Old-fashioned leases, and not-so-old-fashioned oversupply have created problems in the office market.
Talk to Alexander Neuhuber of DTZ Neuhuber about the Vienna office market and you may find yourself transported back 79 years. Neuhuber himself is a young man, but his appreciation of the historical roots of the city’s built environment begins at the First World War. “During the war, the widows of soldiers killed in action had to be protected because they couldn’t pay increased rents. The restrictions introduced in 1917 still affect the market today.”
He estimates that at least 1,000 luxury apartments in central Vienna are leased for one or two schillings per month. The effect continues through to commercial property, with archaic lease laws that stipulate guaranteed tenure for the tenant. While modern leases have been introduced by international landlords, local leases are still regularly drawn up with infinite occupation clauses and six- or 12-month get-out clauses for tenants only. Rents are lower than in most European capitals, including Budapest, Lisbon, Milan and Stockholm.
The unfavourable lease terms are only partly responsible for the lower rents; like most European cities, a flood of new supply in the early 1990s has exacerbated rental weakness.
Since 1991, more than 1m m2 of new space has come onto the market, according to Österreichische Immobilien Partner. The supply pipeline has slowed dramatically. Only 35,000 m2 of new office space came onto the market in 1995, with a further 47,000 m2 predicted for 1996, according to Willy Rader at ÖIP.
Firm figures on stock and vacancy are hard to fix. ÖIP puts total office stock in Vienna at 7.2m m2; Jones Lang Wootton assesses it at more conservative 5.9m m2. The vacancy rate has hovered at around 8% for the last three years; currently it is estimated by “IP to be around 7.6% (550,000 m2) but is expected to rise above 8% next year.
Local property professionals argue about the definition of “vacant”, however. Some claim that the older stock should be exempted from calculations as it does not have much future as offices: many companies are planning to move to newer space, and there are easy ways to convert buildings to residential use. Jones Lang Wootton puts the vacancy rate at 6.6%, assuming feasible vacant space to be 390,000 m2. Of this, only 80,000 m2 is modern offices, adds the firm. This is less than one year’s supply: take-up last year was estimated by “IP to be 95,000 m2. This year is expected to be around the same, while next year it could rise to 130,000 m2.
The proportion of available space is likely to decline in the short term, given the lack of new development reaching completion and relatively strong demand, particularly in the tightly-regulated CBD, bound by the central ring road. By 1997, there could be a genuine flurry of completions, including the 20,000 m2 Stumpf Donau Business Centre building on the Handelskai, the 11,700 m2 Floridsdorfer Plaza and parts of the Donau City scheme.
Agents are predicting some rental growth by the end of the year. Best office space could fetch between AusS 270 and AusS 290 per m2 per month, compared with the AusS 200 to AusS 250 which has been the benchmark since 1993. This would still be short of the AusS 320 achievable at the peak of the market in 1990 and 1991.
Rents have traditionally been highest in the historic First District, inside the Ring road that follows the trace of the old city walls. There is estimated to be around 1m m2 of offices here, mostly in listed buildings on small floors, mixed in with residential and retail space. Pressure for modern office space has forced occupiers to move outside the Ring, principally into the second and third districts.
Vienna’s property market remains dominated by owner occupiers – estimated to account for some 75% of all office buildings in Vienna – and a fiercely local investment market, controlled by Austrian insurance companies, banks and private individuals. There is little turnover of investment property and, with the majority of deals conducted principal to principal, little hope of transparency.
The insular market has proved a tough nut to crack for outsiders. Successive international property agents have come here aiming to set up bureaux to service central and eastern Europe, using their own western European (usually English) staff. Most have foundered on the rocks of local knowledge, the nod and wink practices which mean that less than 25% of property transactions are agent-handled. The survivors then merged or bought out local agents and now run quite happily with native Austrian staff.
“The broker business has a bad image in Austria,” maintains Max Huber, whose company is a member of the international alliance, Savills Galbreath. “The guidelines for brokers are not so well developed here, and ‘service’ is a strange word in Austria. But some new companies are learning how to work with consultants; things are improving.”
These factors have held back the city’s ability to attract international capital, and it is only since the mid-1980s that any sort of international investment market has appeared.
Another troublesome item is yields. These are stuck at between 5% and 6% on average, and are judged too low by many international onlookers. Austrians themselves are prepared to buy at yields as low as 4% and it is only in the lower-standard, out-of-town locations that yields rise to 7% or 8%. The restrictions on rents are one reason for this situation, but there does not appear to be any willingness in the government to legislate for change.
Nevertheless, foreign investors are buzzing around Vienna. Just as in the Czech Republic, Austrian society has been a little shocked by the speed and substance of German acquisitions. Half the country’s newspapers are now German-owned, for example. “There used to be a bad feeling about this, but now we are more concerned to keep our jobs,” comments Dr Christian Lippert at Healey & Baker Lippert in Vienna. Unemployment has risen from 4% in mid 1995 to 6% today, and rising.
Austria’s turbulent economic history has made it wary. The German occupation during the Second World War left the country devastated: poor, hungry, with little industrial power and a demoralised population. In the late 1950s, as the USSR flexed its military muscles in Budapest, and then even more threateningly in Prague in 1968, many Austrians became scared for their security and took flight, often to Canada. There was a genuine fear of Soviet invasion, which impeded any major property schemes.
It was only with the softening of the eastern bloc (and then the gradual leak of dissidents through East Germany to Austria) that the country regained faith in its commercial future. Prices rose, a number of major office developments took off, and there were plans for a joint World Fair with Budapest to take place in 1995 as a motor for the whole economy and the property industry in particular. A referendum on the fair in 1991 knocked that idea out of the window (to the big relief, in hindsight, of most Viennese players) as Europe slumped into recession.
Since then, Austria has fared surprisingly well, insulated from the worst ravages of the recession. But this was perhaps a mirage. “Our decline came later, because we’re always two years behind Germany in these cycles,” believes Alexander Neuhuber. “Developments begin in the States, move to the UK, then Germany and then out to other European countries.”
Austria’s position as gateway to the east is fuelling interest from international investors. Although there is still little commercial property investment in strict terms, there has been much activity in related sectors. Russians are buying up villas on the outskirts of Vienna with their trademark suitcases full of dollars; German investors are buying up Austrian companies by the handful, which involves property investment by proxy; and other European companies are investing in joint ventures with Austrian interests in order to create Eastern European headquarters, for example.
More property investments are expected to follow. German buyers are now showing strong interest, especially the open-ended funds, with Dutch, Belgian, Swedish and British buyers not far behind.
The opportunity to acquire the 14,900 m2 Galaxie office tower was one of the prime attractions for CGI’s open-ended Haus Invest fund when it agreed to buy MEPC’s European portfolio in March. Matthew Olley of Weatherall Green & Smith, which advised CGI, says: “It is very difficult for outsiders to get into the Vienna market and CGI had been looking for some time.”
The price it agreed remains wrapped up in the £185m CGI is paying MEPC for the entire 17-property portfolio. Local agents point out that attaching any meaningful yield to the building is difficult, as around 20% of the space is unoccupied. The location, at Praterstrasse 31 in the Second District, is outside the ring, but still considered a quality address.
One tax law has changed recently to make investment harder for Austrian companies: it used to be possible to keep profits from property investment for 10 years, and to invest this sum elsewhere. Now an investor can only deduct costs from investment into the same building and only 10% can be deducted as depreciation.
Today’s low yields have come down from a high of more than 10% in the mid to late 1980s, when “most of these properties were in bad condition”, comments Alexander Neuhuber at DTZ Neuhuber. They could be bought for DM 300 per m2, which was very cheap by German standards. Today, capital values for prime office space are between AusS 35,000 and AusS 50,000 per m2.
Neuhuber judges that the investment market will pick up during the rest of 1996 and 1997 as a general economic upswing gets underway. There is, he suggests, a willingness for the government and the local Viennese authorities to encourage property investment, but they are unable to frame any legislation to achieve this.
What has changed over the past decade is that investors are now more serious and long term, Neuhuber believes. “In the 1980s there were a lot of gamblers who wanted speculative gains. Now there are more real investors who are interested in long-term performance. The mentality has changed.”
The small amount of commercial property which comes onto the market is generally snapped up by the local institutional investors.
“These investors are active at the moment, partly because they see membership of the EU as a positive sign,” says agent Max Huber. He deals with many émigré Austrians who moved to Canada following the Soviet invasion of Czechoslovakia in 1968. Some of them are now interested in re-investing in their homeland, as are Croats and Slovenians who have emigrated from their former lands. Huber also puts faith in the EBRD to inject funds into Austria, even if indirectly.
In the end it is the low yields of Austria which dissuade investors most forcefully. The few signs of life in international transactions are minimal, but increasing. The sale of the Galaxie building is seen as a breakthrough point in the market, and Normura’s part-funding of Donau City is a further signal that Vienna’s (and Austria’s) time is nearly come.
The Donau City scheme comprises a 90,000 m2 mix of office, retail, entertainment and residential space sitting between the river Danube and the UN complex. It will compete with the other major development planned for the city, the Wien Mitte development, envisaged to rise up from the corner of Landstrasse and Umgebung in the first district.
While aiming at roughly the same markets in terms of office occupiers, the two are widely different in style. Donau City has begun building on its 17.4 ha site, for one thing, having built a huge plate over a stretch of motorway which could not be diverted. The first stage of the scheme will be an 18,000 m2 office/retail building – Andromeda Tower – to be followed by further offices, restaurants, apartments, possibly a department of Vienna University and – even more speculatively – the Guggenheim Museum. This last feature has been pushed by the developers for its high-profile trophy aspect, but the Guggenheim is reputedly having second thoughts and Vienna observers are now doubtful of its success.
Donau City is a co-financed scheme between the City of Vienna, Bank Austria and Japanese bank Nomura. The Japanese involvement is a surprise, given the relative lack of foreign funding in the city, but Japanese tourists and business people are quite a feature of Viennese life today.
A new $150m five-star hotel, the ANA Grand Hotel Vienna, opened this year in the centre of the city, owned by All Nippon Airways. Other hotels provide Japanese satellite TV in their rooms.
Wien Mitte, meanwhile, is still on the drawing board. Its aim of building five slim towers up to 67m has to be debated further by local planning authorities, but the intention is that the 90,000 m2 of space they would contain will be split between 45% office space, 30% residential and 25% per cent retail. Building is due to start any time between 1998 and 2001.
What the two schemes have in common is that they are both speculative: no pre-lets have been recorded for either, and in the current market, no-one is holding their breath waiting for them.
“Wien Mitte is a very interesting project,” says Alexander Neuhuber at DTZ Neuhuber. “It’s very central and has great access but because it’s in the inner city there are a lot of sensitivities. The project will cost AusS 1bn and it will be almost impossible to pre-let. That never really happens here, you have to build to a risk of 95%.”
Donau City, meanwhile, benefits from investors with “deep pockets” says Neuhuber. With total projected costs of AusS 15bn, they need them. “They’ve recognised that as long as it stays a theoretical project nobody will take it seriously, so they have started.”
Richard Lemon at Jones Lang Wootton points out that, with a total area of 365,000 m2, Donau City is bigger for Vienna (in relative terms) than the Docklands development is to London. He is critical of the developers, WED AG, for their blasé approach to the scheme: “There has been so much bad press about the amount of local government subsidy the scheme is getting and the taxpayers resent it.”
|
ALIGN=”CENTER”>Vienna investment transactions |
|
ABC Aspernbruckengasse, 2nd District 7,100 m2 office investment sold in March 1996 by Group Pierre Première to Bank fur Arbeit und Wirtschaft, at a price believed to reflect a net yield of 6%. Galaxie Haus, Praterstrasse 31, 2nd District 14,900 m2 office investment sold in June 1996 by UK property group MEPC to German open-ended fund MEPC. Part of a £185m portfolio of 17 properties sold at an initial yield of around 7%. DTZ Zadelhoff and Jones Lang Wootton advised MEPC, while Weatherall Green & Smith acted for CGI. |
|
ALIGN=”CENTER”>VIENNA OFFICE LETTINGS |
||||
|
Building |
Tenant |
m2 |
AusS/m2 |
Date |
|
Mobil Bldg, Schwarz Pl |
Giro Credit |
8,000 |
200 |
Q2 1995 |
|
Basler Burozentrum |
Oracle |
5,000 |
– |
Q1 1995 |
|
Basler Burozentrum |
Austrian Mobile Telephones |
5,000 |
– |
Q4 1995 |
|
Storchengasse |
AT&T |
3,200 |
120 |
Q4 1995 |
|
Concorde Business Park |
Stelrad |
3,000 |
160 |
Q3 1995 |
|
Kelsenstrasse |
Ö-Call |
3,000 |
130 |
Q1 1996 |
|
Heiligenstädte Lände |
Ö 3 |
3,000 |
– |
Q1 1996 |
|
Aspernbruckencarre |
SDS |
2,000 |
180 |
Q2 1995 |
|
ALIGN=”RIGHT”>Source: Richard Ellis |
||||
