AUSTRIA: An Introduction to Real Estate

AUSTRIA  

An Introduction to Real Estate 

Content  

1. Current state of the Austrian Real Estate market
2. Main hurdles for 2021
3. Potential pitfalls for foreign investors

1. Current state of the Austrian Real Estate market

The global spread of the coronavirus has left deep traces in the Austrian economy. The year 2021 will continue to be dominated by strict governmental measures. As economic activity decreased, it is feared that difficult times lie ahead for the Austrian real estate sector. However, as always, it is necessary to take a closer look:

Hospitality Market– “From hero to zero”: The hospitality industry, which had enjoyed great popularity by investors and financing banks alike, has been hit hardest. Government backed insurance schemes for international events are in place, but will only have an effect once international travel is back to normal. While there are ample opportunities on the market, banks refuse to finance acquisitions as the long-term effects of Zoom (and the like) on business travel cannot reliably be predicted.

Retail– “sold out”: The retail market has experienced major sales decreases during the lockdowns. The forced closure periods put many retail tenants in financial difficulties. Landlords are indirectly affected, as turnover based rents dropped and fixed rent tenants withheld payments. Forecasts show that retail sales space will continue to decline in secondary locations, leading to increased vacancies. Leases are expected to have shorter terms and stronger turnover-based rent elements.

Office-Market– “open for business”: Offices remain in high demand. This market segment recovered quickly with very low vacancy rates. However, the pandemic helped level the path for the technical and legal framework which allows remote working from home or elsewhere. It remains to be seen if this leads to decreased demand in office space and price adjustments in non-prime locations. Office sharing concepts are expected to regain popularity, as was the case before the pandemic.

Residential Real Estate– “no place like home”: The housing market is the most crisis-resistant, as demand for housing is less dependent on the economic situation. The pandemic did not significantly dampen the growth of this sector, in particular in and around Vienna as the city continues to grow rapidly. The ongoing low interest rates ensure a steady demand for residential ownership; banks have granted payment deferrals for existing loans. Prices continue to move only one direction: up.

2. Main Hurdles in 2021 

In the course of 2021, landlords will face two main concerns. Firstly, once government aid programmes expire, cash stripped tenants will increasingly file for insolvency proceedings and either renegotiate the rent or cease their operations altogether.

Secondly, a wave of litigation over rent reductions for the lockdown periods is expected. While landlords are mostly trying to find mutual agreements with their tenants, this will not be possible in all cases. As the case law on rent reductions has yet to evolve, this leads to significant uncertainty for both landlords and tenants.

3. Potential pitfalls for foreign investors 

Besides the COVID-19 legislation, the Austrian real estate market holds a number of legal particularities which a foreign investor should be aware of:

Acquisition of Property 

As in many other jurisdictions, property transactions typically start with a letter of intent, where the parties outline the cornerstones of the transaction and the buyer is granted exclusivity for a certain period. If no show-stoppers turn up during the due diligence phase and the valuation of the property is in the range of what had been anticipated, then the parties engage in contract negotiations. Both asset deals and share deals are common in Austria. This decision is usually driven by tax factors and by the structure which the buyer ultimately requires.

If the buyer is domiciled outside the EU, then the acquisition typically requires a permit of the foreign land transfer authority. This is regulated at province level, leading to nine different regimes in Austria. It is important to address this issue at an early stage of the transaction, in order to avoid delays at closing.

Also, restrictions apply to certain sensitive regions, in particular tourist areas. In such regions the local governments may prohibit the acquisitions of land for any purpose other than taking up primary residence. The respective permit of the local government is a precondition for recording the ownership in the land register. Again, this must be investigated at an early stage in order to avoid a costly transaction which ultimately cannot be implemented.

Ownership and other rights relating to real estate are recorded in the land register. This register is binding: if a right is recorded in the register, then it exists. If is not recorded, then it does not exist. The register also contains all documents and deeds upon which each entry is based. (These documents are a valuable source for purchase prices which have been paid in the past). The register is available online and can be accessed by anyone for a small fee. Other registers, such as the register of contaminated sites or sites presumed to be contaminated, are not binding and do not comprehensively list all properties.

Purchase agreements trigger Real Estate Transfer Tax, which is generally 3.5% (subject to certain exceptions). The tax base is typically the purchase price, but can be lower in certain transactions. In case of asset deals, a 1% registration fee is charged by the land register.

Lease Agreements 

In Austria, both commercial and residential tenants are protected by the Rent Act. The core provisions of this Act limit the landlord’s right to terminate the contract, regulate maintenance obligations and specify rent caps.

The questions if and to what extent the Rent Act applies to a particular lease is governed by a very complex set of rules. This can only be answered by persons frequently dealing with the Act and sometimes not even by them.

In addition to tenancy protection, the Rent Act contains some rules which may seem surprising, such as the landlord’s statutory right to increase the rent for commercial leases in case a change of control occurs within the tenant company.

The execution of lease agreements can trigger substantial stamp duties. The stamp duty mainly depends on the duration of the lease. For fixed term leases, the stamp duty can be up to 18% of the gross annual lease. The stamp duty is non-refundable, even if the lease is terminated before the end of the term.

Estate Agents 

Unless agreed otherwise, estate agents are entitled to a commission of three months’ gross rent in case of a lease agreement or 3% of the purchase price in case of a purchase agreement. It is advisable to conclude a written fee arrangement with the agent before entering into a lease or purchase agreement.