Budapest property appeals at home and abroad

Last year may have marked a turning point for Hungary's property market, as strong macroeconomic performance, combined with loose monetary policies across Europe and investors' greater tolerance for risk helped lift commercial real estate from its crisis-era doldrums.

But the country's higher risk premiums, compared with neighbours Poland and the Czech Republic, may in part reflect investor wariness of Hungary's unpredictable regulatory environment.

A hastily introduced law this year to restrict Sunday and late-night trading has prompted complaints from foreign retailers, and development activity in retail has stagnated.

Instead, yield-seeking domestic, European and Middle Eastern investors have focused their attention on premium office and residential properties in central Budapest.

Behind the headline figures of €460m of income-producing investment last year - an increase of 70 per cent on 2013 - analysts note a two-speed recovery, with a small number of big-ticket investments in high-grade property in the capital amplifying overall investment volumes.

"Much of the recovery is concentrated in the Budapest central business district," says Aron Horvath, head of the Eltinga Centre for Real Estate Research. "City authorities are upgrading infrastructure in central areas along the Vaci ut corridor and a mix of Hungarian and foreign investors are active in high-end property transactions here."

Headline deals, such as the sale of the Eiffel Palace office building to Hungary's central bank for €46m, have drawn significant attention. The bank has invested about €80m in property in 2014, according to Mr Horvath, placing it in the unusual position of being a leading investor in the market.

Separately, commercial lenders are working through a glut of non-performing loans and officials hope the central bank can spur financial institutions to increase lending by removing distressed assets from their balance sheets.

Mr Horvath says: "The central bank will invest about €1bn over 10 years in the commercial real estate market through a 'bad bank' taking on non-performing loans from banks. But solving the problem of distressed assets will take years."

Early sales of some distressed assets by lenders such as Banca Intesa SanPaolo's CIB suggest lenders are accepting losses of about 50 per cent on boom-time developments in various stages of completion.

In the residential market, the government's mass conversion of foreign currency mortgages and low inflation has meant greater disposable income among Hungarians who are now seeking to buy homes in greater numbers.

The median price for homes was up 4 per cent in the capital last year, according to FHB's residential price survey. Prices remain well below their pre-crisis peak, but the increase in 2014 was the first significant rise since 2008 and is already feeding into a recovery in home construction, according to the bank.

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Case study: Futureal, Budapest

Gabor Futo, co-founder and chief executive of Futureal, a Budapest-based developer, is talking big, reports Kester Eddy. "Vision Towers is one of the most significant buildings delivered since the crisis," he says, referring to his company's office development on Budapest's Vaci ut corridor. "It [encapsulates] all the ups and downs of the real estate market here."

The project was launched by KPMG, the professional services firm, which invited bids for a headquarters in 2011 when the eurozone was in turmoil, and vacancy rates in the Hungarian capital remained obstinately above 20 per cent.

"We were the only developer bidding that didn't have land, but they trusted us," says Mr Futo. "We purchased an old [communist era] hotel at a major crossroads with a metro station; one of the best plots in the city."

Futureal agreed on a first phase, an 11,000 sq m tower for KPMG, to be followed by a second, comprising two towers offering 9,000 sq m space in total.

The developer handed over the first phase last August, and the second - already largely let to two big tenants - in February. Both buildings have been sold to Erste Bank's real estate fund.

"We're not releasing the precise numbers, but I can say we sold it for an attractive yield, in the region of 7 per cent," says Mr Futo.

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