MIPIM 2010 – Quiet construction in Cannes

Less glamourous, more professional panel discussions characterized this year’s property parade in Cannes. Developers have disappeared in droves from the world’s top property exhibition and the cooperation of cities and regions has taken their place. Poland was the star at this year’s exhibition. Our report from MIPIM.

The atmosphere at this year’s MIPIM was certainly quieter and more moderate than in the past. As a result of the crisis, the Cannes exhibition was concentrated into a smaller area than in the previous years and the list of exhibitors also changed significantly. Earlier, it was common for large developers to have their own stand. However, this year, we could hardly find any of these. Instead there were cities, regions, perhaps even, countries with relatively large stands representing several developers, investors, and even fiscal institutions. TriGranit is a good example: In the past, they were regularly present with a large exhibit stand. However, this year, they were not exhibiting at all, despite the fact they remain one of CEE’s largest developers.

In this regard, MIPIM is increasingly becoming a competition between regions, cities, and countries, as the organizers made an effort to place geographically neighboring regions and cities next to each other within the exhibition area. Hence, we were able to find the Prague and Bratislava stands just a few meters away from the Budapest stand.

As in previous years, the Budapest Business Region’s stand represented the Hungarian capital of Budapest, in cooperation with Studio Metropolitana. The location of the Budapest stand within the exhibition area was considerably favorable and attendance was also relatively high when compared to turn out to presentations by other regional capitals, like Prague or Bratislava. B&V Group, Duna City, Duna Spirit and Talentis Holding were all represented at the stand.

Budapest Mayor Gábor Demszky was representing the capital at the Budapest stand. Contrary to Expo Real held in October, Budapest did not focus on presenting concrete projects here, but on informing potential investors about the city’s Danube Strategy.

Shrinking region?

Almost none of the emerging market countries in the CEE region represented themselves at MIPIM. The Romanian and Bulgarian property sectors practically went without notice in Cannes, as did Croatia and Serbia. Classical Central European countries, such as the Czech Republic, Poland, Hungary, Slovakia, were all present. However, it was Poland that stood out from the crowd, in all aspects.

Poland was clearly the undisputed star of the exhibition – and not only because they were the guest of honor at this year’s MIPIM; displaying a greater number of stands, with more national companies presenting themselves than any other country in the region. Poland was a topic of conversation at almost every panel discussion, highlighted as currently one of the most, if not the most, attractive property markets in Europe. Warsaw property markets, as well as other significant Polish cities, are appealing to investors. PropertyEU, for instance, published a special MIPIM edition featuring an interview with Director of Eurohypo Markus Leininger who said that they no longer consider Poland an emerging market, but a mature one.

The banks are still waiting

Distressed assets were a recurring theme at the professional conferences held throughout the exhibition. These real estates are hanging like the sword of Damocles over the heads of both the property industry and the finance banks. The question is still up in air as to whether European banks are going to restructure their poor-performing project loans or whether they will choose to simply sell this real estate, says Isabelle Scemama, head of CRE Loans and Corporate Finance at AXA Real Estate during a panel discussion. As she put it, larger banks are currently “sitting on their books” and just don’t want to realize any further losses. Surely, there will be some examples of forced sales but, with current pricing levels being what they are, these clearly will generate huge losses for the banks. Thierry Leleu, Director of GE Capital Real Estate Investment agrees. His comment was, if banks decided to face the truth and realized their losses as per project financing, they would need additional capital injections – that is why the rational decision for banks is, indeed, to “sit out” the property cycle.

The topic of negative yield tendencies came up frequently during the panel discussions. Some believe that the irrational investment behavior, as seen before the crisis, had returned and this has already resulted in London yields dropping to 2006 levels. Ben Broadbent, an economist for Goldman Sachs formulated an interesting counter-opinion: The decrease in property market yields is a totally rational response to present monetary circumstances. He emphasized that the fall of property yields is a natural process, in consideration to the current interest levels and government security-yields, since property as – an asset category – is basically behaving similarly to bonds.

End of Eastern European illusions?

The illusion of Eastern European growth has come to an end. The region will not join the club of the world’s most rapidly growing areas in the coming five years, stated Barbara Knoflach, CEO of the German company SEB Asset Management, at a MIPIM panel discussion. In her opinion, Central and Eastern Europe was subjected to one of the many severe lessons of the crisis. Knoflach said investors generally regarded Eastern Europe as the region with the second largest growth potential after Asia. As she sees it, the crisis has destroyed this illusion and the region’s rating has drastically deteriorated. In regards to market growth, Eastern Europe will certainly not get on par with the world’s most dynamically developing regions like Asia or Latin America in the next five years.

Knoflach emphasizes that there are more than just macroeconomic problems in the CEE region; the property industry itself is dealing with serious fundamental problems and demand and supply are not balanced at all. Alarmingly low take-up rates clearly indicate these problems. At the same time, Knoflach believes that Poland is currently performing better than other countries of the region but still regards the Czech Republic, Poland, and Hungary as the core Central European markets.

Fear of the W-shape

Péter Würsching, Managing Director of B&V Group, is rather pessimistic about the recovery of the real estate industry. According to him, the property sector has a “W-shaped” road ahead, as opposed to a simple V-shape. He simply doesn’t see any structural changes that might guarantee the prevention of bubbles. In his opinion, a bubble has already begun to inflate on the developed Western European markets and, since Hungary is basically a secondary market, any possible negative effects will reach us later, even if the regional markets don’t develop a bubble in the coming period.

Concerning the Hungarian and the regional markets, Würsching says that Central European and European capital basically sails in the same boat. No wonder they all represent themselves in regions at MIPIM, with no individual developers present with their own stands at the exhibition. He goes on to say that Budapest has to show up at international exhibitions like this because, in any case, we are lagging behind in the competition with our regional neighbors. Würsching gives Poland and the Czech Republic as examples: In addition to their capital cities, almost all their bigger cities have had their own stands at MIPIM. Due to growing competition within the region, he thinks that major Hungarian cities should also be building an international presence.

The region needs a star

As Ernõ Takács, Chairman and CEO of Talentis Holding sees it, everyone was a little more moderate at this year’s MIPIM, compared to the past. The exhibition was concentrated in a smaller area and cooperation between regions and cities dominated over monumental project presentations. Takács believes the event’s direction has shifted from exhibitionism and luxury to common sense.

As to his opinions about the Hungarian property market, Takács said that he has followed conversations with foreign market players and they now have more information about our market than ever before, which is basically a positive development. International investors consider it a positive experience, he added, that the Hungarian property market has not collapsed in the one to one-and-a-half years following the outbreak of the crisis; the ship has survived the big storm and is still afloat.

In his opinion, the current favoring of Poland is clearly helping the Hungarian market. His argument is that Central and Eastern Europe needs a “star” that acts as a guiding light and example to the poorer performing countries throughout the region. The Polish example proves that international investors have not totally written off the CEE region and the success of the Polish market is an indication as to the significant growth potential still present in the region.

Takács is optimistic after this year’s first quarter since there were actual investment transactions which reveal international investors’ trust in the Hungarian market after all. (Of course, it isn’t at all certain that these recent transactions weren’t exceptions that prove the rule.) While Takács is still expecting a gradual decrease in transactional yields, in his opinion, pricing levels will not return to the top levels held before the crisis, at least not in the mid-term.