We Have Survived This Crisis Too

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G.P.: I have joined Cushman & Wakefield in 2004 as an office agent. I was 28, I was at the start of my career. I have to admit that everything important happened to me in this past 9 years both professionally and in my private life.
In the 2000’s I experienced the best times, the boost of the Hungarian real estate market. There have been many new developments including those that were not supposed to be built and were not fulfilling the quality criteria, but those were good times. Plus the tenants had completely different expectations than today.
I took the lead over the office agency in the summer of 2008. This meant that I had one more good month before the crisis hit. This did not really happen at the right time, but I have lived this period positively. Obviously we had to do much more to hit the same targets as before the recession, but thanks to the fact that we have managed to re-position ourselves at the right moment, our market share grew even then. In February 2013 I was offered to take over as Managing Partner from the 1st of July. I am now fully optimistic regarding the future and I expect a positive flip. This economically difficult times made the market more mature, tenants are more conscious and developments are better and better.

J.H.: I am a little older and have been working on the European real estate market for two decades and I have already experienced a recession similar to this one. In the time of the last crisis in 1992 at the start of the Gulf War, I was working in Paris. The difference between then and now is that then I was new in this field and now I have to act as a manager. I see things differently. Then I only saw that there was no salary increase and no bonuses for 4-5 years, but that seemed normal, since I was at the start of my career. I was still learning and I imagined life like that. I think this recession although is not like the ones before, they say that nothing will ever be the same. I would not make any prognosis for the future, but once we are over it we will see that we survived this as well. This recession was different because it also affected banks and at the end of the day the real estate is, just like any other business, all about capital. This difficult years did however clean the market and pick up should start soon.

Both of you are optimistic. How would you describe the regional real estate market, what shall we expect in the next year?

J.H.: It is clearly a positive sign that the last quarter of 2012 closed positively in the Americas. This gave a positive swing to both global and regional markets.

In Western Europe we can definitely feel the return of confidence, both the United Kingdom and Germany are performing well. This is good news for the regional markets since the tendency for the last 5-10 years was that all that happens in Western Europe will follow in Eastern Europe a year later. I assume this stands for now as well and in 12 months we will see a more positive picture in our region. The only problem could be that this will be spread, meaning that Poland will be the first to recover, then Czech and we will see how fast the recovery will be in Hungary.

How is this in Hungary? Do you agree with Jonathan’s view regarding European market trends?

G.P.: I fully agree with him. Confidence is definitely starting to return. Much more companies have looked at Hungary in the past 6-9 months then in the previous 2 years which we can mainly see on the office market.

Rents are very low and vacancy rate is very high – what is the situation in the domestic office market? Many people ask when the positive turn will happen and when the rents will start to increase.

G.P.: At the beginning of the recession we were likely to say that the situation is horrific in the office market and we were waiting to get back to the earlier heights. But if we look deeper we can see, that in the peak time (2004-2007) the office vacancy rate was around 12-13 % which was already high compared to Western European countries. There were more and more speculative developments and leasing was continuous. The vacancy rate now climbed up to over 20%, but it is a bit tricky as it is an average number. The vacancy rate of the well located and truly category ’A’ buildings is still around 12-13%. Of course these cannot be rented on the same prices as 5 years ago and it might take longer as well. I would not say that the market is under-performing, but that this is the current market and it might stay for years but it is still manageable to lease and to represent tenants.

The office market is mainly about large corporates and luckily in the past 5-6 months we see that they are likely to move their Shared Service Centres here.

The fact that we got back to the radar of international tenants is mainly due to the fact that rents are so low that even though we are competitive.

G.P.: No doubts, it is good to be a tenant on the Budapest office market nowadays since quality buildings can be rented on a good occupancy cost. It is definitely true that more to the west from us cost cutting is still the biggest motivating factor. Compared to six years before rents decreased, rent free periods and fit out contributions increased. Besides this it is still valid, that qualified and good staff is much cheaper to find in Hungary then let’s say in Germany or in the UK. Hungary is still market leader in terms of Shared Service Centres. The country was participating in every tender till 2008 and we always had a big chance to win. Many SSCs have moved here, such as IBM, British Petrol, Diageo, Citibank etc. We saw a positive turn regarding this in the past 6 months and if these companies move here, they create new jobs which is good for all.

Concerning the above, Hungary is not only competing regionally but globally. How do you see Hungary’s position in this competition?

G.P.: I experience that most of the companies willing to bring business to Hungary mention other countries in the region as competition and not India or Brazil. These are all Western European or American firms and the usual competitors are the Czech Republic, Slovakia, Poland and rarely Romania.
Rents in Budapest were always lower compared to the West. Out of the price of one workplace in Germany they can set up 2-3 workplaces here and probably the rents are not the most important factors. On the field trip they first they check what support they could get from the government and the second question is if there are enough qualified workers. SSCs are the best example that companies do not always choose the cheapest office building but the one with e.g. the best location.

The investment market is the best indicator. In the past years those suffered the most. The activity now seems to recover in the region, Poland counts as one of the most favorable targets in Europe. This tendency is not seen in Hungary. When could Hungary regain confidence for investment products?

G.P.: It is definitely true, that investment activity unbelievably decreased in the past years, mainly in Hungary. It seems though; that confidence can get back to normal but it will be a slow process. My colleagues are now working on a bigger transaction and in the second half of the year there might be 1 or 2 deals closing and those will be the ones pushing the market to the positive field.

Investment market is quite moody. If players see other companies being interested or buying then they also consider observing the situation. For such transactions it takes 6-12 months to close, meaning it might not be visible in this year’s numbers, but I believe that investment activity will pick up.

J. H.: Investors look at two things: risk and returns. If they are looking at possibilities they check how many investors there are on the market except them. They might be able to buy at a good price, but is there anyone likely to buy from them? If they are the only investors the risk is high and that can be a problem.

The capital on the market is also an important factor. In Poland there are a lot of international and local investors at the same time so we can say they have been one of the most important players on the European market in the past years. The Czech Republic survived the recession for two reasons, in 2008-2009 the invested amount decreased marginally and more local players – like CPI, J&T or Penta- started to spend on mainly premium category offices and regionally important Shopping Centres. They put together portfolios worth more than a billion Euros, for example in the past few years CPI spent an average 500-800 million Euros a year.

If domestic capital is strong in a country that increases confidence for foreign investors. The situation in Hungary is difficult, because there is not much domestic money though it shows some positive changes recently.

Hopefully there will be bigger amount of capital coming to other countries besides Poland. Where can we count on bigger transactions?

J.H.: Besides Poland we will see a number of big transactions on other smaller markets. We can expect the close of a few big transactions in Prague. The recent important transactions as the closing of the Park is exceptional as we did not see deals like this in the past 5-6 years in the region including Russia. We are talking about a 300 million Euros deal. There are also some bigger transactions in the pipeline in Hungary worth 70-80 million Euros and I think some of those will be realised. This does not mean that the market recovered but can be a good sign.

Developments under construction are very rare in Budapest. What should happen for the constructions to start?

G.P.: More and more workplaces should be created. If there are more workplaces the need for commercial real estate area increases which helps to vanish the current vacancy. One of the barriers of the development market is financing. If it happens it is very expensive. On the other hand if there is activity then all players of the market, may it be developer, constructor, or financer, will move together to fulfill needs. Although Budapest was never abound of preleases since most buildings were developed speculatively and leasing started when the building was out of the ground. This might change in the future and developments will need stronger fundamentals.

J. H. : We might be at the nadir of the real estate market cycle, rents realistically cannot decrease further. In the meantime on the corporate side things are getting better and other parts of businesses have started to pick up. Soon they will all start investing, developing since no one wants to lag behind. When incomes will change they will start expanding and moving. That is true though nowadays developers are finding it difficult to reach profit with new projects.

From where does the capital come to the investment market? During the recession the most visible fact was that corporate investors disappeared from the CEE region and opportunistic investors became more active.

J.H.: As I have mentioned before the domestic capital is strong in some markets. Typically other local names like Bluehouse (Greek money) and Nepi (New Europe Property Investments) (South African money) are buying a lot in Romania and observe both the Hungarian and Czech markets. Russian money is also flowing in the region, they now mainly target hotels but start looking at other assets as well. Slovakian capital is also important and I have mentioned J&T, Penta and HB Reavis. These firms are focused on developing and have set up new funds.

G.P.: The classic investors from Western Europe are still present but there are also opportunistic investors from the East. Besides these there exits such a market segment that are responsible for smaller volume but can be the target of domestic, well off investors. Till big volumes do not come back the main targets are the ’B’ and ’C’ category assets which tend to attract demand.

As an investor what type of asset would you chose in the current market?

G.P.: My area is the office market so probably I would choose a building 20-30% let with good location, cheap and its position could be improved in the next 1-2 months e.g. fill it up quickly. After the market comes back there is a possibility for a bigger reconstruction and further developments if there is space.

J.H.: I would choose from premium shopping centres in regional capitals, followed by prime assets with long term leases. A portfolio for example consisting of supermarkets or DIY stores let for long term, with good locations and that can guarantee yields between 8,5 and 9,5%.