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Real estate: More good news as investment improves in Q2

With €197 million in investment volume, Hungary was the only CEE country to see growth in the second quarter.

Most of the clothes there are on sale, but the Premier Outlet itself is valued at €30 mln

Hungary has recorded €197 million in real estate investment volume for the second quarter of the year compared to €79 mln for Q1 according to Cushman & Wakefield.

Although Hungary continues to lag behind the €365 mln in investment transactions concluded in Poland and €304 mln in Czech Republic in Q2, liquidity in the Hungarian investment market and sentiment towards Hungary is regarded as improving. Investors are increasingly looking to make higher yield acquisitions elsewhere in CEE outside the popular Polish and Czech markets – the currently most favored higher yielding destinations for investors are Hungary and Romania.

According to Rita Tuza, head of research at JLL Hungary, improving market fundamentals are fuelling the appetite for Hungarian assets. The most sought after market in the first half of the year was that of offices, representing 34% of the half-year transactional volumes.

With regard to market sectors for the second quarter, the office market was number one with €89 mln in deals recorded, followed by retail with €47 mln. Budapest office vacancy could fall to 13-14% by the end of 2016; this would be below levels in Czech Republic and Poland according to Cushman & Wakefield. With the very low pipeline there is growing pressure on rentals. Cushman & Wakefield research indicates that certain CEE office markets are suffering with new net supply outstripping new net demand, which is putting downward pressure on rents. As pricing is pushed higher by the weight of investment capital searching for greater yield, higher returning opportunities further up the risk spectrum are beginning to look like more appealing alternatives. Thus one of the better performing cities in the CEE region is expected to be Budapest.

Big deals

A number of big logistics operators are looking at Hungary, however there is still a pricing expectation imbalance between potential vendors and buyers in the view of Mike Edwards, head of CEE investment and valuation at Cushman & Wakefield.

Significantly for the Hungarian investment market, product in Hungary formed part of the largest CEE portfolio deal in the second quarter. In the transaction Aviva sold ten office, retail and industrial assets across Central Europe for a reported €185 mln to Lone Star. The Hungarian part of the transaction consists of the 17,000 sqm Premier Outlet center close to Budapest, valued at a reported circa €30 mln, and the DHL logistics facility in Székesfehérvár. The purchase was partly financed by a €125 mln loan from Deutsche Pfandbriefbank (PBB) and UniCredit Bank Austria. The portfolio will be placed in the Lone Star Real Estate Fund 111. Lone Star has previously shown confidence in the Budapest market with the purchase of part of the Office Garden office center.   

Big dealers

Major European investors, U.S. private equity and Middle Eastern investors are now actively considering Hungary. “Domestic funds tend to be interested in €30-40 mln lot sizes. However the challenge is in finding product of €50-150 mln that would attract more international investors,” said Mike Edwards.      

According to Cushman & Wakefield, investment activity in the Central European markets of Poland, Czech Republic, Slovakia, Hungary and Romania maintained momentum with €881 mln invested in the second quarter and a total €2.21 billion invested in the region this year. Given the significant pipeline of transactions, CEE yearend volumes are expected to exceed 2014 levels.

“We are optimistic in our forecasts for the region, demonstrated by a strong pipeline of transactions in due diligence. We continue to see strong investment inflows across the office and retail sectors. Prime yields have gone below 6% for landmark properties and retail investment has gained significant momentum. Although the difficult situation in Greece is influencing the eurozone, the evidence to date is that volumes in Central Europe will be stronger this year than last and will reach €7.5 bln,” said James Chapman, head of CE capital markets at Cushman & Wakefield.

Big growth in Q2

The largest single asset deal was concluded in Prague with the sale of the Arkády Pankrác shopping center for €162 mln. However, Hungary was the only country seeing higher activity than in the first quarter and was also the only country seeing quarterly investment activity volumes above its five-year quarterly average.

The DTZ “CEE Investor Survey” for the second quarter has recorded increasing appetite for Central Europe from 40 investors who focus on Hungary, Poland, Czech Republic, Slovakia and Romania. According to the research, concerns with regard to economic stability are considered to be the main risk with regard to Hungary. Overpricing is the key risk in Poland while potential investors in Czech Republic, Slovakia and Romania are faced with a lack of investment grade product.     

With the strong weight of money chasing investment opportunities across CEE, yields continued to compress in the first half of the year. Budapest provides a yield premium on both Poland and Czech Republic as the second quarter yields in Budapest stood at 7.5% for office and retail and 8.75% for industrial. This provides a clear premium on Prague where yields are put at 5.75% for office, 5% for retail and 7% for industrial.      

A major deal in Hungary is said to be close to completion. “We expect a much stronger second half that should translate into 2015 full year numbers 20-30% above the 2014 level. The good piece of news is that the liquidity is coming back across all asset classes and for different investment ticket sizes,” concluded Benjamin Perez-Ellischewitz, head of capital markets at JLL Hungary.