property news

Published: 27-03-2008
REsource IngatlanInfó

Reading real estate news, we come face to face with the fact everyday that residential prices in Hungary fall well-short in a regional comparison. The reasons can (and should) be analyzed at length, though the “why” is more difficult to address. In this article, I will look at the relationship between market developments and foreign investment activity as well as expected trends, focusing exclusively on the residential market and private investors.

Let us begin with a brief historical overview! People have been investing money into domestic real estate as a relatively low-risk activity promising certain returns since time immemorial. Large-volume real estate investments realized abroad have only appeared on the investment palette in the last few decades and materialized as opportunities carrying larger risks but sometimes promising fabulous profits.

In the beginning, the hotbed of foreign real estate investments used to be the south of Spain where Irish and British investors typically appeared first. Their bravado was rewarded by success and real estate prices rose drastically as investors multiplied their capital. Factors of the credit market played a significant role in this success: Mortgages offered at favorable interest rates made a high ratio of finance possible, which generated high leverage and even higher returns for the investors on the invested capital. These factors then strengthened the residential properties which could be sold straight off the designers’ tables. Later, with market saturation, investors’ attention turned to the Eastern European region where Budapest and Prague became the focal point. A few years later, investors discovered Bulgaria, Romania, Poland, Slovakia and the Baltic states. After Eastern Europe, the next target became the Near East, specifically Dubai. Inspired by success in Dubai, other areas of the Emirates received increased attention and we witnessed unbelievable influx of money into the region in the form of mega-projects. It is clear that we are talking about an extremely quick changing, volatile market, which (by definition) holds a lot of pitfalls and, yet, at the same time, a lot of opportunities too.

The route of money follows a simple rule: Foreign investors target a country, city, or region, increase local prices with their activity there, then move on in search of larger profits.

So far, it’s the same old song and dance. Budapest, however, doesn’t follow the pattern. Here, the avalanche of foreign investment began five or six years ago with the Irish, then continued with the British and the Spanish. Still, real estate prices did not increase to a significant degree in contrast to all the above-mentioned countries. Prices remained relatively low. Yet, foreign interest has fallen far behind what it was a few years ago.

Why did a large portion of investment disappear? Where did the investors go? What can the Hungarian market offer? Can we expect their return? I will attempt to answer these questions.

We know that the credit market crisis has shaken the entire foreign real estate investment market. The driving force behind these investments was mostly mortgages drawn against Hungarian real estate market – the source of which was quickly shut off by the crisis. The good news, though, is that the tried-and-true golden rule still works: Every wonder only lasts three days and interest rates, though not the same as times past, is already beginning to revive at the international level.

Even before the credit crisis, investor’s activity in Hungary already started showing a downward trend. Ask investors for the reason and they’ll tell you that their preference for other countries is due to the extremely high prices in Hungary and the lack of potential growth here. Indeed, there is a segment of the Budapest residential market where we witnessed substantial price increases and where many Irish and British investors achieved enormous returns. After realizing their profits, many of them, obviously, left. The price explosion which occurred in neighboring countries and affected the entire market did not happen in Hungary, however.

The international market does not ignore such salient facts for long. In my opinion, it is a (short) matter of time before foreign investors return to Hungary - and in droves. Today’s top hits are Dubai and Romania, with their EUR 3 per square meter prices (for up to as much as 6,000 square meters). How much growth potential do such prices have? Exactly how much potential does Budapest represent - where good quality, downtown locations, and newly built apartments are offered for EUR 2,000 per square meter? The answer, I hope, is something we will soon be experiencing.

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