Is Everyone Holding His Breath On The Hungarian Real Estate Market?

Portfolio.hu: Did you experience an increase in transaction yields as a consequence of the credit crunch? 

Doug Hardman: I think this region is a less mature market and it is very interesting to see how Central and Eastern Europe is behaving during the credit crunch compared to more sophisticated markets in Western-Europe, particularly the UK. In London - one of the most dynamic and sophisticated markets in the world - the re-pricing was much quicker and more dramatic than in the CEE markets.

I think we are waiting to see the full outcome of the credit crunch. Probably at the end of Q1 2008 and definitely by the middle of 2008 we will be in a better position to see how the market has changed. I've just talked to some of my colleagues in other CEE markets and they said not many investment transactions were to be closed in this quarter, so I think that a lot of players are waiting to see what will happen. 

Doug Hardman: I think this region is a less mature market and it is very interesting to see how Central and Eastern Europe is behaving during the credit crunch compared to more sophisticated markets in Western-Europe, particularly the UK. In London - one of the most dynamic and sophisticated markets in the world - the re-pricing was much quicker and more dramatic than in the CEE markets.

I think we are waiting to see the full outcome of the credit crunch. Probably at the end of Q1 2008 and definitely by the middle of 2008 we will be in a better position to see how the market has changed. I've just talked to some of my colleagues in other CEE markets and they said not many investment transactions were to be closed in this quarter, so I think that a lot of players are waiting to see what will happen. 

In reality, I don't believe people take on board re-pricing unless they are forced to. Developers are negotiating, they are waiting to see what is happening and they are not forced to do anything at the moment. The reaction time of this market is relatively long and we should not forget that the Hungarian investment market is much thinner and less transparent than in the more established markets. 

Portfolio.hu: Besides correction in pricing what are the major impacts of the credit crunch on the Central and Eastern European property investment market?

Doug Hardman: I think that the secondary properties will suffer the most in the new market environment, because the mispricing was the greatest in this market segment, since in many cases investors were not considering property fundamentals and risk correctly.

The willingness of banks and investors to take on risks has been greatly reduced as a consequence of the global financial crisis, which means that secondary products will suffer the most. We already see evidence of that.

Portfolio.hu: In terms of yields, as well?

Doug Hardman: It is very difficult to say. Everyone is extremely focused on Initial Yields as a market indicator, however the reality of a transaction is far more complicated. Initial Yields are one of a number of factors that make up a successful transaction, particularly in developing markets.

Some of the assets were not sold in Budapest back in the end of last year partly because what the sellers and the buyers priced did not match and the deals didn't happen. We've seen evidence of that in secondary cities in case of retail projects.

Some of these products are still on the market, they are still under negotiations, but buyers and the sellers could still reach an agreement on the price. Re-pricing is still taking place, the sellers haven't got to the point where they believe it is fair value and the buyers haven't got the price that they think justifies the investment.

The most efficient market is where the buyer and seller agree on what the value of a product is. It doesn't mean I regard the Hungarian market as inefficient. I'm only saying that it is definitely a less efficient market. However, when we talk about prime products, the market is much more efficient than it used to be.

Portfolio.hu: Do investors still consider CEE countries as a single market or they rather look at the individual countries and their economic, political fundamentals? If so, Hungary cannot be in the best position right now, considering the sluggish economic growth and the chaotic political situation...

Doug Hardman: I believe that the Central and Eastern European region is still a developing market, in a lot of respects, however, this maturing process is happening very rapidly now.

I think market players are now looking at investment on a country-by-country basis. For instance, the Czech Republic is still seeing very aggressive pricing of assets compared to Hungary. We had a record year last year in Hungary but the pricing certainly wasn't as favourable as in Poland or in the Czech Republic.

Everybody knows the problems that Hungary is facing at the moment. We are at the hardest point now, having a credit crunch on top of the austerity package - it's just the perfect storm brewing. So, it's very difficult to assess what the impacts will be. I think the worst combination to add to Hungary's woes would be to have some political instability. Interesting times are ahead...

Portfolio.hu: You've already mentioned that last year was a record for the Hungarian market in terms of investment volume with a total of 2 billion euros invested in the country. What is your forecast for this year?

Doug Hardman: I would say it is unlikely we will achieve last year's figures, partly because of the lack of large investment products on the market. And as a consequence of the already mentioned re-pricing issue, I don't think that investors are going to sell their products on the market now, at least until the end of 2008, unless they really have to.

Portfolio.hu: Last year in Central and Easter Europe, especially Hungary, was strongly dominated by UK investors. The massive re-pricing in the UK could turn their attention to their own market instead of CEE...

Doug Hardman: I think this is a reasonable assumption because if you look at international investments, it is always a question of relative returns. UK investors have grown to be the second largest investors in the main Central and Eastern European markets in 2007.

The most frequent question I am raised when I talk to UK investors is that 'why should I come to Hungary and pay this price for a product when for this same return I can get good secondary product in the UK, my home market?'.

So I agree with you, the UK is re-priced and I think there are opportunities there on which a lot of UK funds are focusing on. That's not to say that they are not going to be here, we still talk to UK investors, there are still investors who have appetite for CEE markets, but they probably will be tougher on pricing considering risks and returns in their home market and in Hungary. On the other hand, what is a very positive sign is that we see more and more local - Czech, Polish, Hungarian - investors in the marketplace.

Portfolio.hu: What would be your 'top pick': retail, office or logistics?

Doug Hardman: My top pick would definitely be retail, as I continue to believe that retail is the most interesting asset class across the CEE region, because of potential rental growth. There is still a major long-term catch-up story in terms of personal wealth and purchasing power.

Portfolio.hu: Do you agree with the popular view that Russia is the least affected by the negative impacts of the credit crunch and it is more or less the only market where yield compression is likely to continue?

Doug Hardman: Moscow is not experiencing the same kind of considerations that the rest of the markets in Europe are. However, the reality is that they are not in isolation either, and the full extent of what is happening on the Russian market is difficult to judge, especially with growing inflationary pressures in these Core + markets.

There is a huge pipeline of development projects going on in Russia at the moment, so I don't think it is clear yet what the full impact of the credit crunch will be in Russia. I believe that if a lack of liquidity in the world market persists, Russian regional development pipeline will negatively effect. This in turn could be an opportunity for the right investor."

Source: Portfolio Online Financial Journal