Investment properties – Market Report 2005/2

2005 was buoyant for the market players in the investment property sector. Already-let offices introduced to the market, revenues from privatisation, and the sum of money flowing into property funds were all remarkable. The decreasing monetary base rate had a favourable effect on the volume of real estate investments in all three regards, together with the considerable sums of money ready to be invested in the market.

According to preliminary estimates, one quarter of all investments in the CEE region were in Hungary, boosting yearly volume to the level of 1 billion euros. Among the major transactions were the sale of the Pólus Center (buyer: ING Real Estate Fund, price: € 90 million), the MOM Park Shopping Center (buxer: PBW RE Fund, price: € 71 million), and the successful closing of the Harbor Park deal (buyer: Prologis, price: € 70 million). The sale of the Roosevelt 7/8 office building was close to being sealed at the end of the year.
Property investment transaction volumeFurther noteworthy transactions took place in the commercial retail property segment, including the sale of four Plaza Center shopping malls in the countryside (buyer: Dawnay Day, price: approx. € 56 million), and the sale of 12 Stop.Shop chain units (some of which are in the planning phase; buyer: Immofinanz, price: app. € 210 million).

The net asset value of open-ended real estate funds has tripled during the year, indicating an outstanding demand for such investment tools. However, the great dynamism of the segment, which was supported by low interest rates, was not followed by a corresponding pace of property purchases, thus the ratio of assets tied up in real estate fell back considerably. To overcome the disadvantages of this phenomenon, many real estate funds began to develop their own projects or, alternatively, invest in schemes already under construction. Európa Real Estate fund, taking advantage of its former experience in the field of residential development, is building a 163-unit project named Zugló Garden; the fund is also involved in the ongoing construction of the Vértes Center shopping mall in Tatabánya. OTP Real Estate Fund realised its Aquincum Logistics Park project in Szőkőkert utca (7,000 sqm in District III), while Raiffeisen Real Estate Fund developed new premises for Dana Hungary in Győr. The specialisation of property fund activities is now supported by a new categorisation of funds by the Hungarian Association of Investment Funds (BAMOSZ), which now listd 12 main categories instead of the previous 5.
Domestic funds made successful choices among completed properties. Raiffeisen Real Estate Fund purchased the West Point Office Building (3,200 sqm, € 6 million) together with ECB Dévai Center (9,000 sqm, € 12.5 million) and the Moszkva Tér Business Center (4,200 sqm, € 9 million). OTP Real Estate Fund acquired a 9,000 square meter office building in Petneházy u. (District XIII) and a warehousing and office complex in District XXII.

By the end of the year, an agreement for Europe Tower (25,000 sqm) was closed between buyer Erste Bank and Immofinanz in the neighbourhood of Váci út; meanwhile CIB Bank purchased the new Skanska development, Light Corner, originally scheduled for modern offices but no longer because of the purchase, in District II (13,000 sqm, € 30 million). Orco Property Group acquired a portfolio of 55,000 square meters of offices and retail units from the Ofer Brothers; the € 70 million deal included the Budapest Stock Exchange building, the parking building at Szervita tér, a downtown hotel, and Budapest Bank offices along Váci út. Orco also purchased the Atronyx office building in Budaörs and the protected premises of the Divatcsarnok during the year.
The greatest revenue arising from privatisation in 2005 was derived from the selling of 75 years’ operating rights for the Budapest Airport (HUF 465 billion); the buyer, the British Airport Authority, operator of many international airports, plans to boost airport turnover by developing underutilised properties. During 2005, many plans have been announced for the redevelopment of former military premises. A new residential project is scheduled on the site of the Kinizsi Barracks, which was sold by the local government for HUF 5 billion. The Győr barracks will also be renewed; Leier plans to carry out a HUF 25 billion development project including offices, a hotel, and some shopping facilities. Furthermore, upon the redevelopment of the airport at Börgönd, Alba Airport expects a million discount flight passengers per year.

Looking at the listed investment transactions, we can conclude that the supply of “ready madeâ€? investment properties is still very narrow, though highly motivated; sometimes pressured, investors widen their target group with properties under construction and development possibilities. A decrease in yields continued in line with the significant investment volume: office yields amounted to about 7.1%, and retail yields were slightly above 8% at year end. According to our expectations, the limited supply and significant amount of investment sums will still force buyers into competition in 2006, both pointing in the direction of further decreasing yields. However, a monetary base rate increase by ECB may reduce the yield-interest margin, by ultimately increasing the cost of financing. This would weaken yield compression, and if interest rates increase significantly, it may even lead to a turning point in yield trends.