UK Investors Biggest Spenders In Hungary's Real Estate Market

90% of the transactions occurred in the office and retail sectors. The average transaction size was around EUR 55 million, mainly owing to two high value transactions concluded in the second half of the year.

Transactions over EUR 100 million in 2007 

UK investors were the biggest spenders, accounting for about 40% of the transactions. German, Austrian and French investors also had more than 10% share of the total investment volume each. The largest deal was concluded by the UK based institutional investor, aAIM Group, which purchased Arena Plaza for EUR 380 million. The biggest office transaction involved JP Morgan Asset Management, which acquired Terrapark A-B in Budaörs and Margit Palace in Buda for EUR 110 million.

Forward transactions remained popular in the Hungarian market due to the short supply of high grade products; more than ten projects were sold in this manner.

The highest value transaction of this kind was the sale of Arena Plaza, followed by Corvin Atrium, which was purchased by Klepierre for EUR 229 million. Both transactions occurred in 3Q 2007. Forward sales accounted for some 60% of the total transaction volume. However, there are indications that they may become less prominent in the future as supply improves and investors become increasingly risk sensitive.

Yields have been steadily diminishing in the investment market in recent years. Major office and retail products were sold at 6% as opposed to an average of 8% and 10% respectively in 2003.

As the crisis in the financial markets increased in the second half of 2007, not only financiers but also investors became more cautious about embarking on new transactions.

Financing costs for investors have increased. The 12-month EURIBOR kept rising throughout 2007, eventually reaching 4.79%, representing a 87 basis point growth relative to the end of 2006, while the ECB base rate increased by 50 basis points.

Liquidity deteriorated and banks became more selective about the projects they would finance, and as the risk increased they put up the interest margin on the loans they did grant. Investors were hit hard by the rise in financing costs at the same time that yields were falling. Hence the yield premium of property as an investment product dropped, the stable cash flow ensured by the right tenant mix became increasingly important to investors in mitigating risk in the current environment. 

As the crisis in the financial markets increased in the second half of 2007, not only financiers but also investors became more cautious about embarking on new transactions.

Financing costs for investors have increased. The 12-month EURIBOR kept rising throughout 2007, eventually reaching 4.79%, representing a 87 basis point growth relative to the end of 2006, while the ECB base rate increased by 50 basis points.

Liquidity deteriorated and banks became more selective about the projects they would finance, and as the risk increased they put up the interest margin on the loans they did grant. Investors were hit hard by the rise in financing costs at the same time that yields were falling. Hence the yield premium of property as an investment product dropped, the stable cash flow ensured by the right tenant mix became increasingly important to investors in mitigating risk in the current environment. 

“As another consequence of rising financing costs, funds operating conservatively with lower leverage have come to the fore instead of those buying with high leverage," said DTZ researcher Máté Svébis.

“The falling yield trend, which started in the early 2000s and accelerated considerably in 2006, slowed down in 2007 when it probably hit rock bottom. No further dramatic decline can be expected, and yields may even increase in certain segments in the medium term."

“As a result of the credit crisis that started last year products have been re-priced and become differentiated according to the level of risk. Banks consider projects proposed for financing and deal structures much more thoroughly."

“There is no doubt that the increases in financing costs have affected the investment market but the Hungarian commercial property sector appears to be developing on a sound basis. It is important to note, however, that in recent years the fundamentals of the Hungarian economy have been weak and this may also affect the commercial property market."

“It is worth thinking about the fact that the decisions concerning projects currently in progress were made in a market environment that was a lot more stable and was believed to be more predictable than the present one. The big question is, under what terms and conditions and at what pricing new developments will get underway?"

“Nevertheless, developers have not lost momentum yet, evidenced by the 300,000 sq m class A office space that will be delivered in 2008, along with several new retail and logistics projects."

Source: Portfolio Online Financial Journal