Vienna’s premium properties, which have long been sought after as safe havens— prices have soared 72% since 2008—are giving way to more robust pied-a-terre and development markets, according to a new report from global real estate consultancy Knight Frank.
Price inflation in Vienna has slowed since mid-2014, but the U.K.’s Brexit decision may provoke a new wave of capital inflows. Increasingly, the pied-a-terre and development markets are becoming more attractive to new investors. In some up-and-coming areas surrounding the inner city districts, gross residential yields (calculated by dividing the annual gross rental income by the home price) can reach 3% to 4%, according to “Austria Insight 2016” released on Monday by Knight Frank.
The city already has one of the most robust pied-a-terre markets in Europe, with residential ownership rates amounting to around 20% (in other words, 80% of the homes in the city are rentals). There are also about 6.6 million tourists that visit Vienna each year, resulting in 14.3 million overnight stays, so the potential demand for landlords is evident.
Russian interest in investment properties in Vienna has been reined in by the falling ruble in recent years but German, Swiss, U.K., Chinese and Middle Eastern buyers are filling the gap, according to Knight Frank.
New developments are also in great demand due to a continuous housing shortage. Knight Frank estimates that between 2015 and 2017, more than 44,000 new households will be created while only 32,000 apartments will be completed in the same period.
The metropolitan area of Vienna accounts for a third of Austria’s population. In the last decade, the population of wealthy people living in the city has expanded faster than any of its neighboring northern European cities, including London. Austria’s capital has become a viable investment alternative to the German cities of Berlin and Frankfurt.
The prime district, which commands prices between €6,000 and €16,000 per square meter (about US$628 and US$1,676 per square foot) extends out from the the Innere Stadt or First District, to a surrounding ring which comprises the Second to Ninth districts and a few outlying areas including the 13th, 18th and 19th districts.
But currently, both population growth and development activity are focused on the 21st and 22nd districts (Floridsdorf and Donaustadt) which sit on the right bank of the Danube, according to Knight Frank.
Vienna is home to numerous international organizations including the U.N. and OPEC. In addition, the city consistently ranks highly for its quality of life and can compete with London and New York when it comes to culture in the form of museums, theaters and opera.
Write to Fang Block at fang.block@dowjones.com