Investment property market – ESTON analysis 2010/1

There were no significant changes in the investment market in the past half year, although in the latter part of the year several market experts reported an upturn in investment activity across the Central Eastern European region.

The largest investment deal in Hungary was the sale of Tesco’s Hungarian logistics portfolio to W.P Carey & Co LLC. The investment firm, which is listed on the NYSE, mainly specializes in sale and leaseback transactions helped Tesco with approximately EUR 63 million to release value from its portfolio.

At the end of 2009, investors showed great interest in the new Allee shopping centre in Budapest, developed by ING. In December, ING Real Estate Development was in serious negotiations with Allianz SE (Societas Europaea) on the sale of its 50 pct stake in the shopping centre; the 100 million transaction was closed in January 2010.

The investment transactions concerning small and medium properties have been significantly restructured – as notified in advance in our previous report – due to changes in property acquisition duty, therefore several deals due at the end of 2009 will be closed only in 2010.

Due to lack of benchmark transactions, the exact yields are still unknown, in our estimation premium office yields were around 8% at the end of the year.

While the period before the crisis was characterized by plenty of people looking to invest and there was fierce competition for both “good” and “bad” products, the number of buyers and inquirers have both fallen back by now. Furthermore, only exceedingly good products become marketable. Weaker investment products are not likely to sell, or only with a high yield premium.

It can be said from the buyers’ perspective that the market has been realigned compared to the preceding period. End users have shown increased willingness to buy in the first half of the year and their market presence enhanced during the year, a tendency which is expected to continue in 2010.

Mostly premium investment products of Poland were in much demand within the Central Eastern European region. Concerning Hungary, investors are still very reserved, and their current market strategy consists of surveying and waiting for opportunities.

Another problem preventing liquidity is that some investors, owing to the previous loose credit policy of the banks, financed their property acquisitions high, as high as 80% LTV. As a consequence of the 25-30% decline in capital value, 20% of investors own equity completely disappeared (negative equity). Arising from this, selling cash-flow producing properties is not a rational step for them with these current, estimated price levels, in case they are able to retain their financing.

However, in the case of non-cash-flow producing properties the bank usually obligates investors who have run out of money to provide extra capital. If this is not accomplished, the bank has the right to take the property, although in Hungary, this is not likely in the case of commercial properties, as most of the banks do not have the appropriate apparatus for their management.
This hopeless situation will continue until the low rents move upwards or until high yields evolve from scarce money and credit moves downwards.

Hungarian real estate funds came into focus again as the base rate stayed at a very low level, 6.25% at the end of the year, an equivalent of the level of 2006. From the four biggest property funds, Raiffeisen and Europa Property Fund, which transitioned to close-end funds in April, speculate on a price correction on the market that would take place in the following 3-3.5 years, till maturity. Therefore they would only sell their properties at an exceptionally good price.

Meanwhile, marked differences emerged between the two open-end funds, Erste and OTP Property Investment Fund. Although both of these funds are in the process of collecting deposits, OTP supposedly could not stop the outflow of capital, or actions to raise capital were not successful enough, as 90% of its portfolio consists of properties. Erste is in a more advantageous situation as it has raised capital and its property portfolio is only 54%, therefore it may turn up as a buyer on the
market.

In addition, the current level of the base rate could enable new funds to be formed on the middle term.

Due to tight finances, difficulty of borrowing and over-supply in the office market, the market for development plots is still frozen. Positive events on the international money markets indicate that the investment market could begin to gather momentum again in the second half of 2010.