Still hungry for Hungary

Both institutional and private investment is still good business in the Hungarian property sector. We witnessed a record level of investment of EUR 1.9 bln in 2007. But what of the credit crunch that is just around the corner?

The general view in Hungary is that it will hurt, but by how much we don’t yet know. So far no major local bank has experienced write-downs because of the sub-prime mortgage crisis in the US, and representatives from both the financial services sector and commercial developers agree that transaction charges will inevitably increase in the short term.

General costs such as building materials and energy will also rise, at the very least at the same rate as inflation (nearly 7-7.5 pct in 2008). The borrowing costs of loans from Hungarian banks have also increased from 0.2-0.4 pct, and therefore companies applying for project financing will ultimately have to pay more back. This will undoubtedly affect the commercial property business, with the likelihood that smaller and less liquid companies may slow their future development plans and even delay some of their existing projects.

Unstoppable wave

However, the wave of new office development is continuing in Budapest with more than 300,000 sqm coming on to the market this year. Obviously institutional investors and private funds will remain cautious despite this rise in supply and the subsequent price change that will occur throughout the country, due to other external factors involved in acquisitions. However, yields are expected to remain stable or will even rise, which will have the effect of further lowering capital values.

In the opinion of Zoltán Radnóty, managing director of the HB Reavis Group, (a Slovakian developer that entered the Hungarian market last year): “I see no fundamental shortage in the flexibility of the Hungarian commercial property market, and the harsh effects of the credit crunch already being felt in Western Europe will only spread to Hungary in the first half of this year; with this delay primarily due to the generally slower deal-making here. But developers may stop or delay some projects which have a higher than expected risk, and this will inevitably lower the demand and price of sites.”

Iain Sellers, managing director of Orco Property Group in Hungary, however, is not pessimistic about the future. “We don’t foresee delays to our projects. The Paris Department Store is due to open in Q1 next year, and we are trying to speed up Váci 1, a unique retail project in downtown Budapest. I anticipate that financing will become more difficult and expensive for companies without a proven track record and financial background, and banks are certain to require more equity.” Mr Sellers goes on to say that he expects prime rental prices will increase substantially – in some cases by as much as 40-50 pct in the coming 2-3 years – on the two main shopping streets (Váci and Andrássy). While rents in shopping centres like Aréna Pláza will remain stable.

Football gets in on the act

A consortium led by English businessman Kevin McCabe (the owner of Sheffield United football club) shares this optimism. He and his fellow business partners have just bought the famous Ferencváros club, and all of its assets, for app. EUR 11 mln. They plan to convert this huge site into a retail and office complex, while the club is hoping to be managed more professionally. Other main contenders for this project were Swiss company Neuchatel Financial Ltd. and Polish firm Echo Investment. The main attraction of this 8-ha site is its good location – downtown on the Pest side. Mixed-use developments such as the one planned for this site are becoming very popular in Budapest, and the winning consortium believes the potential for such projects is still relatively high.

Kevin McCabe’s consortium is one of a number of British businesses to invest into the Hungarian property market. aAim, a fund management company backed by a number of high profile sporting personalities, including Sir Alex Ferguson, has recently bought part of Aréna Pláza, the biggest shopping centre in the CEE region, just 2 months before the grand opening in November last year. While visiting Hungary twice in 2007 on football business, Mr Ferguson expressed his optimism about the market’s potential on several occasions. The 65,000 sqm GLA is increasing its popularity with big brand tenants (Peek&Cloppenburg, C&A, Tesco, Electro World and Zara), who are actually queuing up to secure retail space there. The purchase of Aréna Pláza was by far the biggest deal in 2007 in Hungary; aAIM paid EUR 400 mln for the property, which represented a yield of between 6.5-7 pct.

Prices here in Bucharest are still well below comparatively sized flats in Paris, Berlin or Rome, not to mention London or New York. However rises in price will continue as supply is on the decline, shown by the fact that there has been 15-25 pct fewer projects being started during the last 3-4 months compared to the same period in 2006/2007. Some argue this is the recession itself, but most investors believe that good projects can only benefit from this fall in supply and increase their profitability.  

Nandor Mester