by Ákos Budai | Interview

2015 has proven to be a turning point for both the Hungarian commercial property market and for Cushman & Wakefield, which has merged with DTZ. Adrian Limp MRICS, Head of Valuation & Advisory at Cushman & Wakefield Hungary talked to us about valuation practices in a recovering market.


Last year’s merger between Cushman & Wakefield and DTZ was a big change for the company. How did it influence the valuation department? 
 
Cushman & Wakefield and DTZ started the worldwide merger process in September 2015, and all staff sits at the consolidated Cushman & Wakefield HQ office since January 2016. Despite the merger being a complicated and challenging legal and HR task, our teams have come together very smoothly. Both companies had their strengths, there were very small overlaps across the globe and luckily there is a continuously increasing number of projects to work on. My team at Cushman & Wakefield consists of eight both locally and internationally trained professionals. We consider ourselves market leaders for best valuation advice. The company currently employs over 80 real estate professionals and is an absolute market leader in office and retail leasing. 
 
Almost all segments of the real estate market have been showing signs of growth in the past one or two years. Can this growth be felt in the number of requests coming from prospective clients? 
 
It is certainly more encouraging to discuss trends in the current market than it was during the years of the crisis. Last year was clearly a turning point for both the Hungarian commercial property market and Cushman & Wakefield. Market sentiment has improved significantly: demand from larger institutional investors is increasing, beyond that observed from the usual suspects. We do more and more work in connection with ongoing transactions whilst still performing the recurring portfolio valuations. Besides, the requirements of purchasers, banks and corporates are increasingly advisory-related, rather than simply ticking the box for valuation work done. And we love to work for clients who are actually looking for more than just a number. 

Different segments are of course characterised by different trends. Where is the upswing the strongest and where is it the weakest? 

From an occupational point of view offices have performed very well and we are seeing a turning point in the Budapest market, while rental growth is actually becoming a reality in the market. That is not irrespective of the low rent levels observed in the past several years, nevertheless it is a story worth telling. Logistics have picked up too, rents have stabilised and vacancy is falling. Speculative developments are not on the agenda though, we rather see market consolidation and entry attempts. Retail stock is rather steady, partly due to current regulations rather discouraging developments. On the back of increased spending power and more consumer confidence, retail assets with good fundamentals perform well. We have seen a number of encouraging retail transactions and expect to see some more assets changing hands in the near future.
 
The lack of transactions made pricing and calculating yields difficult over the past years. How has this changed with the increase in investment activity? 
 
I see a major positive change in this regard. Whereas a few years ago I had to justify the applied yield for a certain property with transaction negotiations or with less relevant or dated transactions, today, there are quite a few actual comparables available for most of the valuations. Whilst this is positive and it is good to see activity and decreasing yield levels, it is also the responsibility of a valuer to stay realistic and act in line with the market. 
 
How might yields change over the next 12 months?
 
We are witnessing a flight for certain investment products in Budapest. Offices are sought after and I would not be surprised to discuss prime deals well below the 7% mark towards the end of the year. In the case of retail, significant differences are observed in various asset classes. Due to the small market, shopping centre deals are rare and literally each product is different. There is a real buzz around high street products, investors are ready to compete for strong assets. I anticipate further yield compression with levels converging to 6% or even lower. Eyeing core markets such as Warsaw and Prague there is certainly room for improvement. The challenge is rather for Budapest to prove itself again, as a core CEE market, as over the past years there has been more comparison to SEE countries such as Romania or Bulgaria.
 
Based on the volume of developments, growth is much more modest on the Hungarian commercial real estate market. What kind of projects can be successful under the current market conditions? 
 
After some failures in the past, developers focus on property basics. Location, tenant covenant strength, lease term and market rental levels are the keywords for investment properties. Banks’ willingness to lend is important and I see improvement in this area. Long term client relationships are important in all aspects, after all property is a people business, rather than just brick and mortar.
How has the practice of valuation changed as a result of the crisis? 
 
On the strategic level risk management has become more important. This has brought along a focus on better analysis of property fundamentals. Do we have an optimal tenant mix, are tenants happy, what are the lease expiry profiles, do we have significant landlord costs, is there an investment market for the product – these are some of the questions to ask to get to the market value. 
Our valuations are typically reviewed by two or three valuers; we keep on challenging each other to get to the right answer. Beyond that, our opinion of value reflects the knowledge of our investment and leasing agent colleagues, who are continuously out in the market doing deals. 
 
What challenges must valuers face on this newly growing market? 
 
As mentioned earlier, valuers shall remain realistic. Whilst agents are rightly bullish and proactive to facilitate deals, valuers should rather be the followers of the market, interpreters of trends if you like. Being interpreters does not stop us from giving valuable advice as to future trends, but we always need to bear in mind that we value today, not in one year’s time. I have seen many overly optimistic valuations in the booming years, perhaps anticipating further market growth. But one should understand, and more importantly, remember that property is a cyclical business.
 
This interview was first published in Porfolio Property Magazine.