A cavalcade of tendencies /ESTON analysis/

Demand outstripping supply, an abundance of liquid capital. A narrow supply of quality real estate, slowing yield compression. Great volume transactions, effects of the American mortgage crisis.
These concepts, characterizing investment property trends, are often to be read nowadays. But do a few short sentences describing the current tendencies of the investment market say it all? According to Eston’s experience this is less and less the case.

The accelerating economy and the commercial property market, showing signs of development, attracted real estate investors to Hungary throughout the nineties; still, for some years, due to the lack of proper supply, significant activity was visible on the class B and C markets only. Following this era, the demand and the capital to spend well exceeded quality supply for years, and first class A transactions had to wait a long time. Development activity accelerated by the turn of the century, reflecting the maturing of the real property market; and, following class A office buildings, logistics parks dominated the annual investment volume for a while. Capital, competing for adequate investment opportunities, has recently turned to retail properties (e.g. shopping centers, retail chains and other retail parks); thus, throughout the preceding years, this property type became overrepresented in the terms of the value of closed deals. Thanks to continuous appreciation, several premises have been already sold for the second time (e.g. Science Park, Alkotás Point); beside this, the class B and C segments have also shown signs of higher investor activity.

Between 2004 and 2007, even the interest-increasing wave set by ECB, which influences the cost of financing, could not hamper the continuous yield compression on this less-transparent market. However, pace of yield decrease has slowed significantly. (As such, the rate of return on owner’s capital has dropped remarkably in the last three years, due to a more expensive financing.) Actual average yields vary between 6-8%; high-end real estates with unique features have already been reported at a narrow 6%, while average rate of return stays between 8-10% for class B and C premises.

An effect of the American mortgage-crisis is the escalating cost of financing in Europe, which is reasoned by the continuous increase in EURIBOR over the last years. This and the effects of the strict terms affect mostly those investment funds operating with a high leverage. Risk taking, and willingness to buy at once, of such organizations has already notably decreased, those investing with a high credit ratio have even withdrawn from some segments.

The increasing cautiousness of investors and temporal leaps in development on some segments all lead to a structural change in investment transactions: dominance of forward purchase deals will expectedly ease this year.

2007 brought a new record in the total volume of property investment transactions; investment volume of the preceding years could almost double, to over EUR 1.9 billion. Regarding the majority of the market yields bottomed, according to most of the researches; still, if some unique properties come to the market their pricing may break away from the average.

Among investment transactions, the priority of retail properties and retail chains is unquestionable, concerning their total worth; and according to market information, the pace of yield compression in this segment has not abated in the recent years. This field may still offer space for investor competition, showing in a further decrease of yields, as some iconic shopping centres have not yet been introduced to the investment market.

On the office market, the jump in supply has led to an increasing vacancy rate, which in return keeps our region-wide low rents under pressure. However, in spite of the growing development activity, market absorption has been healthy in recent years; thus, a prospective rent increase might open the door for further appreciation. Together with the development of the market, as a response to tenant needs, there are more standard offices to find. The segment of those properties with unique features, or developed with high class materials, is still narrow; sellers of such precious properties may achieve favourable prices well over the market rate, and this way market tendencies may have a smaller effect on these.

Expectations on yield changes have been neither justified nor controverted by any significant transaction. As such, the first transparent deal of the year may price the market. Because of the increasing cost of buyers’ side financing, investors’ flexibility at a deal became inversely proportional to the extent of leverage. The uncertainty coming from the current political environment and the economic downturn that resulted from the austerity measures may effect a yield correction. Also, Central-European markets that compete with Budapest may receive a greater share of incoming capital than before; still, property, as a long term investment tool, is not expected to be burdened by a yield surplus in the near future.

It is commonly known that international investors seeking appropriate investment properties think in regions rather than in cities or discrete countries; still, their strategies are primarily influenced by their domestic markets and own market positions. (Obviously, capital withdrawals of the funds affect decisions on international investments.) On the other hand, increased cautiousness upon the more expensive financing urges buyers to give more weight, along with overall market tendencies, to the discrete property parameters, such as concrete location in the town or tenant mix. The result: the expansion in supply and the pickiness of investors lead to a more diverse market. Thus, in the very near future it will not be enough to categorize properties by quality (class A, B or C), by use (office, retail, logistics) or by location (Budapest or countryside) when describing the investment market. It is also essential to consider trendsetting effects of some uniquely designed investment products as well, even if these are single effects (such products may be extremely priced office buildings, boutique hotels or even passive office buildings).

Last year’s remarkable investment volume growth may repeat with an increasing number of new products coming to the market. However, upon the temporarily low-key activity of investors it is still ambiguous whether supply expansion, the increasingly expensive financing and availability of capital or the political and economic perception of Hungary (and Budapest) will have the greatest effect on the annual investment volume.

For further information please contact our experts or visit our site at www.eston.hu and read the full issue of Property Watch under „Our publicationsâ€?.