Skeletons outside the closet
Real estate development is not a particularly risky business under normal conditions, but the economic environment since the 2008 financial crisis has been anything but normal. In our article, we take a look at the most infamous property developments of Budapest where things have not turned out the way they were meant to.
Ever since its opening in 1971, Hotel Panoráma has been a remarkable, if not very nice, characteristic of the sight of the Danube’s Buda shore. Originally owned by the centralized trade unions (SZOT) in the communist era, the building used to function as a hotel until its difficulties began in the early 1990s. Following various changes in its ownership structure, it became the ultimate symbol of Hungary’s greatest embezzlement and fraud scandal, known as the Globex case. During its seven years of operation, Globex Holding was found to mishandle its investors’ funds in the volume of some HUF 7 billion. After its collapse, the building remained in the state of refurbishment, exactly as it can be seen now, 14 years later.
The various attempts to utilize the former hotel, which is regarded as one of the most valuable properties of Budapest, included plans to transform it into a luxury apartment building, with real estate prices between HUF 1-3 million per square meter. The construction that began in 2007 was then put to a halt due to a two-year-long lawsuit and finally ended in the bankruptcy of its investor, Pro-Hill Kft, which proved unable to finance the lengthy procedure.
According to recent rumors, the building’s current owner, CIB Bank have requested feasibility studies from various architecture firms this March, although its specific plans with the property are yet to be revealed.
The concrete jungle that spreads across some 180 hectares just outside Budapest was originally intended to be a vivid city within a city, packed with office buildings, apartments, a lake, a huge and beautiful park, its own motorway exit and even a train station. Two years after the construction was put on standby, its biggest achievement is that both Paramount Pictures and 20th Century Fox considered the area as a potential shooting scene of their movies World War Z and Die Hard 5, respectively. Eventually both chose other locations instead.
The project, whose overall budget was estimated to be in the area of HUF 300-500 billion, went bankrupt shortly after the financial crisis began in 2008. Tópark’s financing partner, German-based Eurohypo Bank (an affiliate of Commerzbank), decided to withdraw from the Hungarian market in 2010 after its parent company received state subsidies in return for cutting back on high-risk projects such as EMEA investments. Although construction carried on until November 2010, the interim period resulted in unpaid invoices to the tune of HUF 2 billion, and the numerous lawsuits that followed suggest that the parties involved are unlikely to cash in on the project, ever.
The missing amount is one of the many points currently under debate. According to business weekly HVG, the investor received some EUR 80 million of the EUR 130 million the original 2006 contract was about, but according to the bank’s claims, the project’s state of completion is far below the proportional 60%. Last autumn the general contractor, DGB Kft, suddenly moved to Zalaegerszeg, known as „the elephant graveyard” among corporate lawyers. The liquidation procedure against DGB was launched earlier this year.
As Central European as its name, the whale-shaped CET (Central European Time) cultural and commercial center has been ready to open its doors for over two years but is still standing empty and unused. Originally meant to become a new symbol of Budapest, the project might as well earn this reputation on the long run. The lawsuits, police investigations, fines and quarrels around the construction are next to impossible to untangle.
CET was originally a PPP investment worth HUF 8.5 billion, with Porto Investment Hungary Kft as general contractor, MKB Bank as financing partner, and Budapest contributing to the project with the construction plot. According to the original contract, Porto would finance the construction in return for the exclusive right to manage the property for 25 years. Calculations suggested that the building’s revenue would be more than enough to pay Porto’s fee.
But when the previous, Gábor Demszky-led city council of Budapest was followed by mayor István Tarlós and his staff in 2010, things began to get clumsy. Completion of the building was delayed, a fact that was mutually blamed on the other by both parties involved, and the handover of the building never happened. The unwholesome situation was followed by vice mayor Gábor Bagdy calling on a bank guarantee of over HUF 1 billion (a step that was never agreed by the city assembly, and one that Porto claims was unlawful), the municipality imposing a fine of HUF 1.5 billion and demanding that Porto immediately hand over the building. Porto, on the other hand, refuses to leave the construction site, sued the municipality for HUF 12.5 billion (the original costs plus interests), and MKB Bank also chipped in with a HUF 7.5 billion lawsuit against Budapest. If that does not sound symbolic enough, one wonders what does.
Budapest is famous for its bath culture, but the HUF 8 billion refurbishing of its Rác Bath is unlikely to raise this position any further anytime soon. The bath, and especially the construction of an adjoining 67-room luxury hotel, raised the ire of local residents early on as they are located in one of the rare green areas of downtown Buda. But now, as the building that had been completed two years ago is still standing abandoned in Tabán park, it seems difficult to think up a scenario that is even worse for everyone involved.
The obstacle in the way of the opening ceremony was a debate between general contractor Rác Nosztalgia Kft and its 25% shareholder, the Budapest municipality, but just as the two sides appeared to reach an agreement earlier this year, the project’s main financing partner, Hungarian Development Bank (MFB) decided to cancel its contract. Part of the reason is that its claims were left unpaid by Rác Nosztalgia since June 2011, and another part is that the agreement between the other two was negotiated and reached without MFB’s involvement, something the bank dubs “a business nonsense”.
As a result, in late September a liquidation procedure was launched against Rác Nosztalgia and the building is expected to be auctioned, meaning that another HUF 250 million state subsidy that was used in the project will be lost.
The Ballet Institute (Drechsler Palace)
In the previous paragraphs, we introduced a few miscalculated, mismanaged or simply unfortunate projects that were abandoned at various stages of their constructions. But the example of the former State Ballet Institute shows that for a property project in order to go completely wrong, not a single brick needs to be moved. The representative building just opposite the sparkling Opera House on Budapest’s Andrássy út has been empty and increasingly in ruins for over 14 years, after the municipality of Budapest’s District 7 sold it to a company called Andrássy 25 Kft (named after the building’s address), which then traded it to two Israeli investors, sister companies of Plaza Centers, for an unrevealed sum. The investors mentioned huge property developments and planned to transform the former ballet school into a luxury hotel, but no details or actions followed. A few years later, in 2007, the building was acquired by Portuguese real estate developer Aquapura Hotels, who also published plans of completely refurbishing the building and turning it into a premium hotel. Unfortunately these plans, along with much of Aquapura Hotels’ assets, were washed away by the economic crisis that hit a year after the deal. According to Aquapura’s CEO Miguel Simoes de Almeida, the company is doing “their utmost” to at least maintain the building’s conditions, but the actual development plans seem more remote than ever.
According to anonymous sources, the Portuguese owner, who now refuses to officially disclose its plans with the building, made it clear to its Hungarian partners that it is willing to sell the palace in case a good customer shows up. Industry experts agree that another deal, and the potential of the building’s reconstruction’s gaining new momentum, could be a key element of the Hungarian real estate market in the following years.
The bankruptcy procedure against Tőzsdepalota Ingatlanforgalmazó és Fejlesztő Kft, the owner of the former headquarters of the state-owned television MTV, was filed in early September. According to its books, the company is in a severe financial situation, and its losses have been skyrocketing since MTV left the building in 2009.
Tőzsdepalota Kft, led by Canadian businessman Michael Tippin, acquired the prominent property in 2006 in a public tender, which was the fourth attempt to sell the building by the state. The HUF 4.5 billion price included the condition that MTV would rent the building back for a monthly HUF 25 million (this amount was later raised to HUF 45 million). But when the television moved out from the building on July 31, 2009, things began to get worse for the owner. Its losses equaled HUF 576 million in 2010 and rose to HUF 1 billion in 2011. Plans to completely refurbish the building by the end of 2015 with an investment of some HUF 100 billion are still in the preparation phase, although all permissions are ready and valid as of November 2010.
It is currently unknown what, exactly, caused the collapse of Tőzsdepalota Kft’s plans and the bankruptcy of the company, but business website Mfor.hu suspects that its short-term debts could be in the background. According to Mfor.hu, the project’s financing partner MKB Bank and Tőzsdepalota are currently making every effort possible to re-negotiate the conditions, but to date neither parties wished to comment on the details or possible scenarios that may follow the bankruptcy.
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