Weird Austrian real estate market

We started to look for a location for our first restaurant in the beginning of March 2019. We got the location by October 2019 – so, it took us around 8 months, which is forever to be honest.

What stunned me in the Austrian commercial real estate market is its strange reverse ownership nature and its inflexibility. What do I mean by that? After the Second World War Austria adopted a lot of laws to protect people who rent real estate, be it commercial or non-commercial. It became increasingly difficult for the owner to increase rent, evict the renter, make renter pay for damages and so on. The incentive behind these laws was noble, namely, to protect those who are poorer from those who are wealthier and have more leverage.

Seventy years on and what happened? The tables turned. Due to these laws, today’s renters have become de-facto owners of the real estate and demand an investment (“Ablöse”) from consequent renters for the right to take over the contract. For good commercial locations this investment can amount to 7-digit numbers. On paper this investment is for some kind of assets (furniture, equipment which is inside, ventilation), but it usually exceeds the real value of those assets by many times. How does this roughly look like?

  • Imagine Franz rented a 100 sq m commercial property in Viennese city center 20 years ago and he is still paying EUR 400 monthly for it, which is way below today’s market price, but the owner of the place cannot increase prices.

  • Franz decided he doesn’t need the location anymore, so he wants to “sell” it. So, he finds a next renter, named Josef who is interested in the location. They agree that Josef pays Franz EUR 200,000, so that Franz transfers the contract to him. On paper Josef pays the money for 5 old fridges, 2 air conditioners and 15-years old furniture, which is inside the location. But they both know that what Josef really pays for is the contract’s transfer.

  • What the real owner of the location gets out of this deal? Nothing. He cannot even increase the prices for Josef, because Josef has now the same rights as Franz.

  • Could Josef potentially avoid Franz and go directly to the owner of the place and offer him money instead, to actually buy the location? No, because the owner doesn’t have the right to sell as long as somebody is renting. The owner actually has much less rights than Franz. So, Franz has become de-facto the owner. Even though he himself at the start didn’t spend any money on actually buying the location.

This creates a situation in which renters are going bananas and ask for huge investment for the contract. Then, they hold to the location for a long time even if they don’t operate it. But since their rent is so small, they can afford to wait until the right offer comes their way. A lot of empty commercial property in the city center? Now you know the reason. A lot of old shady-looking shops about which you are wondering how they can make any money in the city center selling light bulbs and why nobody with better products can take them over? Now you know the reason.