Investment properties – Market Report 2007/2

Due to the overheating of the American mortgage market in previous years, more exactly, due to the granting of mortgage loans to customers without proper credit standing, in an environment of increasing interest rates, the housing market bubble was burst, loans defaulted in large quantities and banks suffered huge losses.

As a consequence of mutual financing relations between banks, almost each of the credit institutions were seriously hit. The subprime crisis projected a threatening economic recession in the USA and FED, in order to prevent that, reduced its benchmark rate drastically, by 125 basis points. In Europe, the impact of the crisis could be felt primarily on the money markets, with some decrease in the amount of monies waiting for being invested and financing became much more expensive.

Parallel to the unfolding of the subprime crisis, the ECB benchmark rate and the general reference in financing: inter-bank rate (EURIBOR) diverged. The latter rose with 0.7-0.8 percentile, which means, the mutual financing of banks also became more expensive. And this makes more expensive the access to funding for other market players, including developers, reducing by the same the achievable returns and, together with that, their willingness to develop, to invest into properties.

On the market of the Hungarian commercial properties, there was only little impact from the subprime crisis in 2007 in terms of development projects, and even less in terms of investments.

The amount of the year’s investment transactions was close to 1.9 billion euros according to the estimates, that is, it was more than doubled in a comparison with the activity experienced in past years, partially, because of certain deals with large amounts. The main attraction of the emerging markets of Eastern Europe, and within that, Hungary was a higher yield achievable, in a comparison with the primary markets of Western Europe. The capital cities of the emerging nations of Eastern Europe offered an excellent opportunity for convergence play. While yields in London, Dublin dropped below 4% in the first half of the year, the most popular products exchanged hands at levels of about 5.5% in Prague and Warsaw, and just below 6 in Budapest (with 5.8-6% on the office market, 6-6.5% in the market segment of retail properties, 7-7.5% on the market of logistic properties). This also meant that the aggressive reduction in yields experienced in previous years came to a slowdown, even though it did not come to a standstill. However, in addition to the correction observed on the primary markets – with London yields recovering to the range of 5-5.5% by the 4th quarter of the year – a further decrease in yields is quite questionable on the convergence markets as well.

In Hungary, the largest investment transaction of the year was the sale of Arena Plaza, where the British aAIM paid 381 million euros to the developer, Plaza Centers for the largest shopping mall of the country, four months prior to its completion, but at an occupancy level of 100% already. In addition, several important transactions were made in the market segment of retail properties: Corvin Ã?trium, a shopping centre under construction was bought by Kleppiere; Campona shopping centre, built in 1999 and operating at an occupancy level of 97% also exchanged hands when one of ING’s partially open-end funds purchased it from Compagnie ImmobiliÄ?re de Belgique for a consideration of 110 million euros. The portfolio of Park Center, consisting of retail properties in 10 cities in the countryside was sold for 70 million euros.

Among the most significant transactions on the office market, the sale of Ã?trium Park, developed by Wallis Ingatlan shall be mentioned, where Immoeast paid 100 million euros for the property. The office building Aréna Corner was bought by Orco, from the developer, Raiffeisen Property, while the Parkway development project of Biggeorge’s NV, to be accomplished in 2009, was bought by Raiffeisen Property Fund, in the framework of a forward purchase transaction, with the contribution of Eston. Skanska sold Népliget Center to GLL, a few weeks before the completion of the first phase, against a consideration of 72.2 million euros. The first Hungarian project of Hochtief, Capital Square, to be completed in 2009, was bought by CA Immo International, for 71 million euros. Margit Palace was transferred from the ownership of Terrafinanz to the portfolio of JP Morgan, IVG Institutional Funds bought, from a group of international and Hungarian investors, the Herzog Palace, accommodating the Budapest Stock Exchange and an office building on Károly körút, vacant at present.

A new trend is an increased interest in hotels – for instance, Art’otel, on the Buda side of the Danube, exchanged hands – and in properties suitable for hotel development, but offer remains scarce in this respect. Development motivation does not leave intact the countryside either, where the SCD Group, committed to development projects on Lake Balaton attracted the attention of the Irish Quinlain Group, wishing to participate in the projects of the coming 5-7 years.

At the same time, attention continues to be focused on areas suitable for office development in Budapest, in particular, the section from Váci út to Hungária körút, as well as the outer ring, but Kerepesi út also became included into the maps of the developers.

After a very strong year of 2006, there were almost no changes in 2007 in the stocks of the Hungarian property funds. The most important players remained the property funds of ERSTE (HUF 151 364 billion), OTP (HUF 141 625 billion) and Raiffeisen (HUF 91 553 billion), being increasingly active on the market.

Read further details and the full report here.