Investment properties – Market Report 2006/1

The amounts of capital accumulated on the investment property market still create fierce competition for investors; together with this, the yields continue to decline. However, this latter tendency seems to have slowed down due to the European Central Bank base rate having increased three times since last December.

The ECB key interest rate grew to 3.0% from 2.0% over a year, thus a more expensive financing narrows yield profits and cuts leverage on owners’ equity. The typical yield of class A offices has fallen below 7%, yields vary between 6.6 – 7%. Forward purchase agreements concerning offices offer an average turnover lower than 8%, yields may be realistic below 7% for retail premises and for some premium investment tools. Turnover rates for big box units and supermarkets have slipped slightly below 8%, logistics parks usually are offered at 8.5%.
Following last year’s outstanding increase in property investments, some major transactions were completed during the first half of 2006. Once again, offices were in the focus of investor queries. A sign of considerably falling yields is the fact that some properties are being sold on the market for a second time. Such properties include AIG/Lincoln’s Alkotás Point development, and Skanska’s Science Park project in Southern Buda, both of which have been purchased by the Morley Fund and sold by Sachsen Fonds. Alkotás Point was sold for the first time in 2004, when price was EUR 62 million; Science Park was acquired by Sachsen Fonds in the same year, the then EUR 67.5 million property later sold to Morley at EUR 70 million. IVG Immobilien AG has successfully sold its property portfolio of five comprising some 38,000 sqm; HGA Capital paid EUR 99.8 million for the package. Three buildings are at Infopark and the rest lie along Andrássy út.

Stiff competition has resulted in increased risk taking from some investors; Raiffeisen Real Estate Fund purchased the to-be let Büro Center West (District XI, HPV Hungary development) while Immoeast became the new owner of the not-yet launched Haller Kert (District IX, AIG/Lincoln project). According to publications, the purchase price of the 4,500 sqm Büro Center West was around EUR 10 million, and the handover of the 49,000 sqm Haller Kert is expected at the end of 2008.
Negotiations have ended concerning the Roosevelt 7/8 office building, a redevelopment of the former ‘Spinach House’. The buyer of the 27,500 sqm premium priced property is GLL Partners; BHG acquired the premises for around HUF 8 billion in 2001 and sold it currently at a price of EUR 99 million.

The Alkotás Office Center was also sold in District XII. The buyer of the 2,200 sqm building was Redevco. A sale and leaseback agreement was closed regarding the Central Coffeehouse. The former owner, Imre Somody, will rent the property from the Spanish buyer Punto Fa for a 20 year period.
On the logistics market, Rodamco decided to sell Rozália Park. The first 32,000 sqm modern warehouse centre was sold to Immorent for EUR 17 million. According to market information, the successfully launched Premier Outlets Center at Biatorbágy also found a buyer; meanwhile, ING Real Estate continued negotiations regarding a retail project in the countryside worth EUR 10 million.

Following the acquisition of the former tobacco factory in Eger, Wallis Real Estate started the partial demolition and redevelopment of the premises. By modernisation and redevelopment, the urban landmark property will be turned into a 24,000 sqm retail centre called Agria Park. The sale of MTV headquarters was also closed during the first half of the year. The Canadian company Palace 17 Ltd. has transferred the purchase price of HUF 4.5 billion; however, no contract has been signed concerning further use of the building. An analysis of data on the development properties sold by Eston shows that office developer activity has increased along Hungária körút; thus this neighbourhood may soon become a new focus area for the continuously expanding office market.
Agria Park

Last year’s dynamic growth of the net asset value of open ended domestic real estate funds slightly slowed down by the middle of this year. The main reason for this lies in their disability to follow the rate of asset value increase with property acquisitions on a market where supply is narrow and investor demand is outstanding; the diluted portfolio thus could not provide remarkable surplus yields. The greatest net asset value is currently possessed by the Raiffeisen Real Estate Fund (HUF 106 billion), followed by the OTP Real Estate Investment Fund (HUF 98 billion) and the Erste Real Estate Investment Fund (HUF 93.2 billion). The success of these funds is assured by their aggressive acquisition strategies and the appropriate diversification of their portfolios. Despite the first half year’s slow growth rate, a dynamic expansion of real estate fund assets is expected up to the end of the summer since, in accordance with the introduction of the interest tax in September 1, many will strive for a long-term investment opportunity still offering favourable returns.

To read our entire market analysis, click here.