Investment Property Report 2023

We stand for Substance

Investment Property Report Vienna |2023

We stand for real estate.

Introduction

In theory, long-term oriented investors appear to be following a reaso- nable approach: No market will generate constant growth, temporary price declines are perfectly normal, and good products will always reco- ver in the foreseeable future. Developers and investors, together with the investment property market as a whole, are witnessing the first time in ages when prices are not always rising. The normal market cycle has been overstressed by eco- nomic weakness, uncertainty over the possible negative effects of the energy transformation, significantly higher interest rates and endless political manoeuvring over the indexing of benchmark rents, and these factors have been responsible – to varying degrees – for a decline in square metre prices. This situation is undoubtedly challenging for many market participants, but is no reason for a fundamental re-evaluation of the investment pro- perty market. These properties are basically healthy, and all signs point to excellent value growth over the long term: Vienna is growing and cen- tral locations will not automatically represent an increasingly important condition for apartment seekers. High construction costs are driving the prices for new construction, and high inflation combined with negative real interest is, perhaps, the best argument for a substance-oriented asset class like investment property. It is, therefore, likely that the current market development is a temporary phenomenon and today’s declines will be more than offset during tomor- row’s real estate cycle.

Michael Ehlmaier FRICS Managing Partner EHL Immobilien GmbH

Yours,

Michael Ehlmaier

Awards

The EHL Investment Property Specialists – We stand for high values We are committed to improving quality and expertise in the real estate sector. Our responsible interaction with partners and customers has been recogni- sed many times with awards both inside and outside the branch. We stand for social awareness as the basis for our ethical actions and see it as our mission to anchor these values as a member of the most important real estate associa- tions.

Austria’s Leading Companies

EHL Investment Consulting ranked number one in the category “National Companies with over 10 million Euros of Revenues (Vienna)“ in the Austria’s Leading Companies (ALC) competition.

EUREB

In 2023, EHL received the Real Estate Brand Award as the most valuable Austrian brand in the category ”Real Estate Brokers“ for the twelfth time and in the category “Decade’s Strongest Brand“ for the first time.

Euromoney

The prestigious financial magazine “EUROMONEY“ presented EHL with its Award of Excellence in the category “Advisors & Consultants“ as Austria’s best real estate service provider for the sixth time.

IMMY

EHL has received the Vienna Chamber of Commerce's quality award 11 times for the category “Apartment Brokerage“.

Cäsar

Each year, the Cäsar honours outstanding performance by men and women in the real estate sector. EHL has already received 11 Cäsars (also in 2021 and 2022) – more than any other company in the branch.

Leitbetriebe Austria

EHL was again certified as a Leading Company in Austria during 2022. This title is only awarded after an extensive screening process to model companies which are focused on sustainable success, innovation and social responsibility.

Great Place to Work

The EHL Group also received the Great Place to Work Award in 2023, which makes it one of Austria’s best employers. Respect, supportive communication and fairness define our interaction with customers and employees.

ÖGNI

EHL Immobilien was the first real estate consultant in Austria to be recognised by the Austrian Sustainable Building Council (ÖGNI) with its certificate for ethical management.

EHL Investment Property Specialists

The EHL Investment Property Specialists – Commitment and Expertise

The know-how of one of the leading real estate service providers in market research, property appraisal, development, consulting and apartment rentals gives you the perfect support for your investment property.

Franz Pöltl FRICS Managing Partner EHL Investment Consulting GmbH f.poeltl@ehl.at +43 1 512 76 90-300 Markus Mendel MRICS Managing Director EHL Investment Consulting GmbH m.mendel@ehl.at +43 1 512 76 90-320

Karina Schunker MRICS Managing Director EHL Wohnen GmbH k.schunker@ehl.at +43 1 512 76 90-400

Mario Schwaiger Head of Retail Properties m.schwaiger@ehl.at +43 1 512 76 90-841

Herwig Michael Peham MRICS Head of Investment h.peham@ehl.at +43 1 512 76 90-303

Verena Lehner Head of Transaction Advisory v.lehner@ehl.at +43 1 512 76 90-310

Astrid Grantner-Fuchs MRICS Managing Director EHL Immobilien Bewertung GmbH Court certified and accredited expert a.grantner-fuchs@ehl.at +43 1 512 76 90-750

Thomas Stix Certified Real Estate Trustee (Vienna University of Technology) t.stix@ehl.at +43 1 512 76 90-304

Ingrid Neugebauer MRICS Authorised Signatory EHL Wohnen GmbH i.neugebauer@ehl.at +43 1 512 76 90-418

Contents

The Investment Property Market in Vienna

Overview of Vienna’s Districts

Introduction................................................Pg. 03 Awards.......................................................Pg. 04 The EHL Investment Property Specialists.....Pg. 06 Contents....................................................Pg. 07 The Vienna Investment Property Market at a Glance......................................................Pg. 08 Market Development in 2022/23.................Pg. 09 The Economic Environment......................... Pg. 10 Market Trends..............................................Pg. 11 The Housing Market.................................... Pg. 12 Commercial Space...................................... Pg. 13 Appraisals..................................................Pg. 14 Construction Management.......................... Pg. 16 Facility Management.................................... Pg. 19 Round Table: Sustainability..........................Pg. 20 References.................................................Pg. 24

1. District Innere Stadt..............................Pg. 26 2. | 20. District Leopoldstadt | Brigittenau.Pg. 28 3. District Landstraße...............................Pg. 30 4. District Wieden....................................Pg. 32 5. District Margareten..............................Pg. 34. 6. District Mariahilf...................................Pg. 36 7. District Neubau....................................Pg. 38 8. District Josefstadt................................Pg. 40 9. District Alsergrund................................Pg. 42 10. | 11. District Favoriten | Simmering........Pg. 44 12. District Meidling...................................Pg. 46 13. | 23. District Hietzing | Liesing...............Pg. 48 14. District Penzing.....................................Pg. 50 15. District Rudolfsheim-Fünfhaus..............Pg. 52 16. | 17. District Ottakring | Hernals.............Pg. 54 18. | 19. District Währing | Döbling...............Pg. 56 21. | 22. District Floridsdorf | Donaustadt...Pg. 58

Data Sources

The data for this EHL Investment Property Market Report was compiled by the EHL Research Department, in part with the use of basic data from IMMOunited, unless indicated otherwise. The average apartment rent by district was based on the data for new rentals in 2022 (first-time occupancy and rental of existing space) which are subject to the partial application of the Austrian Tenancy Act (“Mietrechtsgesetz”) for properties built after 1945. Other important data (demographic data, distribution of space in the districts, income, population forecasts) were supplied by Municipal Department 23 (Economics, Labour and Statistics) of the City of Vienna or drawn from the Statistical Yearbook of the City of Vienna, Issue 2023.

The Vienna Investment Property Market at a Glance

Market volume

Number of transactions in investment property shares

Transaction volume in EUR million*

Number of transactions in investment properties

0 100 200 300 400 500

1.000 1.500 2.000 2.500

0 500

*Investment properties + investment property shares

The included data are based on transactions recorded in the real estate register up to 2022 (asset deals/share deals). Differences to previous years can result from subsequent registrations.

Investment property market by buyer

Investment property market by transaction volume per property

• 1 %

• 9 % 6 %

16 % • 21 %

18 %

• 11 % 9 %

15 % • 17 %

• 20 % 14 %

81 %

29 % • 33 %

Bold 2022/Light 2021

>10 M EUR 6–10 M EUR

4–6 M EUR 2–4 M EUR

1–2 M EUR <1 M EUR

Foundations & private persons Project developers

Banks & insurance companies

The included data are based on transactions recorded in the real estate register up to 2021 (asset deals/share deals). Differences to previous years can result from subsequent registrations.

Investment property market yields in the Vienna districts

4 %

3 %

2 %

1 %

0 %

Source: EHL Market Research | Q2 2023

Market Development in 2022/23

Rising interest rates, tougher times

The lengthy upward trend on the investment property market was interrupted by the sharp trend reversal in interest rates. In this increasingly difficult environment, prices declined in part for the first time in more than ten years.

The investment property market in Vienna was faced with difficult dynamics in 2022 and the first half of 2023: a weak economy, the decline in potential condominium buyers that followed the massive tightening of financing requirements for private apartment purchases, an expected increa- se in investments to meet the future ESG taxonomy criteria and, above all, the fundamental change in the ECB’s interest rate policy which drove finan- cing costs and the yield expectations of potential buyers to new heights. In contrast to the various crises in earlier years – key word: COVID-19 – this time, the market was able to digest this combination of negative factors without a loss. A comparison of 2021 with the second half of 2022 shows price declines of five to 15 per cent on average, whereby the mark-downs in weaker areas were substantially higher than at good or very good locations. The first months of 2023 brought a continuation, but in somewhat weaker form, of this downward trend. The price consolidation was accompanied by a slight decline in the transaction volume. It was, however, not fully reflected in the data for 2022 – the transaction volume declined to EUR 2.2 billion (minus 8.3 per cent compared with EUR 2.4 billion in 2021), primarily due to the strong beginning in that year. The absence of a year-end rally similar to 2021 is particularly remarkable and led to a change in the transaction volume. This trend has continued

into 2023 and, from today’s point of view, is expec- ted to result in a substantially lower transaction volume. It should be no surprise that high-equity private investors and private foundations dominate the buyer side. Numerous institutional investors are restructuring their portfolios and are prepared to divest very good assets. Their new targets consist primarily of developed and extensively moder- nised properties. “Opportunities“, in particular loft extensions, are only included as part of the purchase price at very attractive micro-locations or large-scale expansion projects due to the high construction costs. Of special note is the interim shift in market activity from the centre towards the periphery: The previously dominant 1st District recorded a massive drop of 45 per cent in volu- me, and the combined transaction volume of the outlying districts (1100+) has come to match the centrally located districts (1010 to 1090) – but this situation is expected to change during the course of 2023.

Purchase prices in EUR/sqm n 8,000–14,000 n 4,000–7,800 n 2,300–6,100 n 2,000–4,500

Source: EHL Market Research | Q2 2023

The Economic Environment

There is light at the end of the tunnel

Any hopes of fast market recovery have been checked by inflation and interest rates – but the outlook is slightly more positive, at least for long-term oriented investors.

Interest rates are definitely not a trivial factor when it comes to investment property. However, even experts were surprised by the speed and scope of the approach taken by the ECB to fight the rapid rise in inflation by raising interest rates. Price increases are slowing considerably and the ECB will, hopefully, substantially reduce the pace of its interest rate hikes. For the investment property market, interest rates still pose the gre- atest challenge for the branch – at least over the medium-term.

these developments, there are reasons to expect the ECB will continue to raise interest rates at a moderate pace and end these activities in the second half of 2023. The investment property market – as well as the real estate market as a whole – has been generally cautious given the uncertainty over future interest rate developments. There are, however, grounds for optimism due to the continuing interest in top properties within the beltway and, above all, in the 1st District. These properties can draw enough potential buyers who are perhaps looking for a unique opportunity to upgrade their portfolios. The stabilisation of market prices is also expected to support the resumption of normal transaction activity in the broader market for “standard pro- perties“ at average locations.

„Debt financing is often impossible to explain “

Investment property traditionally generates little regular cash flow but does produce steady value growth, and the increase in interest rates has posed a challenge for some owners. The debt-fi- nanced acquisition of investment property is often impossible to explain at the present time: Interest expense is usually higher than rental income, and banks are demanding higher equity ratios and faster repayment for new loans. This constellation has led to a substantial reduction in transaction activity on the investment property market. In particular, the sale of investment properties for the short-term realisation of value appreciation has virtually come to a standstill. Optimism is, however, still justified over the long-run because the ECB is not only countering the high inflation with interest rate hikes but, as “collateral damage“, has also brought macroeco- nomic dynamics under pressure – and, as can be seen from the Credit Suisse debacle, banks can also be faced with enormous challenges. In view of

Franz Pöltl FRICS Managing Partner EHL Investment Consulting GmbH

Market Trends

The equity hour

Debt financing for investment property has become difficult to find and rather expensive – but for high-equity investors, price declines and negative real interest make today’s market even more attractive.

Vienna‘s investment property market may be difficult this year, but it also holds particularly good opportunities for certain market players. Investors who financed their acquisitions primarily with debt in the past are faced with a climate that is not very attractive, while the situation for high-equity buyers is completely different. The traditional function of real estate, in general, and of investment property, in particular, as nearly perfect protection against inflation has become dramatically more important since the start of the war in Ukraine. Investors who can draw on sufficient equity to realise acquisitions with no or only minimal debt benefit from several important factors: Transactions are currently possible at more favourable terms due to price declines that typically range from 5 to 15 per cent of the previous record highs, while the sharp rise in inflation has led to clearly negative real interest and, due to indexing, also to a steady increase in yields. And last but not least, the market is seeing more and more investment properties tendered by owners who had never thought of selling only a short time ago. Austrian private investors and private foundations, in particular, are increasingly sounding out opportunities to develop and expand their portfolios. Their main focus is on properties at central locations or top micro- locations in the outlying districts. Here, potential buyers tend to act quickly instead of waiting for further but uncertain price declines and possibly missing out on a unique opportunity. The approach for average locations is more wait-and- see, but this situation will change quickly when

the interest rate cycles end and the price level stabilises.

„Buyers’ interest will return quickly when the interest rate hikes end“

The market also holds opportunities for developers – but only when value-increasing measures are involved. Simple property turnovers and superficial improvements are not enough to generate an earnings potential. In contrast, developers who refurbish and modernise properties at good locations in line with ESG principles can produce high-quality living space that covers the renovation costs and brings a very respectable return on investment for future sales.

Herwig Michael Peham MRICS Head of Investment EHL Investment Consulting GmbH

The Apartment Market

Rental units: Growing interest in existing flats

New apartment construction will be substantially lower than demand, at least into 2026. The interest in existing apartments available for rent is therefore high and will create added benefits, above all, for average locations.

The construction boom in previous years led to record numbers of new apartments entering the market in 2021 and 2022 and largely offset the structural backlog in Vienna. Completions will be relatively high at 15,900 units in 2023, but the supply of new space will then drop significantly. Estimates for project starts and issued building permits indicate that this trend will continue at least into 2026. The number of apartments ente- ring the market will be limited to roughly 12,000 in 2024 and decline further to only 7,500 in 2025. This is primarily attributable to the postponement of new construction projects in urban develop- ment areas, but also reflects a substantial reducti- on in vacant site projects and loft extensions. Although this development appears to be pro- blematic for the apartment market as a whole, it brings good news for existing stocks. The oversupply of units still expected by many market players in 2022 will definitely not materialise and, consequently, the timespan required for rentals will also decline.

subsequent sale in properties that already meet future ESG obligations represent a very promising exit strategy. In summary: Investors in this asset category have a number of challenges to master in the coming years – key words: energy transition and ESG – but sale or rental should not pose a real problem. Full rental – or a tenancy conversion strategy and the sale of units in older properties – will be easy in this market environment.

„The shortage of rental apartments is already visible “

The shortage of rental apartments is slowly becoming visible. In contrast, the effects on condominiums will be delayed because of the sharp drop in demand caused by the difficult financing situation. The decline in new constructi- on will, however, improve the outlook for the sale of separately marketed condominiums in invest- ment properties. The conversion of tenancies and

Karina Schunker MRICS Managing Director EHL Wohnen GmbH

Commercial Space

Ground floors: From problem zones to promising locations

The demand for commercial space in older buildings has increased substantially in spite of the economic crisis. Moreover, the lack of rent control regulations in this area supports higher cash flows and better yields for investors.

An article in a real estate magazine caused ripples across the branch in mid-March: The Vienna Chamber of Commerce reported a “rush on vacant retail outlets in Vienna’s ground floor zones” and indicated that these areas have been completely resistant to corona. To be specific, demand rose by 60 per cent ye- ar-on-year in 2022 and, according to the Cham- ber of Commerce, new locations were found for roughly 300 businesses. The increase was particularly strong in the inner city districts, with demand coming mainly from the retail trade and gastronomy – two branches that are faced with a difficult market environment. This report may seem surprising at first glance given the existing business climate, sluggish economy and visible decline in real purcha- sing power. However, a closer look provides an obvious explanation for the anticyclical boom in ground floor retail space.

property owners is also related to the higher cost of capital and the resulting focus on stable yields. In this respect, commercial space usually outperforms apartments. The relatively good de- mand situation – in spite of the difficult operating conditions – leads to expectations that vacancies will decline as the economic situation improves and higher rents will again be possible.

„Commercial space generates higher stable yields “

The increase over 2021 can be easily explained by weaker demand during the pandemic. Rising demand is now faced with a much smaller supply: Many former retail outlets were adapted for al- ternative uses like warehousing, offices or Airbnb rentals during and after the corona crisis. This re- duction in space was compounded by the routine loss caused by demolition and new construction.

Mario Schwaiger Head of Retail Properties

The transformation of these former problem zones into promising locations for investment

Appraisal

19th Century buildings: Dynamic trends in appraisal

The rapid increase in interest rates, high construction prices and the investments required to improve sustainability have a substantial negative effect on valuation results.

A central task for real estate appraisal is the best possible mapping of the market in valuation results. Appraisers calculate not on the basis of hope, but objectively according to facts. Nevert- heless, the valuations of 19th Century investment properties in Vienna rose steadily to new record highs up to the previous year. This trend came to an abrupt end in mid-2022: A combination of negative factors led to a consider- able decline in valuations during 2023. Although statistics only now point towards a downward trend, the increase in inflation beginning at ye- ar-end 2021 was the first warning signal. The tide then turned completely with the start of the war in Ukraine, supply chain problems, rising const- ruction costs and the continuing cycle of interest hikes by the ECB.

for a major part of the statistical minus.

The lower number of transactions also has con- sequences for valuation procedures. When only a limited number of realised prices for comparable properties are available, financial and business groundwork becomes more important. The income approach is routinely used for existing buildings that are planned as long- term investments. The yield and square metre price are key indicators for the market and also establish the basis for the valuation approach. Rising interest rates have a two-fold effect: on the one hand, through higher financing costs and, on the other hand, in the form of the higher yields expected by potential buyers. Inflation, in turn, leads to value growth through rising income, while higher construction prices have a negative effect through the increase in maintenance and renovation costs.

„The limited number of transactions make valuation more difficult “

The effects are demonstrated most clearly by the decline in transaction statistics. Roughly 90 investment properties or property shares were sold in Vienna during the first quarter of 2022, but the number of transactions dropped by nearly two-thirds to 34 this year. The average square metre price fell by almost 10 per cent year-on-year – with a range of up to minus 30 per cent. However, this situation looks more dramatic than it really is because prime properties are sold much less frequently than buildings at average locations or with other deficiencies – and that is responsible

Astrid Grantner-Fuchs MRICS Managing Director EHL Immobilien Bewertung GmbH Court certified and accredited expert

Appraisal

Maintenance costs rose by more than 10 per cent from the first to the fourth quarter of 2022 alone. The building owner is responsible for carrying these routine costs, which are then deducted from annual gross revenue. A further challenge can be found in the ever-in- creasing sustainability requirements on buildings, which also cover investment properties. Meeting these requirements will be expensive, but one thing is certain: As long as various issues invol- ving construction and rental regulations remain unanswered, the valuation of the necessary measures is connected with great uncertainty. It is, however, clear that investments in sustainabi- lity measures will ensure a substantial increase in value.

ments at popular locations with appropriate quality.

Gamechangers at a glance The main factors that currently lead to changes in the valuation of investment properties: Rising interest rates: Higher financing costs and yield expectations by potential buyers

High construction costs: Increased maintenance and refurbishment costs

ESG & sustainability: Investments are required, but the legal frame- work unclear Decline in new construction: Better outlook for condominium sales over the medium-term

„Investments in sustainability are a source of value growth “

The above-mentioned higher yield expectations of potential investors lead to lower fair values in all market segments, but the extent of the decline differs widely depending on the quality of the location. Properties within the beltway or traditionally higher quality locations like the 13th, 18th and 19th Districts will, from our viewpoint, be faced with lower yield discounts than other areas in Vienna. A different valuation approach is applied to de- velopment projects where realisation is planned through the sale of condominiums. In these cases, the appraiser usually prepares a project calculation that compares the expected sale pro- ceeds with the total project costs. At this point in time, rising construction and financing costs are contrasted by weaker demand from potential buyers. The development of prices will, therefore, also be highly dependent on location and quality. For development properties, the spread between properties with different location qualities is an even more important factor for valuation: On the one hand, certain projects are impossible to appraise under the prevailing framework condi- tions while, on the other hand, reasonable project results can very well be estimated for develop-

High inflation: Increase in rental income, “devaluation“ of debt

Construction Management

“Decarbonisation“ has become a serious issue The far-reaching improvement of ecological sustainability will be the major technical and capex issue for investment properties in the coming years. And the financing for these investments can only be managed with timely planning and precisely defined priorities.

When it comes to the sustainability of investment properties, there are more open and answered questions. But one thing seems absolutely certain: Extensive ecological improvements are inevitable. The preparation of a property-specific catalogue of decarbonisation measures can no longer be delayed – in particular because careful planning can play an important role in addressing these major technical and financial challenges and, optimally, with an increase in value. Many different options are available, but implemen- ting all theoretically possible climate protection measures is neither necessary nor economically feasible. The overriding goal is to set clear priorities – “first things first” is the most important rule for a sustainability strategy in existing buildings that is also intended to be economically successful.

effective and cost-efficient measure. Taking all options into account (where possible) – in other words, improvements to the basement ceiling and the ceilings of undeveloped lofts or loft construc- tions – can reduce heating energy requirements by up to 80 per cent. l Basement ceiling: Optimising the thermal insulation over the basement is almost always possible from a construction standpoint. The percentage of heating requirements that can be saved by insulating the basement ceiling depends on various factors, for example the thickness and type of the insulation, the size of the basement and the building/ceiling construction. As a rule, insulating the base- ment ceiling can cut heating requirements by roughly 5 to 15 per cent – and, depending on the construction and materials, the costs range from EUR 80 to 120/sqm. l Roof: It is a well known fact that heat rises. The heat loss through the roof or ceiling in an undeveloped attic can be significant. The most effective insulation is, of course, the development of this area. If this is not economically feasible, conventio- nal insulation can be a cost-efficient method. Costs of EUR 50 to 80/sqm to insulate the top floor ceiling can reduce heating require- ments by 10 to 20 per cent.

„Setting clear priorities is essential “

The development of a cost/ benefit optimised sustainability plan for an investment property should start with an analysis of the most import- ant opportunities for improvement. Decisions for or against certain investments should, in the end, always be based on the specific location condi- tions.

Thermal insulation

In 99 of 100 cases, the reduction of energy consumption with better insulation is the most

Construction Management

Sustainability in real estate

Economy

Ecology

Social

• Cost efficiency • Value appreciation • Reduction of operating costs • Use of durable materials • Sustainable building operations

• Energy efficiency • Minimisation of heat loss • Renewable energies • Resource conservation • Water efficiency

• Health and safety • Accessibility • Comfort and quality of life • Responsible actions • Urban gardening • Meeting zones

• Greening • Recycling

framework materials, good window insulati- on provides effective protection against the overheating of living areas during the summer months. These typical building shell weak spots can be corrected with modern glass products – like triple-pane insulating glass or vacuum glass. High-tech products can also significantly improve the thermal properties of antique box windows without changing their appearance. The replacement of the interior or exterior windows is often sufficient – but the vacuum glass must always be on the inside of the antique box windows frequently seen in Vienna. Upgrading the windows can improve energetic performance by up to 10 per cent.

l Facade: The subsequent installation of insu- lation on structured, historical facades is an expensive and technically difficult venture. Interior insulation can be an alternative, but it reduces the usable space and heat bridges normally remain. Moreover, damage can result from condensation within the walls. Many of these disadvantages can be eliminated by the careful installation of modern systems, but higher costs are the re- sult – and the rooms will still heat up during the summer months. The costs for exterior insulation with a thickness of 20 cm range from EUR 110 to 140/sqm depending on the structure of the facade. Interior insulation frequently involves more complex technolo- gy, which means higher costs for the insu- lating materials depending on the building. However, installation can proceed without a crane and the expensive, time-consuming restoration of the facade.

Sun protection

The prevention of summer overheating will not produce dramatic savings, but the cost-benefit ratio is very good. Exterior shading can make the purchase of an air conditioner unnecessary: Pre- venting the purchase alone can reduce costs, but if not, at least cooling requirements will decline.

l Windows: Poorly insulated windows are a source of high energy loss as well as “energy

guzzlers”. In addition to preventing heat loss with thermally improved glazing and

Construction Management

Modernisation or replacement of heating systems

Greening and redesign of inte- rior courtyards

Heating the interior rooms is responsible for roug- hly 80 per cent of household energy on average, while a further 10 per cent is required for warm water preparation. An efficient heating system that uses renewable energy sources can signifi- cantly reduce primary energy consumption – and also cut CO2 emissions by at least two-thirds (depending on the initial values and the heating system). The combination of several systems (e.g. geothermal with solar power and heat recovery) can lead to even better results. Planning for the conversion from fossil heating systems to a central, more sustainable system is, therefore, essential. Alternatives include air-air or air-water heat pumps, geothermal energy or district heating. Solar thermal technology and photovoltaics can, as a rule, make an additional contribution or improve the ecological quality of the primary heating system. For technical reasons (limited space, access roads, statics etc.), many advantageous alternatives are not possible or economically not viable. In order to cover electricity requirements – e.g. for a heat pump – the installation of photovoltaic equipment on the roof is recommended and, in particular, generates added energy revenue during the summer months. Solar thermal energy is a practical combination alternative for heat generation. The combination of solar thermal technology and a conventional heating system can normally be configured so the solar compo- nent will cover warm water requirements and the heating system will only be activated when additional energy is needed. A ventilation system with heat recovery contribu- tes to energy efficiency just the same as a less expensive wastewater heat pump. Other options to consider from a sustainability (and partially also from a cost) viewpoint include the use of rainwater for green areas and the recycling of process water.

Rainwater management and the moisture stored through greening as well as enlarged seepage areas are a counterpoint to urban heat islands and tropical nights. Greening reduces the heat build-up in a building and, where light conditions, temperature and humidity as well as air circulation and comfor- table interior temperatures are also considered, also transforms ecological measures into a feel-well factor.

„ESG measures can create added value for users “

Many inner courtyards have plenty of available space for gardening. Cool inner courtyard faca- des routinely receive little attention but provide a welcoming climate for a trellis as support for ground-based climbing plants. Additional greening is not only a source of cooling and natural shading for the building, it creates high-quality open space and interactive areas for residents and, in that way, strengthens social interaction.

Multiple building measures

The possibilities to achieve decarbonisation with projects at the individual property level are limited or inefficient and, consequently, measures that cover multiple buildings are necessary in the areas of heating, cooling and warm water. Sample pro- jects are few, but very successful and underscore the potential for cooperation at the housing block level. In many cases, the use of sustainable energy sources is only possible with this multiple buil- ding approach and it almost always significantly improves cost efficiency. The main problems here are not the technical challenges, but legal issues and the fair reconciliation of interests between the various property owners.

Facility Management

Exemptions from benchmark rents

According to the Austrian Tenancy Act (“Mietrechtsgesetz”), benchmark rents apply to all properties built before 1945. That may be true, but there are (several) exceptions to this rule.

The benchmark system forms the basis for the full application of the Austrian Tenancy Act, which applies to all properties built before 1945. But in contrast to the prevailing opinion that these rules are set in stone, there are a number of exemp- tions. A review by the facility manager can identify potential ways to avoid the benchmark application and to rent the entire property or individual apart- ments at an appropriate rate. The most important cases in practice are: l Building sections added after 1945: This exception from benchmark rents is well known and normally covers developed lofts and subsequently erected top floors. l No or only minimal apartment use: If an apartment is used entirely or primarily as an office, business premises or medical practice. l More recent building permits: Also applicable to older buildings which required new cons- truction after 8 May 1945 (usually as a result of bomb damage). l Historic preservation: If a building falls under historic preservation regulations and the owner has invested “significant” equity in its conservation after 8 May 1945. l Usable space over 130 sqm: Category A or B apartments with over 130 sqm of usable space in cases where the renter has not re-let within six months after vacancy to a person who is legally entitled to enter into the lease. Impro- vement project extend this period to one year.

Under other circumstances, rents may also be defined without restrictions (full exemption from the Austrian Tenancy Act): l Hotel, garage and logistics: Rental in connec- tion with the operation of a hotel, garage, trans- port, forwarding company or warehouse. l Business premises leased on a temporary basis up to six months. l Secondary residences: Category A or B apart- ments can be let as secondary residences at freely established rents for up to six months in connection with job-related relocation. Typical cases are student transfers for individual se- mesters or limited job-related stayovers in a city. l Vacation apartments: Sometimes slightly tricky, but when the tenant has a different primary residence and does not work in Vienna, the owner is on the (relatively) safe side. l Small investment properties: Buildings with no more than two independent apartments or business units (apartments in later loft exten- sions are not counted). One important note: The exemptions from the full application of the Austrian Tenancy Act are legally complex, and expert legal advising is absolutely essential.

Roundtable

Opportunities for sustainable investors

An expert roundtable at the EHL headquarters: Franz Pöltl, Managing Partner of EHL Investment Consulting, Martin Prunbauer, President of the Austrian Building and Landowners Association and Kaspar Erath, Chairman of the Association for the Revitalisation and architectonic Upgrading of Vienna’s 19th Century Buildings together with Moderator Thomas Brey.

The prices for investment properties are under pressure from the widespread increase in interest rates. But the long-term perspectives for these buildings are still intact – assuming sustainable management – and, for strategic rea- sons, may be even better than several years ago, to summarise the experts at the roundtable discussion on Vienna’s investment property market.

intensively management and continue to develop. However, investments in these properties are not really attractive for the Vienna Insurance Group right now because of the comparatively low yields. Due to legislators‘ possibilities to influence rental prices and indexing rules – this subject was recently openly debated in the form of a cap on rental price increases – investments in these properties as pro- tection against inflation could also be questioned.

The atmosphere was definitely better when we last met. Have the developments in 2022 and 2023 made invest- ment properties less attractive as an asset category or are these problems only temporary? Christine Dornaus, Member of the Management Board of Wiener Städtische: Our company is very proud of the investment property portfolio we have built up over 100 years, a portfolio that we

financial situation will quickly become unbalan- ced. Most of these properties were not inherited, but acquired and financed, at least in part, with debt. Even with indexing, many investors are fin- ding it difficult to cover the higher interest costs. Many of them wouldn’t survive without indexing, and bankruptcy scenarios could be the result.

That sounds like investment property is more or less a hobby.

Martin Prunbauer, President of the Austrian Building and Landowners Association: It’s a fact that owning an investment property also has emotional aspects for private building owners, and a significant number of these property owners don‘t see this commitment primarily as a way to maximise short-term yields but as a long- term investment in real values for coming genera- tions. But calling this a “hobby“ is, of course, out of the question: An investment property in Vienna has always generated sustainable earnings – at least until now.

Can a one-time indexing suspension really have such dramatic consequences?

Why “at least until now“?

Prunbauer: Any suspension or reduction of indexing would dramatically change the situation. Until the regulations for decarbonisation and, above all, the related financing are clarified, we can’t be sure that investment properties can be sustainably managed in the future. That’s why it was so import- ant to prevent the so-called rental price cap. „ Without indexing, many investors won’t be able to survive. Franz Pöltl “ Kaspar Erath, Chairman of the Association for the Revitalisation and architectonic Upgra- ding of Vienna’s 19th Century Buildings: All this talk isn’t really logical. Indexing must be the normal situation and, at best, can only cover part of the cost increases facing investment property owners. Maintenance costs are rising faster than the CPI, not to mention the soaring interest on debt financing. Franz Pöltl, Managing Partner of EHL Inves- tment Consulting: This is something we need to talk about because the rising costs for loans – interest and principal – must be covered by a corresponding increase in rental income, or the

Christine Dornaus is a member of the Managing Board of the Vienna Insurance Group, one of the leading Austrian institutional real estate investors.

Erath: You need to look at the initial position. Even after indexing, the benchmark in Vienna is only 6.67 euros. If I can’t add a mark-up for the location – and that is frequently vetoed with pseudo arguments by the arbitration boards – rental is simply no longer profitable. The only alternative is conversion into tenancies and sale, but then no one should wonder when the supply of rental units is steadily declining and there are

30 potential tenants for a single apartment.

in Vienna, and I see only one reasonable solution: An owner who refurbishes his building to meet modern standards should be able to exit the benchmark system and rent at market conditions. That would represent an incentive for invest- ments in the billions. Pöltl: In fact, what we are doing is linking support for tenants to the building’s construc- tion year instead of focusing on social criteria. That helps a lot of people a little bit, but doesn’t provide the necessary assistance to people in real need.

But housing must be affordable.

Prunbauer: Cooperatives and municipalities are responsible for 60 per cent of the leases in Austria. No one can tell me that isn’t enough to provide affordable apartments for all vulnerable families. Private landlords shouldn’t be required to take on this responsibility, in part with lower rental income than the cooperative or municipal apartments that are supported with tax funds.

Would this approach also be suitable to safeguard the financing for decarbonisation?

Dornaus: It would, in any event, be an alternati- ve, as part of a revision of the Austrian Tenancy Act – like in Germany, the possibility to transfer the costs of thermal improvements to tenants. In the end, tenants also benefit from these improvements through lower energy costs. Other instruments would be subsidies, tax relief or, probably, a combination of the two because these types of cost transfers would be rather difficult to accomplish in today’s environment with benchmark rents. „ Similar to Germany, the transfer of the costs for thermal improvements to tenants. Christine Dornaus “ Prunbauer: We already have a number of tax-re- lated models at our disposal, for example one involving the deduction of partial depreciation charges. But we need to make sure owner-occu- piers aren’t left behind. As you know, this group of property owners is not really small. Pöltl: But financing isn’t the only problem. We need to know what measures will be acceptable for meeting ESG requirements – these measu- res must be technically feasible, and the timing

Attorney Martin Prunbauer is President of the Austrian Buil- ding and Landowners Association.

Dornaus: Here there are actually a number of con- tradictions. A new tenancy law that covers all rental apartments could – through the integrated control measures – also increase the social accuracy of support for disadvantaged tenant groups.

Erath: The benchmark system is generally outdated when you consider the way it is applied

must also include the availability of the required service providers. Otherwise, you can’t reliably calculate. Dornaus: We also need to urgently solve a number of problems related to rental laws. In particular, legal regulations indicate that the installation of sustainable ESG-compatible heating systems is also possible without tenants’ consent. For tenancy conversions, the unanimity principle must at least be questioned where, in the sense of balancing interests, there is no objective reason to arbitrarily prevent this type of upgrading. Included here are environmentally re- levant measures as well as areas that involve an increase in value or the improvement of residenti- al quality, for example through loft extensions or the addition of balconies. Let’s turn to the issue that ultimately counts: Where do you see investment property prices after one and a half rather difficult years? Dornaus: According to our estimates, this de- velopment will remain with us – especially in view of the steady increase in interest rates. Prunbauer: If legislators establish appropriate framework conditions, I am optimistic for the long run. The fact that negative market interven- tion like the suspension of indexing or a vacancy duty were not implemented at the federal level provides grounds for hope that, in the end, eco- nomic rationality will also prevail in the political sector. Erath: In any event, substantial equity resources will be required in the coming years, and these funds will only be available when there is a return. And only then will it be possible to preserve the supply of older buildings over the long-term. Pöltl: Over the short-term, I see a number of challenges, but am optimistic for the long-term. I expect prices will remain under pressure up to the end of the present interest rate cycle. That will be followed by a new market level which, ho- wever, will be lower than the top values recorded in 2021. In other words, we are facing a number of difficult years and the “buy, cosmetically

improve and quickly sell at a profit” business model won’t work. But Vienna is growing steadily, investment property locations are becoming more popular and the outlook for long-term inves- tors is very good. A number of potential buyers have already realised this. We are in discussions with a Swiss fund that wants to use the changed environment for market entry. I am therefore very optimistic that we will soon see a revival of the interest of sceptical investors like insurance companies in investment properties.

Kaspar Erath is Chairman of the Association for the Revitalisation and architectonic Upgrading of Vienna’s 19th Century Buildings.

References | Brokered Investment Properties

Kärntner Straße 12, 1010 Vienna

Schubertring 9–11, 1010 Vienna

approx. 3,550 sqm Rentable space Built in 1875, this corner apartment building scores not only for its splendid appearance, but also for its exclusive city centre location.

approx. 9,445 sqm Rentable space The Christinenhof on the Ringstrasse, built in 1863-65 by Ludwig Zettl, is a detached, early historical residential courtyard with an architecturally designed inner courtyard.

Schreyvogelgasse 2, 1010 Vienna Rentable space The imposing corner apartment building, built in 1894, is located in the heart of Vienna and, with its prominent location, is part of Vienna's city history. approx. 3,424 sqm

Franz-Josefs-Kai 27, 1010 Vienna

approx. 3,508 sqm Rentable space Built in 1899 and located directly on Franz-Josefs-Kai, this apartment building is in one of the most sought- after locations in Vienna's 1st district.

Favoritenstraße 39, 1040 Vienna

Mariahilfer Straße 3, 1060 Vienna

approx. 2,582 sqm Rentable space Built in 1890 by the architect Carl Holzmann, this corner apartment building is largely oriented towards the con- cepts of strict historicism.

approx. 2,772 sqm Rentable space Nine-storey apartment building from the late Wilhelmini- an period, located directly on Austria's longest shopping street and in the immediate vicinity of Vienna's city centre.

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