Confidence towards market and investor interest returning

With the economy officially out of recession since the fourth quarter of 2009, real estate investor interest has also picked up, although investment volume has remained well below the level of recent years.

The Hungarian market has started to recover from the negative effects of the financial crisis suffered last year, with renewed investor interest towards the country returning as government measures to stabilize finances and improve balances showed results over the past half-year – said Hamish White, partner at the Hungarian office of Colliers International.  

A sign of improved confidence towards the CEE real estate market in general is the increased M&A activity in the sector, such as the recent takeover of the Europolis real estate portfolio with a value of some €1.5B by CA Immo for a reported figure of €272M and taking on their outstanding loans. This takeover now increases the assets of CA Immo to approximately €5B and significantly raises their profile throughout Eastern Europe and beyond.

In addition, during the first half of the year, Colliers International recorded five major transactions of note with a combined value of around €167M, with the largest being the sale of a 50% stake in the Allee Shopping Center by ING Development to Allianz for approximately €100M.

“The number of companies seeking to invest in Hungary is increasing and there is a growing perception that Budapest represents an attractive investment market” – said Hamish White. “One obvious reason to consider investing in Hungary is due to relatively low rents for office projects, which reflects in lower capital values with returns above that of other European capitals.” The second is research pointing to an undersupply of quality office space by 2012 and that office rental rates could rise due to an extremely low pipeline of new offices.

Increased interest for investment properties is visible, among others, from open-ended Hungarian real estate funds such as Erste. These funds have been acquiring various assets over the past year due to growing liquidity from “mom-and-dad” investors attracted to the higher yields.

Local pension funds have also started to become active, with the Évgyűrűk Fund carrying out one of the largest real estate transactions during the first half-year. The purchase of the U48 office building was the only genuinely transparent transaction on the market during the first half, with Colliers International representing the seller, property developer BIF, in the transaction.

Looking ahead to the second half of 2010, Colliers International forecasts further transactions of income generating real estate projects, with both foreign and domestic real estate funds likely to close benchmark transactions in various sectors of real estate.

As an outlook, in terms of yields, there have been limited closed transactions to draw on as sales comparables, but our investor surveys indicate a willingness to transact at yields of approximately 7.75% for prime office, 7.5% for prime retail and 9% for prime industrial.

There is presently a window of opportunity to purchase quality real estate projects at a discount compared to other CEE markets such as Czech Republic and Poland, and if Hungary follows its regional peers, we can foresee yield compression as the markets return to a more functional mode.