ESTON Market Report 2009/2 – Crisis intro

The current situation of the real estate market bears a great resemblance to the process of survival of the fittest. The era that offered the richest harvest is over. There is less and less drinking water (credit) and food (investors); the battle that has recently started for the tenants/buyers is desperate and will have many victims for sure. The changed market environment needs new attitudes, strategies and a widely different point of view. In the following period, natural selection will rarefy the market players, just like in nature. The days of the developers who created “bad posterityâ€?, but moreover the days of all posterity are numbered. When the market environment was favourable, even the less viable projects had the chance to survive. The future of badly positioned or planned projects is now uncertain, however. Can these projects be re-positioned at all, and will there be an appropriate price correction when anyone would see any hope in these dead projects?

According to the professional estimate of ESTON, the owners of the premium investment products would rather wait until market conditions regenerate than cast their vote for liquidity with a drastic and spectacular re-pricing.

Selection could be the next milestone in the evolution of developers as well: in this environment lacking funds, only those may stay alive who can and dare to develop (either from their own capital or by using alternative financing methods) after the setting of the market (2011?). In the current restricted credit conditions, it seems that no one will have the chance to start a new project on a speculative basis in the following 1.5 years, in any of the segments. The Hungarian real estate professionals may suffer from a grave loss as the merit of the knowledge of these professionals will erode dramatically.

Only BTS projects and transactions for the unique needs of the end users may give some hope to the developers. In the struggling for being, only the strongest will survive. It is likely that the developers’ attitude will change; more could follow the footsteps of the Swedish developer, Skanska, who, after the handing over of East West Business Center in 1991, kept it for a long time, then sold the building full of tenants 13 years later to AIB Polonia in a proper market environment.

After 2010 it will turn out whether the lack of new supply could result in rising rental fees, expected by many for a long time. Average logistics and office rental fees have not been on the rise since 2000. Nevertheless, developers were well compensated by the continuously decreasing yields. The current high vacancy rate and the high volume of speculative developments have put rental fees under pressure as well. Tenants have realized their advantageous position arising from the “tenant marketâ€? and are happy to use it. In tandem with this, the quality of tenants has become more valuable as well. Reliable tenants have been able to get more discounts from owners. The government significantly will lower the general rate of the property acquisition duty in case of commercial properties from January 1, 2010. The duty will be 4% of the market value up to 1 billion forints, and 2% for the difference above this amount, but 200 million forints at most. Simultaneously to the drastic cut of the previous duty (10%), now the companies owning real estate have to pay the duty even in case of the sale of business shares. These changes could significantly restructure real estate investment transactions. Transactions towards year’s end are likely to be postponed to 2010. The duty still has to be paid after the gross amount of the property, consistent with the former practice.

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