Investment properties – Market Report 2006/2

Investors’ soaring interest for Hungarian properties remained unbroken in 2006, local real estate funds even got a new – though temporary – momentum due to the implementation of the interest rate tax. The volume of transactions completed was around the € 1bn level, seen also in previous year, the strong demand resulted in further – however slowing – decrease of yields.

Most deals were signed on the modern office market – just as before – while significant part of the investment volume stemmed from retail property sales. This latter market saw the €100 million plus deal between Morley Fund and the developer consortium of Raiffeisen Real Estate and Miller Development covering the first two, fully-let phase as well as the third phase planned for 2007 of Premier Outlets Center.

Dawnay Day acquired Interfruct, C&C chain of 22, at a yield of 7,8% according to press information. SCD Group was the seller of this 105,000 sqm portfolio of € 82.5m.
On the office market there were three transactions of high priority closed in 2006. Morley Fund bought Alkotás Point and Science Park from SachsenFonds for € 145m, HGA Capital purchased IVG’s portfolio of five buildings (three at Infopark, two on Andrássy Avenue) for € 99.8m, while GLL Partners acquired the exclusively located Roosevelt 7/8 office building for € 99m. One of the major deals in Q3 2006 was when Wallis Real Estate agreed to sell a 30,000 sqm portfolio, consisting of Danubius office buildings Bajor and Polar Centers, to CIB Lízing for € 60m.

The asset value of three major property funds in 2006Some deals also happened in the market segment of logistic properties, for example Rozália Park was sold in two steps. In H1 2006 Immorent purchased 32,000 sqm for € 17m and by the end of the year Hannover Leasing has signed for the remaining 60,000 sqm at a price of € 60m.
In the first half of 2006 the increase of real estate investment funds’ net asset value was slower than the pace seen in previous years, but it got a new impetus with the implementation of the interest rate tax in August 2006. Data however indicates that the jump was a one-off phenomenon. By the end of the year the net asset value of all the three largest Hungarian real estate funds well exceeded the HUF 100bn mark. Erste Real Estate managed a total of HUF 130bn, recording more than 250% year-on-year growth from net asset value of HUF 50bn at end 2005. The former top performer, Raiffeisen was able to produce only a slower increase, its NAV went up to HUF 122bn from HUF 92bn, while OTP also done well growing from HUF 73.8bn to HUF 120bn during the same period. The dramatic inflow in August did not hit the funds as a surprise, still their real estate content suffered from it. Due to the low real estate content real estate funds’ performance is largely influenced by money market developments, and lacking the sufficient market supply of investment products they are more likely to opt for own developments (like Europa Real Estate Fund). At those funds, where own development activity is not an option – since their mother bank has its developer arm, e.g. Raiffeisen – real estate content can be increased via forward purchase agreements, but we have seen cases where the mother bank’s headquarter was included in the portfolio for the same reason (OTP, Erste).

Moderation of average yields has continued in all market segments, though at a constantly slowing rate. The largest fall, 1.2 percentage points, was seen at the niche of shopping centers, with its average yield closing the gap to the one achievable on the office market. As of year-end 2006 modern offices were sold with a yield expectation of 6.5%, though in the case of top-quality buildings with exclusive features the rate could slide below 6%.
While the yield of retail properties declined to below 7% by year end 2006, we expect the largest drop in this segment for 2007. Logistic property yields fell to around 8%, but it could plummet further with the potential sale of larger scale logistic parks.

Investors’ activity is seen to remain high in 2007, so yields could slip further, their fall is not likely to come to a halt before year-end. On the other hand the spread to Western markets diminished, while financing became more expensive after several ECB rate hikes during the year. We see these factors to hinder any fast increase in investment property prices for the coming twelve months. A characteristic of the Hungarian market is that transactions are usually signed not on the open market. In the fierce investors’ competition however we believe that direct bids received by property owners are not necessarily the best achievable ones. Calling for tenders and using the service of professional advisors could result in realizing optimal selling conditions.

Increasing property market transparency is therefore the basic interest of sellers, and it is prone to hit the market not later than yields stop falling.