Austria: new government promotes green building

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Peter Kunz
Kunz Wallentin Attorneys at Law, Vienna
peter.kunz@kunz.at

Martin Barrett
Kunz Wallentin Attorneys at Law, Vienna
martin.barrett@kunz.at

The new Austrian government, made up of the conservative Austrian People’s Party and the Green Party, has proposed major changes to existing construction and real estate laws. These changes will serve as incentives to promote investment in sustainable construction projects as well as environmentally friendly refurbishment of existing objects. It is expected that the Austrian real estate sector, which has experienced a considerable increase in foreign investment in recent years (from German real estate funds and also in the form of investors from third countries), will continue to grow. In the light of the proposed changes, it can be assumed that ‘ecological’ buildings will experience an even stronger increase in value.

This article highlights the most significant aspects of the proposed legislation, and addresses the challenges the legislator is due to face in implementing them as well as how the changes may affect market participants, including investors, property developers and construction companies.

Phasing out fossil fuels

A federal law will regulate the phasing out of oil and coal-fired boilers in the building sector in a graduated plan:

• for new buildings from 2020;^[1]

• a mandatory replacement of boilers older than 25 years (from 2025); and

• and all boilers by 2035 at the latest;

Investors that acquire existing assets will now have to put substantially more focus during their technical, legal and financial due diligence on the heating systems of the building. Changing the heating system in an existing asset is likely to prove to be costly and special care will be required. Either the future costs of achieving compliance must be estimated and included in the purchase price calculation, or the Sale & Purchase Agreements must include provisions that set out who bears the costs of the necessary measures, for example, if they exceed a certain threshold.

Investors buying rental assets, be they commercial or residential, must seek specialised legal advice on the complex provisions of Austrian tenancy Law. Alterations that are to be carried out because of obligations under public law may, depending on the rental asset or building, be considered to be ‘maintenance work’ and therefore fall to the landlord or lessor. As such the cost may not be passed on to the tenant or lessee.

Future of timber construction

The government programme strongly promotes timber construction, because it has a significantly reduced carbon footprint. In Austria there are several timber construction projects under way and one of the world’s first wood-based high-rise buildings is being built in Vienna.^[2]

Subsidies only for eco-friendly projects

Construction and renovation subsidies are significant in Austria. They are a viable way, not only for non-profit developers, to secure financing at low costs. Under the proposed law, public subsidies for construction of residential buildings will only be granted if the project is built in an environmentally friendly way.

It will be interesting to see how the government approaches the implementation of these intentions. The Constitution delegates the competence to make laws on public subsidies for construction to the federal provinces. It would be very welcome if standardisation across the provinces could be achieved. At present over-regulation creates a special need for advice, and thus additional costs, for market participants, whether they be investors, developers, construction companies, financiers or end users. Also, in order to maximise investment in ecological construction, the planned substantial reform of tenancy law is imperative. The non-transparent provisions of the various subsidy laws restrict, sometimes severely, the rentability and pricing of subsidised properties. For developers and investors this situation presents additional legal pitfalls.

Reform of tenancy law

The most demanding task that the government has imposed on itself is an extensive reform of the tenancy law, condominium law and related legislation.

Due to its political importance, tenancy law has undergone only minor reforms in recent decades, each of which was painstakingly negotiated. Consequently, Austrian residency law has achieved a level of incomprehensibility that is without parallel. Our advisory practice has shown that when foreign companies or stakeholders enter the market, they are surprised at the complexity and lack of transparency of the tenancy law. This is even the case with legally trained individuals or those who specialise in real estate development or real estate financing.

In particular, the provisions on pricing will be tackled, with the government hoping that: ‘Transparent pricing leads to affordable rent for tenants and ensures the profitability of investments such as new construction, redensification, maintenance and renovation.’^[3]

Comprehensive reform of the Tenancy Act (together with the standardisation of the law on public construction subsidies) would be greatly appreciated by the real estate industry. On more than one occasion, promising projects have not been implemented because of legal uncertainties on the question of pricing for letting, and therefore the expected return, or because of the strict protection of existing tenancies.

The ambiguities at present (predominantly) serve to employ lawyers – which, of course, is not all bad – but bringing balance to the interests of developers and investors as well as consumers by revising the existing tenancy law would undoubtedly be preferable from a macrosocial perspective.  More projects could be finished in shorter times and for less as due diligence processes are streamlined and perhaps partially digitalised. This would also promote the preservation and renovation of historical buildings in first-class locations. Because of their thick walls and durable materials, such buildings are generally more sustainable than most buildings constructed after the Second World War.

Opportunities for foreign companies

As a consequence of these proposed changes, considerable know-how and expertise in environmentally friendly, sustainable construction will be needed in the coming years. Although the demand for this expertise will be met in part by Austrian experts, there are opportunities for foreign companies that have considerable experience in this field or prove to be highly innovative. The legislative measures announced in the government programme will therefore create a more level playing field. Disadvantages that foreign companies face at present compared with established companies due to national peculiarities in real estate law, including the low level of standardisation, can be outweighed by innovation and environmental awareness.