Vienna is once more attracting global interest, while domestic investors remain underweight property with a home bias. Barbara Ottawa reports

As much as one third of investors in the Austrian real estate market last year were Germans, according to CBRE Austria. German IVG confirmed in its latest ‘Research Lab’ publication on Austria that 13 German open-ended real estate funds (GOEFs) had been invested within their neighbour’s borders in 2012.

“By now there are only very few open GOEFs left, but luckily they want to buy more Austrian property,” says Andreas Ridder, managing director of CBRE Austria.

As for why, analysts are calling the Austrian property market, which is basically synonymous with the Viennese market, “stable” and “unexciting”. The vacancy rate in Vienna stood at only 6.6% at the end of 2012, while rents for top locations were at €24-25 per sqm per month, 4.2% higher than in the previous year. A slight further increase is expected in 2013, to €26m at the most, but nothing major.

IVG describes “the preferred asset class” of GOEFs as “Viennese trophy buildings and major property complexes”. One of the largest deals in Austria last year at more than €100m was the sale of the office complex Europlaza 4 to Union Investment. In total, the investment volume in Austria stood at €1.8bn in 2012, at a similar level to the €1.7bn reported for 2011.

Ridder forecasts that the share of Austrian institutional investors in the market will continue to recede, having already fallen from 65% in 2011 to 55% in 2012. “When the markets are good it is basically only Austrians who are buying, but now investors do not have many other alternatives in Europe,” he says.

And this is not only true for Germans finding it hard to find good core properties in their own country. According to Ridder, one of the two “main trends” in the Austrian market will be the arrival of Eastern European investors. Despite being mostly rich oligarchs, with the exception of maybe one or two state funds, Ridder expects them to compete in the institutional segment as they are buying large scale. “They are not acting institutionally, though, which means if they see something they like, a residential building or a hotel, they will buy it at almost any price.”

Austrian institutions, meanwhile, are still heavily underweight property and have a strong domestic bias. The average real estate exposure among Austrian pension funds stands at 3.5%, but only because the six multi-employer Pensionskassen are investing 3.8% on average in real estate, while the 11 smaller company pension funds only have an average exposure of 1.41%.

Other institutions, mainly insurers, have a higher exposure to the real estate market, but in total only around 4% of Austria’s property assets are managed by institutions, while the country has a high home-ownership rate. The Financial Market Authority (FMA) reported an average real estate allocation among insurers in 2012 of 6.7% and predicts that this will rise.

But similar to the situation in other ‘safe havens’, the run on core property has already sent prices soaring in the top segment.

In the retail sector, especially, many owners do not even want to sell despite demand in the market. Ridder says Austria is finally catching up with the rest of Europe insofar as retail investments have begun to take over from offices as top sector exposure of institutional investors. In 2012, a large number of transactions were reported in the retail sector, accounting for 49% of the total investment volume, while the office sector only represented 33%.

For 2013, CBRE expects further closures on several deals in the retail sector. But it forecasts a “collapse in the pipeline” by 2014 at the latest, as virtually no new construction projects have been started in recent years. “People are quite certain that the crisis is over, but they are still very cautious and are only starting new projects if they have a large number of tenants on board to start with,” explains Ridder.

This is mainly down to the fact that banks – just like in many other countries – have become very restrictive in their lending policies. This is likely to lead to a further increase in the gap between top properties and second-tier real estate. IVG and CBRE agree that the latter part of the market will become even harder to sell. Opportunistic investors that used to use up to 80% in debt capital have fled the Austrian market and others are looking for core properties.

Nevertheless, debt investments are not very tempting for Austrian institutions like the Pensionskasse APK. “We are not ruling out real estate debt investments in principle, but at the moment it is not a topic,” says managing director Christian Böhm. “We are already invested in direct lending via mortgages and mezzanine to substitute for banks not fulfilling their role as lenders. But the question is: who is best placed to judge whether the pricing is right?”

The question of the right price also has to be asked in top residential properties in Vienna, Ridder warns. “They are way too high, rendering a maximum yield of 2%, while seemingly more expensive residential properties in London or Paris are yielding between 3.5% and 4%.” In order to still get exposure to top locations in Vienna, some investors are buying hotels or other property segments to buy the right location, Ridder adds.