Investment market
Prime yields on office properties in European comparison (in %)
Source: EHL Market Research | BNP Paribas Real Estate | Q3 2020
Investment Market
In contrast, all types of risks – e.g. vacancies, expiring rental contracts, sub-optimal locations or technical equipment – have been generally overrated in the current market environment, and this is leading to a substantial increase of up to 200 basis points in the yield gap between prime locations and the lower quality segments. The weak economic outlook has made developers clearly more reserved in launching new projects. Consequently, there will be a noticeable decline in office building completions during 2021 and, above all, in the following years. The supply of properties available for sale will, as a result, remain low and represent the limiting factor for the market volume. At the same time, the interest in safe investments in prime properties will be further fuelled by current expectations of the ECB continuing its low interest policy for years to come. This combination will lead to a general upward trend in prime segment prices because the difference to government bond yields is sufficiently large. There has been a noticeable shift in the distribution of buyers since the beginning of the corona crisis. The market was characterised for many years by a steady increase in transactions by international investors, primarily from Asia, but has now turned local and is influenced primarily by German and Austrian investors.
The real estate investment market and, in particular, the office property segment in Vienna have remained robust to date in spite of the corona crisis: The investment volume in the first half-year failed to reach the record 2019 level despite a series of exceptional transactions but – with a total investment volume of EUR 1.5 billion – the difference was not as significant as expected. It reflects the fact that most of the transactions were in a very advanced stage prior to the lockdown and closed during or after this period. Of special note is the high three-digit million range for several properties (Austro Tower, Quartier Lassalle). The supply remains limited, demand is driven by low interest rates From a structural viewpoint, the generally steady and substantial interest on the part of investors has changed significantly: The demand is now greater than ever before for properties with good locations and first-rate technical equipment that feature rentals to quality tenants with excellent financial standing. Buyers are prepared to accept higher prices than in 2019 for these types of properties. Prime yields are currently low at roughly 3.0%, and the strong demand combined with the limited supply of genuinely prime properties will add to the pressure on yields. The best prices will be realised for properties rented to the public sector or state-affiliated companies.
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