Real estate investments are a great protection against inflation, especially compared to alternative asset classes. Michael Wagenhofer, Head of Capital Markets at Arnold Investments talked to Property Forum about investment trends.
If we look at the performance of this year up to now, how did Arnold Investments perform?
After a slow start, we registered a strong pickup of investors’ interest and transaction activity during Q2 and over the summer. What really aided us this year is Arnold Investments’ long-term strategy of expansion: with our broad base with 10 countries, there are always some transactions going on in one of our markets.
Recently, our Group was able to close considerable deals of about €200 million in terms of asset classes, these deals were in the office sector, multi-family residential and retail.
Most CEE countries, but especially Hungary, are still facing high inflation, while interest rates are going up. How do you evaluate the current real estate investment market in Hungary?
Our market research recorded a preliminary transaction volume of appr. €401 million up into the Q3 of this year, which is a considerable decline of 50% year-on-year. Considering that about half of this volume happened just in the last weeks - deep into Q3 - there are two sides to the story of 2023 so far:
Due to the macro climate – Hungary being outside the Euro-zone and comparatively very high interest rates and inflation – there was very limited market activity until recently and we did register a diminished appetite for foreign investments into Hungary. In fact, about 2/3 of transaction volume was done by domestic investors.. On the other hand, these very active last weeks show that Hungary might be on a good road again, and investors are taking advantage of opportunities being available at attractive pricing. Also: Hungary has strong and active domestic capital compared to other, larger CEE countries. Proven also by the strong expansion of large Hungarian players into foreign markets such as Germany, Poland, the UK, Italy and Iberia. As a pan-European broker, we register Hungarian investors in almost all of our markets.
Which asset classes are the most popular ones among investors in Hungary?
In terms of asset classes, our market analysis showed that in 2023 the largest asset classes by transaction volume were office with 49% and hotel with 25%, followed by retail with 12% and industrial and logistics with 9%, respectively.
Have you observed any changes in investors’ sentiment since the beginning of the year?
Due to the geographical proximity to the Ukraine conflict, the CEE region has been affected much more than other parts of Europe, with overseas investors largely looking to Western Europe or into debt investment. There is also reduced construction activity due to rising building costs, which have stabilized at a high level in 2023. So, in most of our markets, the focus has shifted towards improving the existing portfolio, under ESG considerations and the EU taxonomy.
What has crystallized from investors is the interest in “manage to ESG” although I still hear aspects of uncertainty in terms of which measures to take, or which ratings to achieve.
On another note, it has to be said that real estate investments now face competition from other sectors of the financial market – for many years there were hardly any alternatives to real estate investments, but now government bonds and savings interest rates have become alternatives for institutional capital and private investors alike.
Despite the actual situation, would you advise to invest right now or rather wait? What shows your data?
I have an easy answer. For equity-strong investors, the best time to invest is right now, because the amount of quality products being available is unrivalled compared to the last years. While the re-pricing might not be finished yet, we expect the rise of interest rates to be reduced or even done. The lingering uncertainty about pricing is also a good driver for the market – aggressive pricing might succeed and we advise our investors to secure their positions before the competition for high-quality assets will increase again. Finally, real estate investments are a great protection against inflation, especially compared to alternative asset classes.
What are the advantages of the international orientation of Arnold Investments and do you see any direct impact on your business, like the average share of cross-border deals?
Our pan-European strategy really paid off in the last year. We are able to offer more fitting opportunities to investors who are active across the continent. Our latest destination is the Netherlands, from where we want to offer BeNeLux investments. As a result, the share of cross-border transactions is 35% of our total volume.
Truth be told, all of our countries have performed under last year’s levels, no country is an island in the sun, but some less than others. To give a concrete example: Spain and Portugal had a much lower inflation rate in the last 18 months than other European countries and have therefore become very attractive destinations.
What additional services does the Capital Markets department provide for your clients?
We have a “borderless” approach: we are able to offer opportunities from all of our markets, but at the same are able to bring capital from all of these markets, and overseas. Ideally, we have a buyer for every property and a property for every buyer. What we offer, what truly separates us, is offering a bird’s eye perspective of European real estate investment - to be truly able to offer opportunities in all commercial asset classes and large multi-family residential from one source. We offer our customers fitting opportunities in all of our markets and across Europe. They are sourced from our local branches - but the client has a single point of contact rather than multiple contacts in different markets or asset classes.
To bring a recent example, we sold an office building in Hamburg that was sourced by our German team to a French fund that was supported by our Capital Markets team.
Despite the industry trend, Arnold Investments is steadily growing and hiring new personnel. What`s the strategy behind it?
As we wanted to offer more, to provide more services, we naturally had to expand our teams.
In 2022, we formed the Capital Markets team with the strategy being to further professionalize and broaden our offer to investors. We also founded our Hospitality Department dealing with hotel opportunities and all operator-led assets, such as student living, co-living and all types of senior-/assisted-livingIn addition, our Acquisitions and Residential Departments are growing steadily as a result of the international approach outlined above.
So, in a time when the industry and competitors may have had to reduce payroll, we were able to attract more national and international talent, and we are very happy with the people we were able to hire.
