Improving investment climate
The following story, by David Lawrence, originally appeared in the October 31-November 13 print edition of the Budapest Business Journal.
A combination of improving economic indicators and more favorable investor sentiment is strengthening the real estate investment market in Hungary after an extended slump following the economic downturn and eurozone crisis.
This is reflected in figures released by consultants that indicate growth in commercial property investment volume as transactions are being concluded in all markets sectors. For the first three quarters of the year, €440 million in investment volume was recorded according to JLL. Hungary still, however, lags behind Poland and the Czech Republic, where the figures were €1,930 mln and €1,050 mln respectively for the same time period. CBRE have recorded a 126% year-on-year rise in investment activity to €396 mln for the first three quarters.
In addition to the improving macroeconomic environment, increasing investment activity is attributed to such factors as the comparatively inexpensive products on the market compared to the thriving Polish and Czech markets, and the amount of capital that is seeking a home at the disposal of investors. Debt finance is also increasingly available for Hungary. Although a wide range of international and local investors are now active in the country, the more conservative institutional German and Austrian investors have still not returned as uncertainty from both an economic and political perspective continues to deter these very cautious investors. Further, they require an active market that provides liquidity.
The Budapest real estate office market is continuing to pick up as Erste Open-end Real Estate Investment Fund has acquired the 11,000 sqm north wing of Futureal’s recently completed Vision Towers office center. The complex, located in the Váci út business corridor, was delivered in August and preleased to KPMG for use as its Hungary headquarters. Prime office yields for Budapest office are now falling to circa 7.30%. “Movement and action can be felt on the Hungarian investment market, so we are looking forward to opportunities in the near future and we are continuously searching for new properties. The purpose of this fund is to focus on stable and long term investments,” said Eszter Korpás, Real Estate Fund Manager at Erste Asset Management.
In a defining summer Budapest office deal, Skanska Property Hungary sold the 17,800 sqm Green House office center to the Hungarian open-ended Torony Real Estate Investment Fund, managed by Diófa Fund Management, a member of the FHB Group. Erste Bank was the financial partner in the acquisition. The deal is regarded as a significant step in the recovery of the Hungarian property investment market in that a “class A” income producing office center by an international developer is the subject of an arms’ length investment transaction. “The transaction proves that investors have great trust in Skanska and increasing interest in the Budapest market,” commented Zoltán Linczmayer, Managing Director of Skanska Property Hungary on the deal.
Skanska has been operating in Hungary since 1987 by developing, leasing and selling office product to investors. “The closing of the Skanska deal is significant for Hungary,” said Michael Edwards, Partner at C&W Hungary. “The institutionals are holding back, however a significant move by one will open the door. In general, activity is on the up and institutionals are actively looking at Hungary, albeit with caution. However Hungary does provide an alternative to – and yield premium on – Poland and the Czech Republic.”
Both international and domestic investors have completed other Budapest office transactions. The IVG Group has sold the 5,300 sqm Stefánia Park to a private German investor after a successful tender, and Eiffel Palace by the Hungarian developer Horizon Development has been purchased by the Hungarian National Bank (MNB) for a reported €45 mln.
Interest is also extending to the retail sector. In a recent transaction the Netherlands’ ING Real Estate completed the sale of its remaining 50% stake in the 47,000 sqm Allee shopping center in Budapest to the Nationale-Nederlanden fund for a reported €95 mln. The German investor, Allianz Real Estate has already bought a 50% share in the leading Budapest retail center for €100 mln. In the logistics sector, Blackstone acquired the Tulipan logistics park for Logicor, its European logistics platform. JLL put prime shopping center yields at 7.25% compared to 9.25% for logistics centers. This is a significant development in that Hungary is now included in regional logistics portfolio acquisitions. In the hotel sector, the Dubai-based Al Habtoor Group has purchased the Intercontinental Hotel in Budapest. The group, which is active in hotel and hospitality development, bought the Le Meridien Hotel in Budapest in 2012.
With regard to possibilities on the market, the portfolio owned by the German investor, AEW Europe (the 27,000 sqm MOM Park consisting of 30,000 sqm of retail and 20,000 sqm of office space, the 27,000 sqm WestEnd Business Center and the 13,000 sqm MKE office center) is available to investors. Other office developments available are Office Garden and the Mosaic office portfolio consisting of three small office centers. “Investors are looking at Budapest rents and capital values and conclude that they have got to be close to bottom. Budapest was the first city where a market was established before Prague and Warsaw and they consider that it is probably a good time to look very selectively at prime product, despite the political difficulties,” commented Troy Javaher, Head of CEE Capital Markets at JLL.
Opinions differ as to when deals will be concluded with German and Austrian institutionals. Interest from institutional investors is picking up for Hungarian assets but some commentators do not anticipate enquires translating into successful transactions. It is more likely they will be in a second wave of investors following the closing of a number of large deals. “We see large private equity investors, Anglo Saxon money, private and Middle Eastern investors active in Hungary. Missing are the German and Austrian investors. The German funds are sensitive to liquidity and will only become active when others have returned to the market,” said Benjamin Perez-Ellischewitz, Head of Capital Markets at JLL.
Local investors have noticeably increased their activity and 2014 will be the first year on record when Hungarians outperform all other nationalities on the purchaser side. “This is quite a remarkable phenomenon in a market which had been driven exclusively by foreigner investors in the past,” concluded Tim O’Sullivan, Head of Capital Markets at CBRE Hungary. “CBRE expect international investor interest for Hungarian assets will increase once again, as investors turn their attention to Hungary as core assets come to the market. More foreign money will find a home in Hungary over the next 12 to 18 months and therefore the share of international buyers, will increase again at the cost of local investors.”
O’Sullivan estimates a value of up to €300 mln in due diligence that could still transact in 2014. Based on this estimation, investment volume could reach €600-650 mln in 2014, marking a 135% increase on last year and getting close to the level registered in 2011. Confidence is seen as growing, and 2015 is expected to be an even better year.
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