Budapest real estate market awaits 'now or never' buying moment
Despite a building boom in offices and shopping malls - both of which will have their biggest year on record in 1999 - few have managed to make much money, and this year doesn't promise to change that. Naturally, though, the people who make their money by getting people to invest in Hungary's real estate remain optimistic.
"We haven't managed to show good profit for the last three years," said Robert Vecsey, real estate fund manager at Quaesto. "I think the market is not so major, but it will be in four or five years. Until then, the culture of investing will develop here in Hungary."
Despite rosy forecasts, the real estate investment market and property prices in general have failed to grow significantly in recent years.
In fact, rents for office space, the fastest growing real estate segment in Budapest, have declined and probably will not rise much if at all this year, agents said. This year could provide the turning point, as 1999 may be when the market finally begins an upward swing in anticipation of price increases that will accompany European Union (EU) integration.
"There are (investors) on the market looking for products," said Peter Számely, who directs research efforts at real estate firm Jones Lang Wootton. "This year an (investor) will buy a property that will set the market. Investors are like sheep. Once one starts, the rest will follow."
In particular, several German real estate investment funds that have been poking around the market are already showing greater interest here than ever before, Számely said, and word on the street is that the first deal could be done in the next couple of months.
The reason, though, is not necessarily a feeling of "now or never" before prices begin to skyrocket. When they do climb, Számely predicted, it will be gradual. Demand growth will likely be at least somewhat offset by developers getting increasingly eager to sell after sinking hundreds of millions of forints into projects over the last decade. Yields, or the return on every forint invested, currently range from 9.5-11%, compared with 10-12% last year. It's only a small drop, Számely said, but it's enough to make developers want to sell out of old projects and begin new ones.
That means new opportunities for investors on both sides of the real estate coin. On one side, an investor can buy a finished project and rent it out. On the other, they can get in on the ground floor of the building boom, which will be refueled by developers looking for new projects.
"We are expecting a boom in the next half year," Vecsey said.
Development in the West has been fueled by real estate investment funds, which are mutual funds that invest in physical property instead of paper securities. Számely said some of these funds are circling Hungary cautiously, almost ready to dive in.
At the moment, at least one group is considering setting up a U.S.-like real estate investment trust in Hungary - assuming it can get the government to create suitable tax shelters - according to Viktor Orth, real estate partner at PricewaterhouseCoopers.
"If that can be done ... then I think it would be the way to go in Central Europe for sure," Orth said. "Especially in these countries, where by now, at least in Hungary for instance, there is a new wealth of quality investment-grade real estate that could be invested into. And I think that's what they would be interested in. To a great degree, financing up to this point has been done by owner-occupiers."
Hungary does have four real estate investment funds of its own, though, half of which are managed by Vecsey at Quaestor. Its two closed-end funds, the Quaestor Fund and the First Domestic Real Estate Fund, have a combined Ft 1.35 billion ($6.1 million) invested in residential and commercial properties. Vecsey wouldn't say what kind of returns the funds have shown, except that they have not been great.
Prudent-Invest Investment Trust Fund Management runs Hungary's other two real estate funds, both open-ended and traded on the Budapest Stock Exchange (BSE). Piller I, with Ft 3.7 billion invested, has shown a 61.6% return since 1993, said Gábriella Virág, the company's CEO. Piller II, with Ft 2.3 billion, returned 48% between 1994 and 1997. Compare that to the BSE's BUX index, which has risen more than 500% since 1993, and it's easy to see why these funds have been less than popular.
Most private investors look for short-term gains on the stock and bond markets, Vecsey said, viewing slow-to-grow real estate funds as a poor alternative.
"So few private investors came, it's not worth launching an expensive advertising campaign," Vecsey said.
Virág sees reason for hope this year and next. First, the introduction of new mortgage banks onto the market should help spur home construction. Second, as interest rates decline, bonds will become less attractive and home builders will be able to borrow more. Third, volatility and decreasing returns on the BSE will send investors scurrying for safety.
Plus, she said, eventually it really will be "now or never."
"Every member of this industry is expecting an increase in prices," she said.
- Sam Greene and Tim Arango are reporters with the Budapest
Business Journal.
"We haven't managed to show good profit for the last three years," said Robert Vecsey, real estate fund manager at Quaesto. "I think the market is not so major, but it will be in four or five years. Until then, the culture of investing will develop here in Hungary."
Despite rosy forecasts, the real estate investment market and property prices in general have failed to grow significantly in recent years.
In fact, rents for office space, the fastest growing real estate segment in Budapest, have declined and probably will not rise much if at all this year, agents said. This year could provide the turning point, as 1999 may be when the market finally begins an upward swing in anticipation of price increases that will accompany European Union (EU) integration.
"There are (investors) on the market looking for products," said Peter Számely, who directs research efforts at real estate firm Jones Lang Wootton. "This year an (investor) will buy a property that will set the market. Investors are like sheep. Once one starts, the rest will follow."
In particular, several German real estate investment funds that have been poking around the market are already showing greater interest here than ever before, Számely said, and word on the street is that the first deal could be done in the next couple of months.
The reason, though, is not necessarily a feeling of "now or never" before prices begin to skyrocket. When they do climb, Számely predicted, it will be gradual. Demand growth will likely be at least somewhat offset by developers getting increasingly eager to sell after sinking hundreds of millions of forints into projects over the last decade. Yields, or the return on every forint invested, currently range from 9.5-11%, compared with 10-12% last year. It's only a small drop, Számely said, but it's enough to make developers want to sell out of old projects and begin new ones.
That means new opportunities for investors on both sides of the real estate coin. On one side, an investor can buy a finished project and rent it out. On the other, they can get in on the ground floor of the building boom, which will be refueled by developers looking for new projects.
"We are expecting a boom in the next half year," Vecsey said.
Development in the West has been fueled by real estate investment funds, which are mutual funds that invest in physical property instead of paper securities. Számely said some of these funds are circling Hungary cautiously, almost ready to dive in.
At the moment, at least one group is considering setting up a U.S.-like real estate investment trust in Hungary - assuming it can get the government to create suitable tax shelters - according to Viktor Orth, real estate partner at PricewaterhouseCoopers.
"If that can be done ... then I think it would be the way to go in Central Europe for sure," Orth said. "Especially in these countries, where by now, at least in Hungary for instance, there is a new wealth of quality investment-grade real estate that could be invested into. And I think that's what they would be interested in. To a great degree, financing up to this point has been done by owner-occupiers."
Hungary does have four real estate investment funds of its own, though, half of which are managed by Vecsey at Quaestor. Its two closed-end funds, the Quaestor Fund and the First Domestic Real Estate Fund, have a combined Ft 1.35 billion ($6.1 million) invested in residential and commercial properties. Vecsey wouldn't say what kind of returns the funds have shown, except that they have not been great.
Prudent-Invest Investment Trust Fund Management runs Hungary's other two real estate funds, both open-ended and traded on the Budapest Stock Exchange (BSE). Piller I, with Ft 3.7 billion invested, has shown a 61.6% return since 1993, said Gábriella Virág, the company's CEO. Piller II, with Ft 2.3 billion, returned 48% between 1994 and 1997. Compare that to the BSE's BUX index, which has risen more than 500% since 1993, and it's easy to see why these funds have been less than popular.
Most private investors look for short-term gains on the stock and bond markets, Vecsey said, viewing slow-to-grow real estate funds as a poor alternative.
"So few private investors came, it's not worth launching an expensive advertising campaign," Vecsey said.
Virág sees reason for hope this year and next. First, the introduction of new mortgage banks onto the market should help spur home construction. Second, as interest rates decline, bonds will become less attractive and home builders will be able to borrow more. Third, volatility and decreasing returns on the BSE will send investors scurrying for safety.
Plus, she said, eventually it really will be "now or never."
"Every member of this industry is expecting an increase in prices," she said.
- Sam Greene and Tim Arango are reporters with the Budapest
Business Journal.
