those are primarily young families and people moving to Vienna, thus precisely those population groups who require low-cost living space the most".
This has noticeably negative effects on the market. "If it is not cost efficient to move out of a flat that has become too large, i.e. after children move out, after a divorce, or after the death of a partner, this inevitably leads to inadequate use. And if someone has let a privately owned flat subject to the full scope of the Austrian Tenancy Act at far below market prices, then there are no incentives for extensive refurbishments. Both remove valuable living space from the market and increase the surplus demand".
This structural problem must be met with relevant medium- and long-term changes to the Austrian Tenancy Act, Ehlmaier demands. Realistically, an improvement can only be achieved at this time by stimulating new residential construction. "The construction of new subsidised housing must be increased from currently 6,000 to 10,000 units per year. If the use of properties for new buildings in the higher price segments as well as the development of existing properties is simultaneously facilitated, then the strong influx of people moving to Vienna which we can expect in the coming years will not result in any dramatic increase in housing costs".
- Steady moderate price increase due to continuing strong demand
- Population growth remains engine of market development
- Even stronger demand for lower price segment due to weak economy
The times of rapid increases in rents and housing prices are over for now. 2014 and subsequent years will be defined by moderate, continuous price increases. As explained by real estate provider EHL and residential firm BUWOG when presenting the new edition of the "First Vienna Residential Market Report" prepared by both companies, the increases in rents and housing prices will lie largely in the inflation rate.
The price level reached due to the price increases of the last few years is largely safeguarded due to the continuing strong demand, however. "Vienna is one of the fastest growing metropolises in Europe", says Sandra Bauernfeind, director of the residential unit at EHL. "With population growth of approx. 15,000 to 20,000 people per year, there are certainly not going to be any declines in price".
For 2014 Bauernfeind forecasts rent increases of 2 to 2.5 percent for 2014, for privately owned flats 3 to 5 percent. The increase in the benchmark rents from EUR 5.16 to EUR 5.39 as of 1 April is largely irrelevant for flats in which rents are privately agreed. "The rise of the absolute benchmark rents will not have any notable consequences".
General economic development has had noticeable effects on market activity, however. The weak economy and only slight rise in income have led to a disproportionately strong increase in the demand for more affordable market segments. This is where Bauernfeind finds a social problem: "Here is a demand that the market is simply unable to cover, and outside the subsidised segment it won't be possible to create additional residential space at these prices either.
Structural surplus demand requires better conditions for residential developers
- Delay in reform of building code slows development and new construction
- Most big urban development projects only on the market after 2014
- Most important projects Seestadt Aspern and Vienna Central Station
As yet the strong demand for flats has not led to a significant increase in supply. This means that at about 6,000 the number of building approvals remains largely unchanged compared to 2013, and the increase in the number of subsidised residential units from 4,730 in 2012 to 5,648 has only influenced the market situation to a fairly limited degree. The supply of additional flats is far from able to cover the demand arising from the average annual population growth of 15,000 to 20,000 persons and continuing decline in average household size.
The consequence: in Vienna there is a classic sellers' market now and for the foreseeable future. "There are more flats than ever being sold during the construction phase", says Andreas Holler, who is responsible for project development in BUWOG management, "and a significant share of our projects is already sold in full on completion".
The low level of supply is due primarily to the difficult underlying conditions under which residential developers in Vienna operate and which prevent an adequate increase in the supply. "Simpler and faster zoning procedures would probably do more to relieve the residential market than an increase in the volume of subsidies", Holler says. "And the fact that practically every bigger project is now fought through some citizens' initiative also delays construction, causes other appreciable expenses and, as a result, ultimately contributes to the increase in housing costs".
Another impediment is the delay in the reform of the building code (i.e. required parking, easements for built-in lifts, chimneys, attic extension, among other things). This is to bring about a revival of construction activity, particularly in the city-centre, for which there is particularly strong demand and in which new residential space can be created through exploitation of the gaps between buildings and the development of existing properties. "Even if no miracles can be expected, the rapid reform of the building code would certainly be an important impetus", says Holler.
Despite these tough framework conditions, there has recently been a series of attractive, medium-sized projects that have come on the market. There is very good demand, particularly for locations outside the “Gürtel” that have good transport connections in the direction of the city centre. BUWOG is especially active in this segment and is developing residential projects at Vienna Central Station in Gombrichgasse (10th district, 80 flats), in Universumstraße (20th district, 50 flats), and in Missindorfstraße (14th district, 25 flats).
The large-scale urban development projects will only provide relief in the medium term, most of them beginning in 2016 and in subsequent years. The two biggest projects are Seestadt Aspern and the premises surrounding the future Vienna Central Station.
• Seestadt Aspern is the biggest urban development area in Europe. By 2028 flats for about 20,000 people will be built on a space of 240 ha, which corresponds to the districts of Josefstadt and Neubau combined. 2,600 flats will already be completed in 2016.
• The second important urban development area is the region surrounding the future Vienna Central Station in Favoriten. 5,000 flats will be built there by 2015, with the first flats ready for occupation this year.
Trend toward sustainable residential construction continues
The development in building sustainable and ecological residential properties is very positive. Low-energy buildings have already become standard in new construction; at a minimum the quality of new BUWOG buildings is low-energy and often meets passive house standard. "Customers are extremely sensitive when it comes to operating costs, thus for competitive reasons it is obvious for us to adopt a pioneering role in this regard", Holler explains.
Decline of subsidy volume and fragmented tenancy law create serious social problems
- Privileged flat owners, disadvantaged flat seekers
- Tenancy law creates serious incentives for inadequate and non-use
- New construction volume must reflect population growth
The central problem is the continually widening gap between the housing costs for households who have already rented a flat and for persons who now plan to rent or purchase a flat. More than 75 percent of the existing rentals are accounted for by flats owned by the city of Vienna or non-profit organisations or flats that are subject to rental restrictions and most of whose costs are clearly below market prices, some even just EUR 3 / sqm and below. Those seeking a flat now, however, must pay at least three times as much, also for flats of just average quality.
"Ultimately, this means that the strong protection of existing tenants privileges flat owners and those eligible for access and those seeking flats foot the bill", explains Michael Ehlmaier, managing partner of EHL. "And those are primarily young families and people moving to Vienna, thus precisely those population groups who require low-cost living space the most".
This has noticeably negative effects on the market. "If it is not cost efficient to move out of a flat that has become too large, i.e. after children move out, after a divorce, or after the death of a partner, this inevitably leads to inadequate use. And if someone has let a privately owned flat subject to the full scope of the Austrian Tenancy Act at far below market prices, then there are no incentives for extensive refurbishments. Both remove valuable living space from the market and increase the surplus demand".
This structural problem must be met with relevant medium- and long-term changes to the Austrian Tenancy Act, Ehlmaier demands. Realistically, an improvement can only be achieved at this time by stimulating new residential construction. "The construction of new subsidised housing must be increased from currently 6,000 to 10,000 units per year. If the use of properties for new buildings in the higher price segments as well as the development of existing properties is simultaneously facilitated, then the strong influx of people moving to Vienna which we can expect in the coming years will not result in any dramatic increase in housing costs".
IMMOFINANZ – a publicly listed European commercial real estate group with focus on two asset classes: Office and retail in eight core markets.