I OVERVIEW OF THE MARKET
In 2017, Austrian general M&A activity decreased slightly in terms of the number of transactions announced: a total of 345 statistically relevant M&A transactions with Austrian participation were reported, as compared to the 354 transactions that took place in 2016. On the other hand, the general transaction volume substantially increased from €10.7 billion in 2016 to €14.7 billion in 2017, which constitutes a 37 per cent growth. The domestic transaction volume has remained steady over the few past years.
The most active sector in foreign investments in Austria remains the real estate and construction sector, leading both in terms of the number of statistically relevant transactions (86) and the total transaction volume (€9.4 billion). The number of real estate acquisitions has more than doubled compared to 2016, both in terms of quantity and transaction volume, mainly owing to three of the five largest deals taking place in the real estate sector in 2017. From a general perspective, the demand for Austrian real estate is increasing because of the country’s generally stable political and economic framework. This increase in demand is fostered by extremely low interest rates and available financing. Even though real estate prices have increased significantly over the past few years, Austria is still considered a key place for non-speculative real estate investments. In particular the demographic development and expected urban expansion (with Vienna having been consistently ranked as one of the world’s best cities to live in) have resulted in demand that exceeds availability. Therefore, real estate investments also appear attractive to foreign institutional investors. Consistent with the past, Germany plays a key role in Austrian inbound M&A activity with: 28 per cent of all acquisitions of Austrian companies by foreign investors having been made by German investors. Another 32.6 per cent of the acquisitions were concluded by investors from other European countries.
In 2017, the largest M&A transaction was the takeover of the public real estate company BUWOG AG by Vonovia SE with a transaction value of €5,585.9m. Other key real estate M&A transactions included the The Icon Vienna, the first of three parts of the Austria Campus, the DC Tower as well as the ORBI Tower, all located in Vienna.
Despite the overall impression of increasing appetite among private equity investors, driven by notable private equity transactions, the share of financial investor-driven transactions remained almost steady in 2017 (with a slight surge from 18 to 20 transactions). In Austria itself, private equity remains mainly driven by governmental agencies and banks, and to a minor degree by institutional investors as an asset class. Insurance companies have recently gained increasing importance in the Austrian private equity market.
II RECENT MARKET ACTIVITY
i M&A transactions
Below is a short summary of four of the most significant recent real estate M&A transactions in the Austrian market.
Acquisition of BUWOG by Vonovia
The Germany-based and listed real estate enterprise Vonovia SE made a proposal to acquire BUWOG AG, an Austria-based and primarily Germany-listed real estate enterprise with a transaction volume of almost €5.59 billion. The transaction would significantly increase the size of the acquiring company as it would add approximately 50,000 real estate objects to the property portfolio of Vonovia SE. Both the German and Austrian regulatory authorities have already approved the acquisition.
Acquisition of stake in CA Immo by Starwood
U.S. investor Starwood recently acquired a stake corresponding to approximately 26 per cent in CA Immobilien Anlagen AG for a total price of € 757.9 million from Immofinanz AG, an Austrian-based and listed real estate stock corporation. The transaction, still subject to regulatory approvals and other approvals associated with a transaction of this nature, is expected to close in Q3 2018. Originally CA Immo and Immofinanz had agreed in 2016 to merge and create a property heavyweight, but the plan fell through in 2018 after pressure from an activist investor. Shortly after that, Starwood had thus launched its own bid to buy up to 26 per cent in CA Immo and up to 5 per cent in Immofinanz, which failed in the first run. However, the US firm got a second chance when Immofinanz put its stake on the bloc.
Acquisition of ‘The Icon Vienna’ by Allianz
Allianz Lebensversicherungs AG and Allianz Elementar Versicherungs AG acquired the office project ‘The Icon Vienna’ for Allianz-Group for €500 million in June 2017. The building complex with its three towers of different heights is scheduled for completion in 2018 and has a gross rental area of about 88,000 square metres.
Acquisition of Austria Campus by PGIM Real Estate
Likewise in 2017, Signa sold the first of three components of Austria Campus to PGIM Real Estate by way of a forward purchase for a purchase price of more than €500 million. The building with a total gross rental area of more than 200,00 square metres will become the new headquarter of UniCredit Bank Austria who will also be the main tenant.
ii Private equity particularities
The number and volume of Austrian private equity and venture capital funds is well below the European average. Nevertheless, transactions by private equity investors rose slightly from 18 to 20 deals in 2017 as compared to 2016. The Austrian Private Equity and Venture Capital Organisation (AVCO) also reported an increase in the private equity fundraising to €197 million (so that the fundraising is now again comparable to the level of 2012 after the significant decreases in 2013 and 2014). The allocation between private equity investors may be summarised as follows:
• governmental agencies: 36.4 per cent (2016: 100 per cent; 2015: 21.2 per cent);
• banks: 31.8 per cent (2016: zero per cent; 2015: zero per cent);
• insurance companies: 12.9 per cent (2016: zero per cent; 2015: zero per cent);
• corporate investors: 7.6 per cent (2016: zero per cent; 2015: zero per cent);
• unclassiﬁed: 5 per cent (2016: zero per cent; 2015: zero per cent);
• private individuals: 4.2 per cent (2016: zero per cent; 2015: 74.3 per cent);
• funds of funds: 1.5 per cent (2016: zero per cent; 2015: zero per cent); and
• family offices: 0.5 per cent (2016: zero per cent; 2015: zero per cent).
Pension funds (2017: zero per cent; 2016: zero per cent), academic institutions (2017: zero per cent; 2016: zero per cent), capital markets (2017: zero per cent; 2016: zero per cent), endowments and foundations (2017: zero per cent; 2016: zero per cent), other asset managers (including PE houses other than fund of funds) (2017: zero per cent; 2016: zero per cent) and sovereign wealth funds (2017: zero per cent; 2016: zero per cent) were not relevant for the Austrian private equity market.
The SME Financing Act 2017, which aims to establish a more advantageous taxation system for investors, was published on 26 July 2017. Accordingly, dividends of up to €15,000 annually are exempt from capital gains, resulting in a maximum tax relief of €4,125 per investor per calendar year. It remains to be seen whether this new legislation will have a positive impact on fundraising activities. Further, after federal elections in 2017, the new Austrian government declared in its government programme (which has political rather than legal relevance) its intention to strengthen the private equity sector as a part of its strategy to bolster the economic position of Austria including by emphasising its intention to incentivising venture capital as an overall economic strategy.
III REAL ESTATE COMPANIES AND FIRMS
i Publicly traded REITs and REOCs – structure and role in the market
While real estate investment trusts (REITs) are common to many jurisdictions, this structure has not yet been incorporated into the Austrian legal system.
Choice of company structure is highly tax driven. For the purposes of indirect real estate investments in Austria, there are available general stock corporations that operate as real estate operating companies (REOCs) (such as Immofinanz, Conwert and CA Immobilien), as well as open and closed-ended real estate investment funds. Profits of Austrian REOCs are subject to Austrian corporate income tax at a flat rate of 25 per cent. Profits distributed to investors, as far as natural persons are concerned, are additionally subject to Austrian capital gains tax at a flat rate of 25 per cent. This is the reason the majority of the Vienna-listed real estate stock corporations do not distribute dividends to their investors but rather tend to retain profits for reinvestment. Investors merely profit through the appreciation of the stock, which is subject to general market fluctuations. Therefore, certain investors consider this reinvestment policy to be a disadvantage.
As an alternative to investments in public real estate stock corporations, the legislator established a new real estate funds investment vehicle in 2003 through the Austrian Real Estate Investment Fund Act, with a view to providing tax advantages comparable to those of REITs in other jurisdictions. While shares in an Austrian real estate investment fund are not allowed to be offered on a stock exchange, they are obliged to pay out dividends upon the shareholder’s request (to the extent provided by the regulations of the fund concerned, and with certain exceptions allowing dividends to be carried forward for up to two years). The fund itself is not subject to corporate income tax; effective distributions as well as fictitious distributions of retained profits are subject to income tax at shareholder level. It is important to note that not only balance sheet profits derived from real estate, such as income from rent, but also 80 per cent of the increase in value of invested real estate is subject to taxation (even if not yet realised). For this purpose, the total asset value of a real estate fund has to be determined at least once a year by two independent experts. The related costs of yearly valuation and the taxation of unrealised profits are considered to be major disadvantages, especially if the fund is not able to generate an adequate return on investment.
ii Real estate PE firms – footprint and structure
Real estate private equity firms investing heavily in the Austrian market are currently rare. The main vehicles used for private equity funds established in Austria are limited partnerships or limited liability companies, as well as joint-stock corporations. Each of these types of entity has a separate legal personality, but partnerships are transparent for tax purposes.
However, most private equity firms active in Austria with significant investments are located offshore or are founded under laws granting private equity companies a selective tax advantage.
Since the introduction of the AIFMG, most private equity funds established in Austria qualify as alternative investment funds under this Act. The formation of an alternative investment fund requires the prior approval of, and registration with, the Austrian Financial Market Authority. Funds pursuant to the Austrian Investment Funds Act, as well as funds qualifying under the Austrian Real Estate Investment Funds Act, are not captured by the AIFMG.
i Legal frameworks and deal structures
As in other jurisdictions, real estate acquisitions in Austria may differ both in the structuring of the sale process and in the deal structure itself.
The structuring of an investment for the acquisition of property is based on various economic, fiscal and legal considerations, whereby investments may generally be structured as asset or share deals. The advantage of an asset deal is that the investor may be better aware of the transaction scope (particularly in relation to the potential tax or other liabilities of a preexisting company), whereas a share deal is generally tax advantageous as, with the correct structuring, real estate transfer tax can be avoided. This is possible, as an asset deal generally triggers Austrian real estate transfer tax at a rate of 3.5 per cent of the consideration, whereas only a transfer of at least 95 per cent of the shares in a company holding Austrian real estate is subject to real estate transfer tax. In light of this, it has become common practice to implement a share deal structure with two acquiring entities that must each acquire more than 5 per cent in the target company (e.g., a 94 per cent/6 per cent structure). Furthermore, a share deal will not result in a change in the ownership of the property itself, which means that registration fees of 1.1 per cent of the market value of the real estate may also be avoided.
Real estate acquisitions through asset or share deals are not subject to a special legislation regime, but rather to various civil, corporate, tax, stock exchange and antitrust laws. The relevant provisions on asset deals can be found in the Austrian Commercial Code, as well as the Austrian General Civil Code. Mergers, demergers and transformations, on the other hand, are regulated in the Stock Corporation Act, the Act on Limited Liability Companies as well as specific laws. Listed companies, as well as the transactions in listed companies, are additionally regulated by the Austrian capital market laws. Acquisitions by foreigners are often subject to approvals by regional land authorities (see Section IV.v).
The following legal forms are typically used as real estate holding entities and acquisition vehicles (if an Austrian entity is chosen at all):
- Limited liability companies (GmbH) offer flexibility and can be established by legal entities or by one or more individuals, who are generally not personally liable for the company’s liabilities. The minimum share capital amount is €35,000, of which at least €17,500 must be paid in. As of 2014, there has been an option to limit share capital to €10,000 (of which at least €5,000 must be contributed) for up to 10 years.
- Joint-stock corporations (AG) are legally liable entities, the shareholders of which participate in the share capital divided into shares by means of contributions, without being personally liable for the company’s liabilities. The minimum capital stock is €70,000. The ongoing legal structure costs of an AG are higher than for a GmbH. In addition, they offer less flexibility – except in relation to share transfers.
- Partnerships can be incorporated by at least two parties as a general partnership (OG) or a limited partnership (KG). The difference between an OG and a KG is that in a KG at least one partner has limited liability, whereas all partners of an OG are personally fully liable. In addition to the flexibility of partnerships (which is even greater than that of a limited liability company), their main advantage is tax transparency, which allows the direct allocation of profits and losses to partners for tax purposes.
ii Acquisition agreement terms
In Austria, there are statutory rules on warranties and damages as well as indemnities. In general, a purchaser is entitled to remediation or exchange of the deficient object in the first instance. In the second instance, the purchaser has the right to request a price reduction or to rescind the contract. Unless otherwise agreed by the parties, the warranty period is two years for movables and three years for real estate (with a period of up to 30 years applying for legal defects). The tort regime for damages arising from negligence on the part of the seller applies in parallel.
The contractual regime will seek to replace these statutory rules to the greatest extent possible and will usually exclude rescission of the agreement and limit the buyer to claiming damages, which are contractually defined and limited in scope and amount. Certain mandatory provisions may still apply and override contractual limitations and exclusions of claims, such as claims based on deceit or collusion. Caps, floors and baskets defining and limiting the amount of damage claims are generally consistent with international practice and usually determined by the bargaining power of the buyer and the seller.
Conditions precedent to closing regularly involve regulatory approvals such as merger control and the approval of regional land authorities, particularly in the case of non-EU purchasers (see Section IV.v). Additionally, conditions precedent may relate to contractual partners waiving termination rights in the event of change of control. Material adverse changes clauses are heavily negotiated but frequently incorporated into the transaction documentation.
In line with international practice, covenants between signing and closing will usually relate to limitations on the conduct of business until closing (ordinary course) and information obligations on the buyer as to business development, and usually also provide for a prohibition of dividend or other payments to the seller by the target between signing and closing.
In the event of a portfolio sale (potentially also involving multiple jurisdictions) in the form of an asset deal, typically a framework agreement governing the legal terms is negotiated. Short transfer deeds relating to each individual land plot will then have to be executed at the closing of the transaction allowing the purchaser to register the ownership with the applicable land register. These documents generally need to be notarised.
iii Hostile transactions
A hostile takeover of a public real estate company in Austria has not occurred yet.
iv Financing considerations
Generally, real estate financing is provided by banks via loans. Restrictions on who may provide financing in relation to real estate transactions mainly stem from banking regulations that restrictively regulate the commercial granting of loans (including within groups). Typically, mortgages serve as collateral for real estate financings. In the case of share deals, pledges over the shares of the borrower, pledge of movables, accounts pledges, assignments of receivables or rights under any major contracts are also considered. To create a mortgage, pledgor and pledgee must execute a mortgage agreement in writing, with the signatures being notarised. Generally, both fixed-amount mortgages (securing a specific amount) as well as maximum amount mortgages (which may be recurrently used under a specific relationship) are possible under Austrian law. The mortgage is only established upon its registration with the land register, which triggers a registration fee (see below).
v Tax considerations
In the event of a sale or acquisition of real estate in Austria, the following taxes need to be taken into consideration.
Real estate transfer tax
The following are subject to Austrian real estate transfer tax:
- the acquisition of Austrian real estate; and
- the consolidation in the hand of a single shareholder of more than 95 per cent of the shares in a company owning Austrian real estate.
The taxable base for the determination is the value of the consideration. As a rule, this is the purchase price or at least the market value of the real estate (if the purchase price is lower).
Real estate transfer tax generally amounts to:
- 3.5 per cent in the case of an asset deal; and
- 0.5 per cent in the case of a consolidation of more than 95 per cent of the shares in a company.
Further, transfers without consideration (i.e., donations) are subject to real estate transfer tax at a progressive tax rate ranging from 0.5 per cent to 3.5 per cent.
Real estate profit tax
The profits from the sale of real estate are subject to a real estate profit tax, which is generally subject to a flat tax of 30 per cent, provided that a flat tax rate of 25 per cent applies to all profits generated by profits from corporate entities (including from the sale of real estate).
General corporate income tax
Profits from the sale of real estate by a corporate entity are subject to corporate income tax at a flat rate of 25 per cent (see above).
In addition to real estate transfer tax, a registration fee amounting to 1.1 per cent of the market value of the property applies for entering the right of ownership in the land register. For the registration of mortgages, an additional 1.2 per cent of the mortgage amount must be paid.
The execution of a purchase agreement and the contemplated acquisition of real estate does not generally trigger stamp duties.
Real estate transactions are generally not subject to VAT. However, if the selling party is an entrepreneur, they may opt to treat the sale of real estate as VAT taxable at a rate of 20 per cent. Entrepreneurs typically take this option into consideration if they have reclaimed input tax regarding the real estate (which would otherwise have to be refunded) within the past 10 years.
vi Cross-border complications and solutions
Under the land transfer regulations, the transfer of property rights to non-Austrian resident investors may require an approval. In this respect, each Austrian federal province has its own legal framework defining the applicable restrictions and approval process. If the necessary approval is not obtained, a transfer of ownership cannot be registered in the relevant land register and the contemplated transaction cannot be carried out (as real estate ownership is generally obtained only through registration of the new owner in the land register). Persons and corporate bodies of EU Member States or signatory parties to the European Economic Area agreement have the same status as domestic persons and corporate bodies. For certain federal provinces, the creation of an Austrian holding structure is sufficient for fulfilling the requirements of the applicable land transfer regulations.
V CORPORATE REAL ESTATE
Even though a separation of corporate real estate from operating companies seems to occur in the Austrian market in certain cases (including for purposes of real estate financings), the number of transactions does not indicate that this will become a major trend.
The general market outlook for real estate investments in Austria is positive; the reasons being the consistently low interest rate and therefore cheap financing, and the positive economic outlook due to the low unemployment rate and predicted economic growth. Moreover, demand should be steady as the general consumer climate is positive because of relatively low oil prices and growth of the total population through immigration. Therefore, the total volume of transactions will depend on supply, with the rate of return being expected to decline even further.
Political discussions about a reform of the Austrian Tenant Act and the general legal tenancy system will most likely continue in 2018/19 as in past years, particularly owing to the election of the new government, which has announced its intention to fundamentally liberalise tenancy law. The main points of discussion in this context are allowing short-term leases (incentivising at the same time long-term leases), a reduction of the statutory transfer rights for tenants and the possibility to agree on a higher rent in historical areas. In addition, the new government intends to place a focus on the harmonisation of building laws throughout the nine federal provinces of Austria and the reduction of administrative burdens in the building process and to create adequate incentives for structural modifications and modernisation of existing buildings.
As a result, the Austrian real estate market may benefit from the envisaged changes in the near future, but it remains unclear whether the plans will soon be realised. Nonetheless, given the general political and economic stability, investments and real estate prices are still expected to rise.
1 Tibor Fabian and Markus Uitz are partners at Binder Grösswang Rechtsanwälte GmbH.