Property market comes to a standstill

The current transactions were mainly concerning retail properties (36% of ytd volume), industrial sites (35% of ytd the volume) and B class offices (29% of the ytd volume). Most transactions involve ailing properties or redevelopment buildings bought for their future potential. A number of these transactions carried over from 2007!

The main cause for this halt is the ripple impact of the credit crisis. The interest is more expensive and banks are more rigorous with their lending criteria. Foreign buyers, based in markets severely affected by the liquidity crisis (US, Ireland, UK and Spain) are instructed not to buy. Finally, investors, especially the Hungarian ones, have other investment opportunities. A 10 year Hungarian Government Bond offers a yield of 8.56% yield. Hungarian real estate funds cannot justify the purchase of A class office buildings which probably would trade at an average 7% - 7.5%.

In the absence of any transaction, it is hard to comment on the yield evolution. Last year, the average yield for A class office was 6.81%, with prime yield at 5.9%. Based on the echo from current negotiations and valuation activities, we estimate that the yield will increase by 30 to 50 basis points for prime properties and the average market yield will increase by up to 100 basis points.

This is largely due to the higher cost of interest because in the institutional market, we have not seen any pressure on the owners to sell their properties. The absence of investment activity is not a market crush when the supply increases and the demand collapses, leaving owners with empty buildings, thus forcing price downward. The demand for office space is still good (ytd, the vacancy rate and take up were stable) and the quality buildings are leased, or in the process of being leased. Buildings’ cash flows cover the interest expenses of the owners. Hence, no one had yet to urgently sell an A Class property at a discount.”

Meanwhile, investors are still looking for bargain properties and the question is whether or not there will be bargains in the Hungarian institutional real estate market. Versus Warsaw, Prague or Bucharest, Budapest was not the most expensive city in Central Europe. There are two schools of thought as to how the investment market will restart. A bearish view is that the funds, unable to generate the promised return will have to sell properties to generate cash and realize some capital gain while it is still possible. A more bullish view is that owners will be able to wait for a better time and the sale activities will pick up again next year when interest rates start to fall. Both scenarios, unfortunately, are not really dependant on the fundamentals of the Hungarian market and it is therefore difficult to predict which tendency will prevail.  One thing that is in the control of local players is the management of supply. It will be key to ensure that the market is not over flooded with new spaces which will bring average rent down, Research Director of Colliers summarized the challenges. (press release)