ESTON-analysis – Survival or opportunity?

What will happen to the real estate development market next year and after? Where are yields heading? Is it worth investing in real estate, or would it be better to look for alternative investment possibilities? These were among the questions to which Eston International’s consultants sought possible answers and solutions.

Development site market

Several negative factors affected the real estate market last year, of which the most important was a fall in demand, and in addition, tight and pricier credit sources. As in other segments, there were no major transactions on the market of development sites last year whatsoever, and solely end-user purchases were seen. There were many developers who bought up numerous sites in time of boom and planned to start more projects simultaneously. Although conceptions have already been created for some of those, decisions about keeping viable projects or dropping others are now based on new feasibility studies – tailored to the new economic situation. As these empty spaces do not produce any income, it is likely that some plots of speculative “one-projectâ€? developers of less solid capital would fall into the hands of the financing banks. Even if some of them manage to finish their ongoing projects, they will not consider buying new sites or elaborating new projects at all. Even though “for saleâ€? signs are not advertised on the majority of the development sites of Budapest, practically all owners have reconsidered their previous conceptions, and they are more than willing to sell.

All market players share the same opinion about the lack of demand for development sites in Budapest. Certain interest is still shown towards the central areas of the capital, e.g. for some vacant sites in the city centre and inner Buda or for other bargains in prominent locations. Investors with solid capital are looking to exploit these limited possibilities.

It is not worth developing an office building!

We examined a fictive office development project in our example: supposing that yields are between 8-9% and rents are 10-12 €/month, the investment value of 1 sqm ranges from 1,200 to 1,620 €. Calculating 1,350 €/sqm project cost – which includes the fee of planning and authorization, costs of landscaping and construction work, reserve for unexpected costs, in addition to financing, marketing and other soft costs – and 250-400 €/sqm price for the site (these were bought before the crisis) it is sufficiently clear that even in the best case, developers could sell only at cost.
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Selling is, however, quite difficult in this current illiquid market. Subsequently there is only chance in that exceptional case, when developers manage to fill their buildings to an 80-90% level and there is a serious buyer for it in the market. (There has not been a single grade ‘A’ investment transaction in Hungary in the past 12 months). It can be easily determined that as long as these yields and rents stated above are available on a given market, it is impossible to gain profit by developing office buildings. That is the reason why not one developer has started new projects since September 2008.
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As far as it is possible to sell after all on the above price level, the developer then has not realized profit, but only managed to liberate his capital!


Eston International’s experts are suggesting to investors with solid capital to purchase office buildings where tenants have moved in paying lower market rents already adjusted to the crisis – therefore those buildings produce re-priced cash-flow – while on the other hand yields are on the currently estimated, 8-9% level.

This simple example below is to demonstrate the essential elements of the acquisition strategy by illustrating the inverse movements of rents and yields. In our estimation, local rents have dropped 10-20% compared to rents at the time of the real estate boom in 2007 and hovering around 11.5 €/sqm/month. Yields are still high (8.5%), but the exact figures are unknown due to the lack of benchmark transactions. Let us assume that we buy this imagined building filled with tenants with the conditions above, with 30% equity capital. Therefore the selling price would be 1624 €/sqm.

Assuming that 3 years later rents will go up according to market expectations – but they do not reach the level before the crisis – while yields drop back to a level which is still higher than before the crisis, our property would be worth 2,200 €/sqm, which gives us a 500 € difference, the amount of our capital. If we manage to sell and exit at this point, then this could result in the doubling our equity capital in 3 years.

Eston International’s consultants have promoted both buyer’s and seller’s interests in many investment transactions during the past 16 years, whose outcome was not fictive but made a real profit to their clients.

(As a matter of course, models figuring in the article are greatly simplified and have certain limitations. To facilitate understanding, we have disregarded certain costs (building underground parking, operating costs, etc.), passed over the change of lease periods and excluded supplementary costs.)

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