The yield shift began in Hungary with a bit of a delay compared to the regional countries, where repricing has already become evident. Office maintains its dominance but investors have started to see retail assets as more attractive than before, says Attila Balogh, Head of Capital Markets at Hungarian property advisor firm Eston International.
Investment activity fell sharply from the second half of 2022 across the CEE region and has remained subdued since then. How far is the bottom?
The slowdown in real estate investment is currently present worldwide. Global investment volumes were more than 55% down last year, with all sectors and all geographies seeing a decrease in activity. The phenomenon is spread evenly across Europe, with most markets reporting decreases from the European average. The total European volume in the second quarter of 2023 was the weakest measured since 2010.
In Hungary, the transaction volume of the first half of 2023 is the lowest recorded in the past five years, with only two office deals. By now, pricing awaits further transformation for liquidity to recover. It can be anticipated that increasing activity might be driven by opportunity-led investors enticed by the prospect of price adjustments, as deals pursued during challenging times often yielded superior returns in the long run.
Do you see partial repricing already in Hungary or do we have to wait till a full one to see the much-needed consolidation?
Due to the market conditions, demand for repricing arose from the customers’ side, which is often in conflict with the vendors’ objectives. Tenders currently tend to attract significantly fewer offers, mainly coming from strongly opportunistic investors. Long-term holders - if willing to consider at all - are generally more selective these days. Unless it is a specific, unique asset in question, investors are generally not willing to meet the holders’ expectations, which is one of the reasons for such a dry market.
Attila Balogh
Head of Capital Markets
Eston International
How about changes in shares of existing investment transactions? Will offices maintain their dominance or there is a chance to witness an upward trend in retail and logistics?
In 2022 and H1 2023 there has already been an obvious tendency of slowing interest in the office sector in Hungary, both in volume and share. (2021: €1.1 billion, 85% / 2022: €332 million, 40% / H1 2023: €42 million, 20%). An even more significant change was that there were no recorded market transactions in the industrial sector in Q2 2023. In this sector’s case however, the lack of deals is mainly due to the lack of products for sale, which is expected to change shortly by the numerous developments on the Hungarian market.
Despite the standby demand for industrial properties, pricing negotiation is still going to be a rocky road due to high (and continuously increasing) financing costs. Across Europe, a major trend that seems to be slowly gaining traction is renewed investor interest in retail assets. In Q1 2023, retail investment recorded the slowest decline of all sectors in Europe.
Distressed assets, especially underperforming hotels, might be easy targets for some investors. Do you expect banks to put part of those assets to the market in the short term in the region and Hungary?
Tourism in Budapest showed extraordinary resilience after the pandemic. Following the drastic drop during the travelling restrictions in 2020 and 2021, the number of guest nights in H1 2022 reached more than 70% of the H1 2019 level, which was an outstanding year in terms of hospitality performance in Budapest. In H1 2023 the growth continued with another 10%. The recovery is also reflected in the hotel transactions closed this and last year, as none of them involved distressed assets. It is also promising that more than one international hotel chain is expanding their portfolio in Budapest with high quality, luxury branded hotels, such as W by Marriott in the former Institute of Ballet, Radisson at BudaPart, or Kimpton by InternContinental Hotel Group.
Refinancing distressed assets might be a common way out for many owners. Is that the case in Hungary too? How about the tougher conditions to sign such a deal?
Based on our experience, refinancing even non-core assets is rather challenging these days. When it comes to distressed assets, exiting might be only the possible way out, however, opportunistic pricing should be expected. Offering them in a portfolio with better-performing assets could hold a slightly bigger chance on the current market.
Do you agree that yields have softened across all sectors in Hungary and this trend could continue into 2023?
The yield shift began in Hungary with a bit of a delay compared to the regional countries, where repricing became evident as early as the third quarter of 2022. In our experience, the domestic market has not yet gone through the complete transformation, and a further increase is certainly expected, especially since financing costs still keep increasing (ECB fixed rate: 3.75% as of May 10th, 4.00% as of June 21st, 4.25% as of August 2nd 2023).
International institutional investors seem to have lost their appetite to buy assets in Hungary. Shall we see even more local funds and private investors in the investment scene or Western and Asian investors will return to this market?
A drop in institutional investors is widespread globally at the moment since they are affected by emerging risk aversion. In light of the volatile macroeconomic conditions, they predominantly exercise higher caution. Although they have been the significant net buyers since 2018, institutional buyers now have sold off a comparable number of assets year to date to those they have acquired in the region. This does not mean they turned away from real estate for good, however, they are anticipating an enhancement in the value proposition before acquiring new long-term holds.
Regarding local investors, some additional funds may be expected due to the Baross Gabor Reindustrialization Program, however, the capacity of private investors generally caps at €20-30 million ticket size. When it comes to Western or Asian investors, it is important to note, that Hungarian assets compete with the Western European market, where repricing has gone through quicker. Unless the former yield-premium of Hungarian assets is not stabilised again, it is more realistic to bet on the already present foreign investors' activity.
