Investment properties – Market Report 2007/1

In accordance with international trends, on the market of investment properties in Hungary, the total transaction value is expected to be well above the volumes realised in 2005 and 2006, with 1 billion HUF in both years. A limit to that can be actually put only by the number of products coming to the market.

And that may result in a – slower – decrease in yields and an increasing number of forward purchase agreements. Worldwide, a huge amount of capital is waiting for investment on the property market, while favourable opportunities are scarce. On the most developed markets of Europe, in London or Paris, due to the abundant liquidity, the return on premium offices already fell below 4%, while the yields of the 5-10 years’ government securities, that can interpreted as a reference yield, are at 4.1-4.2%. And so, the risk premium has been priced out to an extent that is no longer justified by the low vacancy rates or by the strong demand from tenants, but perhaps not even by the increasingly frequent sale-and-leaseback agreements either. Therefore, increasing attention and volumes of capital turn towards the secondary markets in Western Europe, where yield levels of around 6% are typical, and towards capital cities with similar standing in Eastern Europe, including Budapest.

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Domestic property funds, holding a total of 2.2 bn EUR at the end of June 2007, join that vivid international demand. Even if the overall assets of the 19 public funds decreased by 100 million EUR in the last six months, this amount is still 30% above the stock of one year ago.
The reduction in the last months was due to a number of factors. One of the reasons was that in the case of funds launched earlier, the vesting period, when a withdrawal of capital is penalised by a higher commission, was over. On the other hand, alternative investments became more attractive, with a central bank prime rate of 8%, the annual yields of money market investments was also promising, while commercial banks offered deposit rates above 10% and BUX rose 16.4% in the first half of 2007. Three quarters of the assets under management are held by the four largest funds (Erste – 535 million EUR, OTP – 511 million EUR, Raiffeisen – 407 million EUR, Európa Fund – 200 million EUR) and this already makes them important players, with a high implied potential, because assets invested in properties actually represent only 35-40% of all assets under their management. But interest is not matched, with investment products of adequate quantity and quality on the Hungarian property market, and the impact thereof is a further decrease in yields, even if these are considered already depressed. Even though a number of premium office buildings will be completed in the coming months, only a small portion of these shall appear on the investment market, some of them were already sold earlier in forward purchase agreements and because in a regional comparison the Budapest developers’ propensity to sell is considered to be low. AIM-listed Ablon, for instance, declared its willingness to keep the ownership of its completed houses and is ready to sell these only upon an exceptionally attractive bid.

One of the most significant transactions on the office market was concluded by Raiffeisen Property Fund, with the involvement of Eston International, when it bought, prior to the start of the construction, the Könyves Kálmán Office Building (26,000 sqm), to be built opposite to Népliget, from Biggeorge’s NV. In a much smaller transaction, the French Kleppier purchased, after the retail outlets of Duna Plaza, the offices in the building as well, for a consideration of 14.2 million euro. While Arena Corner was also waiting for its buyer, in the first half of 2007.

The sale of the European industrial business of Parkridge had an impact on the logistics property market in the surroundings of Budapest as well, because in the framework of the deal, logistics parks at Szigetszentmiklós and Százhalombatta, earlier under the Parkridge name, were transferred into the portfolio of ProLogis. Thus, the ProLogis capacity in Hungary includes 310,000 square meters of built halls, with further 330,000 square meters that can be built, and so, it clearly became the largest player of the market. In early 2007, two modern industrial halls exchanged hands: the one in Győr occupied by Renault, and the other in Jászberény by Hilite International. The British Standard Life Investments paid 38 million euro for these and for another distribution facility in Budapest, fully rented before completion.

According to market information, a far more important deal is also in preparation. The would-be largest shopping mall of Budapest, Arena Plaza shall be purchased from Plaza Centers for 400 million euro, prior to its completion in October 2007, by the property fund of the British Active Asset Investment Management. If the deal is made, it will probably be the largest investment transaction of the year on the Hungarian market.