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UK Investors Biggest Spenders In Hungary's Real Estate Market

( 20 / May / 2008 )

2007 was a record year on Hungary's real estate investment market in many respects. Transactions totalled some EUR 2 billion, which is 250% more than in 2006.

Office and retail sectors are responsible for 90% of the transactions. The average transaction size was around EUR 55 million, mainly owing to two high value transactions concluded in the second half of the year.

UK investors turned out to be the biggest spenders, accounting for about 40% of the transactions. German, Austrian and French investors also had more than 10% share of the total investment volume each. The largest deal was concluded by the UK based institutional investor, AIM Group, which purchased Arena Plaza for EUR 380 million. The biggest office transaction involved JP Morgan Asset Management, which acquired Terrapark A-B in Budaörs and Margit Palace in Buda for EUR 110 million.

Yields have been steadily diminishing in the investment market in recent years. Major office and retail products were sold at 6% as opposed to an average of 8% and 10% respectively in 2003. With the worsening situation in the financial markets in the second half of 2007, investors became more cautious about embarking on new transactions.

Liquidity deteriorated and banks became more selective about the projects they would finance, and as the risk increased they put up the interest margin on the loans they did grant. Investors were hit hard by the rise in financing costs at the same time that yields were falling. Hence the yield premium of property as an investment product dropped, the stable cash flow ensured by the right tenant mix became increasingly important to investors in mitigating risk in the current environment. 

As a result of the credit crisis that started last year products have been re-priced and become differentiated according to the level of risk. Banks consider projects proposed for financing and deal structures much more thoroughly.

There is no doubt that the increases in financing costs have affected the investment market but the Hungarian commercial property sector appears to be developing on a sound basis. It is important to note, however, that in recent years the fundamentals of the Hungarian economy have been weak and this may also affect the commercial property market.

It is worth thinking about the fact that the decisions concerning projects currently in progress were made in a market environment that was a lot more stable and was believed to be more predictable than the present one. The big question is, under what terms and conditions and at what pricing new developments will get underway.

Nevertheless, developers have not lost momentum yet, evidenced by the 300,000 sq m class A office space that will be delivered in 2008, along with several new retail and logistics projects.

Source: Portfolio Online Financial Journal

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