This morning I was on the phone again with an "old" friend of mine. After 2 minutes we arrived at the favorite topic of all developers - how difficult it is to get reasonable plots of land at the moment. I covered this topic in my blog "The Challenge of Land Acquisition" a few weeks ago - today I'm going to talk specifically about the opportunities and risks of leasehold as an alternative to the classic purchase.

In contrast to other countries such as the UK or Holland, leasehold is still relatively new in Austria. The basic idea is that you do not buy the land, but receive a right to use it for a longer period of time (typically 60 or 100 years). Apartments, for example, are built on this land, which can be sold off as property. In return for providing the land, the developer or subsequent apartment owner makes a one-time or ongoing payment of a building lease interest. In the case of investment apartments, this is passed on to the tenant in the same way as the operating costs.

The advantages for the developer are obvious. On the one hand, leasehold offers the opportunity to obtain land that cannot be sold as property. This includes, for example, land owned by churches, family offices with a very long-term orientation, or insurance companies with a very conservative approach. On the other hand, building lease constructions are quite attractive from a financing point of view, especially if the building lease interest is low and can thus be easily offset against the operating costs. This lowers the TIC, but the building lease represents a value, which helps in the LTV presentation.

On the other hand, leasehold naturally imposes some restrictions on sales, as both some private and some institutional investors rule out the acquisition of apartments on leasehold plots.

1. • Insofar as you want to sell to private parties set the product in the middle class segment and if possible secure a 100-year building lease. In my observation, most private middle class families are relatively indifferent to the potential obligation to return the property in 100 years, as the emotional bond always extends only to the last living descendants (i.e. mostly the grandchildren of infant age). With a 100-year leasehold, it can be assumed that they will be able to live in the home until the end of their lives. In the case of a 60-year leasehold, the grandparent generation is at least partially eliminated. In my experience, very wealthy people often think in generations, so that luxury properties are more difficult to market as leasehold.
   • When selling to institutional investors, leasehold tends to be less of a problem, at least in Vienna. The core argument here is that the 101st CF discounted to today's cash value is worth nothing almost regardless of the discount factor. In addition, the leasehold brings tax advantages. In my experience, there is little difference between building rights and ownership in terms of yield. As with every rule, there are exceptions. These often include investors from Eastern Europe (for cultural reasons) and insurance companies. And, of course, family offices. Probably the often transparent family tree, which reminds them that the inheritance is passed on in many generations, is detrimental here.
   • It is important to choose the right broker, as not all are equally good with leasehold properties. Investment brokers tend to do easier than those with a private client focus, but just ask for a list of successfully brokered leasehold properties.

For all the lucky ones who have a residential property in Vienna in their possession and are thinking about developing it and selling it as condominiums, here's a thought-provoking approach to optimizing returns. Put the land and the development into 2 different SPVs, grant a leasehold right within the group and sell both separately. The yield for the leasehold issuing land is sometimes well below the yield of the property. You wonder who the buyers of the building lease are? Again, old acquaintances: Insurance companies, the church and now possibly family offices.