How does a CEE real estate pioneer see the post-crisis CEE market? How did CEE markets transform into mature property markets starting in the late nineties? Which countries are the most attractive in the region? What does the Budapest market offer? We spoke to Alan Vincent, B.Sc., MRICS, managing director of ConvergenCE.
You are one of the real estate pioneers in Central Europe, you have experienced how CEE markets developed over the last 20 years. You have seen a lot: booming in the late nineties, the crisis, the post-crisis period, and now – hopefully – the stabilization. How do you see the region now in the context of the past 20 years?
I think all of the Central European markets – Poland, Hungary, Czech and Slovakia -have reached a level of maturity now. It’s a logical progression from the underinvestment during communist times followed by the boom in foreign direct investment which caused this massive development through the ’90s up to 2007. I would say the first ten years was catching up and the last five years become a speculative boom. As I have said in the past, that period will in future be compared to the 1880’s and 90’s in terms of the development of Budapest.
Each market has its own particular characteristic. As such CEE can no longer be seen as a homogenous investment location. It’s clear that the Polish and Czech real estate markets came out of the crisis in better condition than Hungary, both in terms of the health of local banks and in terms of investor perception, but it seems Budapest in particular is catching up.
I see Budapest, Prague and Bratislava as more stable rental markets than Warsaw going forward, mainly due to the urban structure and limitations of the built fabric of these cities, compared to the relatively unlimited development potential, and therefore risk of oversupply (particularly in the office sector) in Warsaw. On the other hand, being the capital city of a country of 40 million people, Warsaw will continue to be an attractive investment location for global investors. I foresee a quite illiquid investment situation approaching in the smaller capital cities (similar to Vienna) once the best buildings have traded to traditional long term institutional investors.
It’s been interesting to see that although Hungary and Budapest were way ahead of any of the other CEE countries in the early nineties, in terms of development and FDI, it started to fall back from about 1998. The cause was partially demographic, which is understandable compared to Warsaw, but obviously as we all know, latterly there was a perception problem with Hungary, because it was very much seen as a small peripheral market. When Greece crashed a lot of investors were expecting that something similar would happen here. This, combined with all the politically motivated negative media that followed the first Fidesz landslide victory, did not help bring investment back to Hungary. Fortunately we seem to be past that now.
Budapest is catching up, but from now on I see significantly less development opportunities than in the past, as it has become a mature market. The future will be far more controlled and less exciting; development and renovation of the existing stock and a more normal market will follow. We are definitely not going back to a situation where you can build an office building in Soroksár, for example, call it an A grade building and expect to rent or sell it with ease.
In Hungary there will be some industrial and production opportunities in the regions and smaller scale commercial investment in provincial cities but this will be more of interest to local investors. Downtown residential may finally pick up and start to show good investment returns after being flat for ten years, thanks to the investment in the downtown by the government, City and district 5, which are finally bringing out the true beauty of Budapest landmarks.
Which markets are the most attractive in CEE at the moment in terms of investment? Budapest is still very cheap, compared to Warsaw or Prague the yield difference is still considerable, is Budapest still a market for opportunistic buyers or there are opportunities for the institutional capital as well?
For institutional investors this is a question of returns. They are chasing yield. The brave ones who come in early will benefit the most. Comparing prime office investment yields for the first half of 2014, with Warsaw at 6%, Prague at 6.25% and even Bratislava at 7%, therefore I see Budapest as the most attractive location with comparative yields for the best offices 7.25%. Similar spreads are also present in the retail and industrial sectors. In fact these yields are already moving down fast (witness the recent sales of Vision Towers North and Eiffel Palace). Investors realize that they can buy here at a discount to other CEE capital cities.
Opportunistic buying of distressed assets has been much more difficult than expected, due to the unclear and fragmented approach as well as overpricing by the banks holding these portfolios. That was an opportunity that I think everybody expected but it hasn’t really happened. The banks, of course, will be very happy to see capital values improving at the best end of the market and they may believe that this will also have a positive impact on their portfolios, but I think that is going to take some time, because they are at completely the opposite end of the risk scale.
Office market indicators in Budapest seemed to improve in the last 12 months. What do you expect for the next 1-2 years?
I believe that there will be a steep increase in interest from investors, which will raise capital values quite significantly. I expect retail and office yields to reach the mid-6% level, rents to stabilize and concessions such as rent free periods to significantly reduce as vacancy continues to fall. The big challenge in Budapest is going to be the renovation and re-use of historic buildings, finding ways to make them efficient.
The Eiffel Palace is very good example here. There is an interesting issue going on about this office building as the Central Bank just bought it. The transaction is quite controversial, experts are debating weather this was a good investment or weather a central bank should invest in real estate at all. What do you think about this issue?
It is difficult for anyone who is not a central banker to make a judgment. I can’t really second guess the investment strategy of the Central Bank without knowing what their investment objectives are. I do think there is a place in every investment portfolio for real estate. It is a long-term secure asset, which holds its value. If you had asked me what are the ten best office investment projects in Budapest, Eiffel Palace is definitely one of them. It is a great building, it was an expensive investment and clearly the developer didn’t cut any corners in terms of the quality of the building. It also has a very good long-term tenant in PwC. As a real estate investment I would say it is a rather conservative one. If the question is whether the Central Bank should be buying real estate or not, I think that is one for bankers not real estate experts.
As for ConvergenCE, what are your plans for the next years?
We are looking at investing in existing assets and developments at the moment, as well as continuing to expand our niche service lines of asset, property and project management services, to a select group of international investors.