Expert talk: Igor Strehl provides insight into Austria's real estate market for investors and buyers

It has been over a year since central banks began combating inflation and an overheating economy by raising interest rates. While economists debate whether Europe is in a recession, one thing is evident: the climax of economic conditions has passed, marking the onset of an inevitable slowdown. In line with the cycle theory, the real estate market stands among the sectors initially impacted by this economic deceleration. This trend is visible through real estate companies and beneficiaries across the globe facing bankruptcy, while other businesses grapple with emerging financial challenges.

Each country, driven by distinct internal economic factors and regulatory frameworks, undergoes a unique path during this phase. Given this context, how might Austria's real estate market respond in the upcoming 2024? This article aims to provide insights and valuable information for individuals and potential investors looking to take part in Austria's residential and office markets.

Residential Overview

- The residential real estate market in Austria has seen some fluctuations recently, particularly with the decline in housing prices noted in Vienna. What do you attribute these changes to?

Igor Strehl: The fluctuations observed, especially in Vienna, can be attributed to several key factors. One significant influence has been the rise in interest rates, which began to impact the market around Q3 2022. This increase in borrowing costs naturally dampened demand for residential properties, leading to a decrease in prices. Additionally, the broader economic landscape, including factors like mortgage affordability, shifting preferences towards renting, and inflationary pressures, has contributed to this adjustment in the housing market.

Source: Oesterreichische Nationalbank (OeNB)

- Rising interest rates have indeed become a buzzword. Is it affecting the market as much as one might think?

Igor Strehl: Absolutely. High-interest rates directly impact mortgage affordability, as borrowers face higher monthly payments. This can deter potential homebuyers from entering the market, leading to a decline in demand for residential properties. Currently, the proportion of income required to meet mortgage installments exceeds the recommended threshold of 30%, indicating a strain on household budgets.

The recent decision by the ECB to hold interest rates steady until mid-2024 is significant for the real estate market. It provides stability in borrowing costs, which can influence consumer behavior and investment decisions. The effects of this decision are not immediate and can take time to manifest in the market.

On the positive side, forecasts for economic growth in the coming years, coupled with potentially falling property prices, could gradually stimulate renewed interest in mortgage products and property acquisitions.

- Thank you for that clarification. Another aspect mentioned is the preference shift towards renting over homeownership. Can you elaborate on the factors driving this trend, particularly in light of increasing rents and inflation?

Igor Strehl: The trend towards renting over homeownership can be attributed to several factors. Firstly, as mentioned earlier, high mortgage costs make renting a more affordable option for many individuals and families. Additionally, inflation tends to be indexed into rental prices, resulting in higher rents over time. This, combined with the potential decline in housing prices, creates a scenario where rental properties offer attractive returns on investment. While the preference for renting may dominate in the short to mid-term, the anticipation of future demand for residential property purchases remains strong, driven in part by demographic factors.

- Speaking of demographics, how does it impact the market?

Igor Strehl: The stable demographic Austrian structure gives stability and boosts confidence in the real estate market, as forecasts from Statistics Austria indicate that by 2030, the number of households will increase by an average of 0.6% per year. As you can see, this factor will be unfolding within a longer period.

- There is a feeling that fewer interesting development projects are coming onto the Austrian market. Will this trend continue?

Igor Strehl: The trend in new residential building permits is on a steady downward path from 2021 onwards. The decline in building permits will continue in the coming quarters. This is partly due to more expensive financing for developers and higher construction costs. Secondly, developers will be reluctant to add new stock to the market when prices are falling.

Office Overview

- Moving on to the office sector, what is the situation there?

Igor Strehl: The office market mirrors the residential sector in many ways, yet it presents its own set of dynamics. Economic uncertainties, coupled with evolving trends such as ESG compliance and the demand for modern, flexible workspaces, are reshaping the office landscape. Despite challenges, the persistently low vacancy rates, particularly in prime locations like Vienna, underscore the ongoing demand for office space. In fact, the vacant office space is at a historically low level.

This demand-supply imbalance, along with inflationary pressures, is exerting upward pressure on rental prices, making offices an attractive investment option.

- You mentioned Vienna. Can you elaborate on the office space situation in the Austrian capital?

Igor Strehl: Despite the economic challenges, Vienna maintained a historically low office vacancy rate of 3.8% in 2023, indicating strong demand for rental properties. Experts anticipate further rental growth, particularly in class A and B office spaces. This demand-supply imbalance, coupled with inflation indexation, suggests the potential for sustained increases in office rental prices.

On top of that, there is an insufficient supply of new offices coming into the market this year. In 2023, approximately 50% of the office space planned for completion were pre-leased before the year end, intensifying the tension in the market. To mitigate this shortage, some transactions shifted towards pre-letting projects planned for 2024/2025. In such an environment, it would be no surprise that once the economy recovers, the office sector will be one of the real estate markets leading recovery and stabilizing rental prices. Meanwhile, the shortage of new office spaces definitely adds to the imbalance between supply and demand forces, implying that there could be a prolonged and sustained increase in office rental prices in the coming years.

Conclusion

- Finally, what recommendations would you offer to investors, homebuyers, and renters navigating this evolving landscape?

Igor Strehl: For investors, it's crucial to remain vigilant and adaptable. Monitoring market trends, financing conditions, and policy developments will be key to identifying strategic investment opportunities. Additionally, maintaining a diversified portfolio and considering long-term growth prospects can help mitigate risks.

For homebuyers, patience and diligence are paramount. Making informed decisions, staying abreast of market conditions, and exploring alternative accommodation options, such as rentals, can provide flexibility while waiting for favorable opportunities.

And for renters, flexibility is valuable. Monitoring rental rates, locking in agreements early, and considering lease options that offer agility amidst market fluctuations can help optimize housing decisions.

We at Dunaj Family Office Consulting are happy to assist you with your home purchase or your investment strategy. Contact us - our team is at your service.