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Property investors slowly turn to Budapest

Investments in Hungary’s commercial property market in the first half of 2011 has already surpassed last year’s aggregate, and consultancies see hope that investment will near 2008 levels by the end of the year.

Europe’s real estate investment market responded acutely to the developing debt crisis by contracting significantly as investors became wary of the risks. Overall, the second quarter of the year brought €25 billion in investments on the continent, a fresh report from property consultant CB Richard Ellis revealed.

Hungary, on the other hand, has improved on its volume within the CEE region with the first six months of the year, actually doubling its share. DTZ, another major real estate consultancy, recorded €230 million worth of investments in the first half of 2011, already beating the €188 million invested in the whole preceding year.


Investment in the Hungarian property market



As Tim O’ Sullivan, CBRE’s head of capital markets explained, the Budapest market holds significant opportunities given the conditions. With the European economy changing, investors are now looking for top-level product on the market. “Due to the lack of available supply, some investors are now being priced out of the Polish market and are once again exploring other CEE countries,” O’Sullivan said. 

As he noted, the Czech market has already started capitalizing on this trend in 2010 and Budapest is expected to follow suit this year with increased investment volume.

However, as Balázs Czifra, managing director of DTZ noted, Budapest is somewhat lacking in such top-tier, so-called prime real estate assets that could be easily marketable. There are nonetheless buildings that are in good locations even though they do not meet level-A criteria, and in such cases seller and buyer interests are easier to coordinate.

DTZ believes institutional investors are predominantly looking for excellent retail assets and quality offices with standing long-term rental contracts. Of the investment volume that will follow this year, the consultancy believes these two categories will carry the greatest significance.

By and large this blends in with the overall European trend. As a report by Cushman & Wakefield points out, the second quarter of 2011 saw a renaissance in the office sector, which its share of activity rise from 36% in Q1 to 46% in Q2, with trading up 10% compared to falls of 35% for retail and 46% for industrial.

Mixed risk factors

Perception of Hungary is showing a mixed picture. It is now believed that the fundamentals of Hungary’s economy have strengthened to a reliable state. This is underlined by the fact that the central bank base rate has been stable for a prolonged time and MNB governor András Simor himself expressed strong confidence in the country’s outlooks. This also applies to the financial system, which he said stood fast during the so-called stress-tests conducted throughout the sector and added that the banks could withstand even more extreme outside conditions.

Accordingly, as O’Sullivan explained, rents on the property market have stabilized and 2012 will see a compression in yields. Thus, those who want to buy can now do so at a discount compared to what’s coming as well as in comparison to the popular Polish market.

Still, the overall perception of Hungary’s risk is still in the negatives. “Investors on the ground understand what is going on and are now far more willing to invest,” O’Sullivan said. However, those that have yet to enter the country and are gathering information from the media or their respective companies’ research departments are still nervous and will be difficult to convince, he added.

Cushman &Wakefield also noted that investors are now mostly looking at core European markets namely the UK, Germany and France, which maintained their market share at 64% - with Germany the stronger, France stable and the UK down a little. The Nordics did particularly well; with volumes up to €4.4bn in quarter two from €2.4bn in Q1, it said.

Improving outlook

Overall, even if the improvement will not be spectacular, 2011 investment volumes will be notably better than the previous year’s figures in Hungary as well as the entire region. “Transaction activity is expected to accelerate further in Q3 and Q4 with investment volumes in all markets expected to outperform 2010 levels by some margin,” said Charles Taylor, partner at Cushman & Wakefield on the outlook for CEE Europe’s property market.

Specifically in Hungary, DTZ predicts an annual investment volume of around €350 million. If that were the case, the annual total would be almost double what was registered in 2010. “According to our expectations, even if the change is slow, investment volume could even surpass the total for 2009,” Czifra said.

These expectations are underlined by CBRE. Following the two big deals of the year to date (Europolis and Árkád, which together added up €183.8 million of the H1 total), there could be others in the cards that are already in the process of due diligence. “We know of several assets that are in this stage,” O’Sullivan said.