German Funds Play Central Role in Commercial Real Estate Investment Market


German institutional investors helped drive the development of Budapestʼs commercial real estate market, only to disappear from the scene in the wake of the financial crisis. Now they are returning, but will they find suitable product?

Eiffel Palace in Budapest.

A notable investment deal at the top of the market was the purchase by the Germany-based investor and asset manager, Corpus Sireo, of the landmark 14,500 sqm Eiffel Palace for circa EUR 54 million from the Hungarian National Bank. Corpus Sireo completed its first acquisition in Budapest in 2016 with the purchase of the Park Atrium office building.  

Corpus Sireo had previously concentrated its CEE acquisition strategy on core product in Poland, especially Warsaw, but says it would now also consider purchases in office and retail in Budapest; the city now offers good product with a yield differential according to Corpus Sireo.

“The acquisition of Bank Center by GLL and Allianz in 2006, Allianz’s purchase of 50% of Allee in 2008, and more recently the deals of KGAL and Corpus Sireo on Eiffel Square, Park Atrium and Eiffel Palace have been landmark transactions,” comments Benjamin Perez-Ellischewitz, head of capital markets at JLL Hungary.

Benjamin Perez-Ellischewitz

“All those assets ticked all the requirement criteria of the typical German institutional investors: assets with scale, income security and fantastic addresses and buildings,” he says.

The German and Austrian institutional investors were at the fore-front of the development of the Hungary commercial real estate investment market, the first to emerge in the CEE region. This was a natural geographic expansion of funds from the German-speaking countries, as they took advantage of the opportunities to acquire higher yielding investment grade assets.

However, these funds subsequently shied away from Hungary in the aftermath of the economic crisis, and turned instead towards the Polish and Czech markets that provided more investment opportunities of the required size and quality.

In their absence, the void has been filled by Hungarian investors who have been purchasing the class “A” investment grade assets that are the traditional targets of the German institutionals.

Sourcing Challenge

With the German funds now returning to the booming Budapest market, the challenge remains sourcing investment grade product of the required size; unlike Hungary, these can be found in, for example, Polish secondary cities.

“German investors played a pivotal role in the development of the real estate market till 2010. Until then, their market share was basically identical to the current market share of the local investors (i.e. circa 40%),” say Perez-Ellischewitz.

“After 2010, their presence fell back drastically and their purchase power was practically replaced by the Hungarian investors. Between 2010 and the purchase of 50% of Allee by Allianz and the market entry of KGAL and Corpus Sireo in 2016, German investors have simply disappeared.”

Approaching 50% of investment acquisitions are being completed by Hungarian funds, which provides more security for the market and makes it less reliant on a positive attitude from foreign investors towards Hungary.

“Budapest has always been an attractive proposition for German capital, but CBRE would argue that it is not quite as important as it once was, primarily due to the increased liquidity within the market provided by the local Hungarian funds,” says Ben Barclay, senior investment consultant at CBRE Hungary.

“In 2006/2007, German investors were responsible for 18% of the transactional volumes, whereas over the last 18 months they have accounted for just circa 10% of transactions,” he notes.

“However, their presence does help attract other sources of core European capital, as other investors can use their presence as leverage when selling Budapest as an investment destination to their particular investment committees. This is particularly true with regards to a recent transaction, where a German open ended fund acquired Premier Outlet Center with the support of CBRE. This was the first German open ended fund coming to the market within this cycle, and helps reinforce Budapest as an investment destination for core capital,” Barclay explains.

Taking Their Time

“The institutional German investors took their time to re-enter the market, with the majority of their acquisitions starting in 2017, all of which were focused on core offices,” he adds. “The two-closed ended German investors, KGAL & Corpus Sireo, significantly increased their exposure, with the two funds spending over HUF 115 million last year, which included the acquisitions of the Europa Capital Portfolio and Eiffel Palace respectively.”

Over recent years, core German investors have been much more active in Poland and in Czech Republic than in Hungary. Perez-Ellischewitz sees the purchase by Deka Immobilien GmbH of the 116,000 sqm The Park in Prague in 2016 and the acquisition of the 120,000 sqm MLP industrial portfolio in Upper Silesia in 2015 as significant deals.

Likewise, Union Investment bought the 99,000 sqm Magnolia Shopping Center in Wrocław in 2017, the 58,000 sqm Palladium in Prague and the Riviera Center shopping mall in Gdynia, Poland.

One of the major obstacles to further development of the investment market is the limited supply of investment grade product, despite the substantial pipeline in, for example, the office market. Investment consultants representing Hungary at MIPIM, the industry-leading four-day real estate exhibition, conference and networking event at Cannes in the south of France in March cited a key challenge as the low supply of class “A” investment stock in central locations of the required size to meet the requirements of international institutional investors.

“A number of significant transactions are currently under offer, but as of H1, CBRE believe that the most significant transaction to have closed is the acquisition of Premier Outlet Center in Biatorbágy, which saw the return of the first German open ended fund to the market within the cycle, and was supported by CBRE,” Barclay notes.

Premier Outlet Center
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