The false message of "THE" conference

What about further yields? Is everything all right (or will it be)?

First and foremost, I wish to make it clear that I attended quite a few conferences and meetings about property market during many years but the only useful and beneficial event of the conference business for me was the portfolio conference. The property conferences titled as “property investment forum” organised professionally by portfolio.hu in November were remarkably useful events for the trade (if I am not mistaken, the third one was held lastly). During such events the audience can get a lot of interesting and useful information – the only thing sometimes you have to do is read between the lines.

I carried out a public-opinion poll and came to the conclusion (the one expected by me...) that the participants I questioned think the key message of the conference was that 7-8% yield is expected on the market for the next year.

After the event, an article was published on portfolio.hu, titled as:

Decreasing yields are expected on the market for 2011

(By the way, I must mention that something can decrease only if it is at a certain level; “nothing” cannot be decreased – as there are in fact not any public transactions so we do not know anything about the average transaction level; consequently, it cannot decrease.)

Where is the false message?

Therefore, let us try to decode everything we have heard.

The conference carried out an opinions survey by making the participants vote. This survey brought the result that 47% thinks that 7-7.5% yield levels on premium office buildings will have been produced by the end of 2011, and 34% thinks that yield levels will have been around 7.5-8%. Consequently, according to 81%, such levels will have been between 7 and 8% by the end of next year.

The opinion having been formed is a hope, a desire and not a fundamentally reasoned valuation. The opinion indexes comprise not the data about market happenings but what the property experts taking part in the survey think of the market. Therefore, such indexes do not usually give precise and suitable forecasts. They are not worth focusing on and drawing conclusions from (I usually oppose indexes).

On the other hand, RICS President (!!!) Robert Peto also attended the event and gave a lecture. I wish to highlight one thing in his lecture:

The “Red Book” containing the RICS standards was first published in 1973. The edition of that time has already included the concept of “Open Market Value” implying practically the price determination in property appraisal, i.e. the price which the given property can probably be sold at.

The international definition says: “The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after a proper marketing wherein the parties had each acted knowledgeably prudently and without compulsion.”

As a result of the present situation, property appraisers have to give special attention to this definition as, owing to the “negative- equity” situation, sellers and buyers do not agree with each other in the open market since buyers are willing to buy at prices which sellers cannot sell at (as only the banks have money tied up in properties at such pricing).

The new definition of “willing seller” takes on special significance:

“ . . . a willing seller . . .

     Is neither an over-eager nor a forced seller prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market.

     The willing seller is motivated to sell the property at market terms for the best price attainable in the (open) market after proper marketing, whatever that price may be. The factual circumstances of the actual property owner are not a part of this consideration because the ‘willing seller’ is a hypothetical owner.”

So the question is not at which point a buyer and a seller agree on the price in the market but for how much the seller could sell the property if there were not any compelling forces (e.g.: indebtedness) on him/her. This drastic definition helps us understand what kind of values there will be in the future. Hence it is not our wishes/desires and the property owners’ position what matters but only for how much the buyers are actually willing to buy. I think it is also true if the owner is not willing to sell at the price which the buyer is willing to buy at.

To sum up:

Experts investigating and intending to understand future should make decisions based not on opinion indexes. Future should be investigated based on the factual data of the market, macro-processes and common sense reasons.

Relying upon these findings, there is only one factor that may produce low yields: the colossal liquidity formed in the developed markets of the world.

There are, however, some factors which have a counter effect on it:

1.  Inflation fears (I intentionally placed these factors first)

2.  Regional and national extra charges

3.  The necessity of replacing resources burned in the financial system (liquidity is appropriated to the replacement thereof and not to financing)

4.  Loss of the significance of the sector as the target area for investment

5.  The effect of simple macro-problems on the market (stagnating economy – vacancy risk)

6.  Cross flow counter effects (money came from Western Europe to this region so far because there had no place for reasonable priced investments – this process has just changed; they know what to spend money on their homeland)

Feel free to decide which way we tend.

Many of us seem to think that 6-8% yield should be produced on the Hungarian property market by God-given ancient right. I can only tell them that ten years is not a long period of time in property developers’ lives. Please be as kind as telling me how investments yields were calculated in Hungary ten years ago?

The Mad Prime Minister of Crazyland

Last month I had several conversations with some non-Hungarian speaking fund/portfolio managers dealing with this region. Practically, all of them consider us as follows (I am repeating what one of them said word for word):

“Hungary is a crazy country with a completely mad prime minister.”

After such conversation starters, you may discuss about different views, the role of the Hungarian and the foreign media, the economic principles and the turning world for hours. The long and the short of it is: foreign investors are afraid to invest in Hungary and do not understand the national measures on politics.

Nevertheless, if things are like this, there will surely not be any transactions; if there will be any yet, they will be carried out with extraordinary charges.

During the “portfolio conference”, in one of the panels it was said that insufficient and ineffective PR activities are conducted in Hungary, not enough money is spent on such activities and there are not well-planned strategies at all. All of this is true. I think, however, that a good PR strategy would not help us, either.

The fact is that we are the subjects of a macroeconomic experiment.

The experiment is dealing with the following questions: is it possible to break away from unwritten international procedures and overthrow taboos on economic policy? Are we able to go against the grain and benefit from such situation? It is the experiment that foreigners do not get the hang of. Or, if they still understand it, they do not like it – for the time being.

The experiment practically means that we can the tried and tested methods and take the “opportunity” to try rather avant-garde and aggressive ones.

Well, I think that is the right way. Or at least this start may give reasons for hope. The fact is that the two big measures (private pension funds and surtaxes) gave scope to the government for further steps. Two main aims have been reached actually without economic tightening (or rather without the tightening of export economy) with the greatest ease:

1.  Tax reduction and simplification

2.  Meeting the low budget deficit target easily

Budget reduction would be the third step. Why is it not the first one? Because budget reduction would lead to additional expenses in the short run (indemnification, costs of reorganisations, etc.) and bigger scope is needed for short-term expenses.

This is a historical moment for us, having never been experienced. I mean, with the steps having been taken so far, the government gained time and space for further measures. Furthermore, with the surplus receipts of the budget, they (i.e. the government) got the possibility of the drastic reform of bigger systems. (The beneficial result of surtaxes and the money from the private pension funds will surely not be experienced after a while. In a few years, however, a far more efficient state should operate.)

Where should reforms be started? As I have already mentioned, about HUF1,000 billion could be saved, only political intention is needed. There are very simple proposals, many a well-known economists have been repeating them like a parrot: we do not need 3,200 municipalities, so many hospitals, we should think civil support system over and streamline the big state service providers...

Just imagine – 1,000 billion!!! With so great reduction, the national budget could be positive!

Why is it important? Because we want strong economy, more workplaces, good salaries and favourable loans for the entropenours. TO GET ALL THESE, WE NEED WEAK FORINT AND LOW INTEREST RATES, BY HOOK OR BY CROOK!!!!! 

We need weak forint as we have to produce for export. We need low interest rates in order that companies may obtain cheap capital and credit. (The running amok of the last eight years was about the opposite of it: we get to this point owing to the forint having been kept artificially strong and the high interest rates – among others, we run into debts in CHF and EUR as we did not get reasonable HUF loans!!)

Weak forint with low interest rates could, however, only be sustained if Hungary does not depend on foreign financing to a large extent.

To conclude, we are subjected to a taboo-breaking and against-the-grain experiment, but I do not mind it yet. If there is political bravery to come to the forthcoming decisions, the “mad” prime minister will make history and set an example for other countries. If, however, we stop here for political reasons and do not take this historical opportunity on great reforms, the foreign investors will be right...

The “trade dodges” having been used so far do not work as there are problems not only with this country. The international financial system is out of order. As every single “patient” has different potentialities (think of the USA or Germany) and seeks for its own recovery, I do not mind if we are trying to work out new remedy.

Over 10% yield- Budapest, October 2010

Wednesday was a nice day. The weather was mild and sunny when we sit down for a round table conversation combined with breakfast with KPMG. We did not hear the usual mantras at last but could listen to the visiting lecturers relatively openly, ignoring all their positions. The introduction to the situation and the experts’ opinion about the future of the market did not mean news for us. No transactions, long recovery, no loans...

I cannot form an opinion about the breakfast as at the end of the conversation I got up, walked across the street and entered the nearby bank office where I could have a look at the outcome of my eleven-month work; the parties were just signing the contracts. On the same day two “A” class office buildings in inner Buda changed hands at 10.4% yield. As loan was also organized by me for the transaction (65%LTV), ROE index was up to 25%.

It was a fine autumn day...

(CEU REality group was involved in the transaction as an agent.)

The CEO of Erste Banks has left us a message

“Hungary warned by Erste chief on bank tax policy”- Financial Times, 11 October 2010, COVER PAGE!!!

I am reading the article on and off but I cannot find any essential information besides the message included also in the title. The article itself is a message, indeed, saying “we are staying but won’t finance”

But this is not news for us. The question, however, is whether the aggressive market gaining policy of the bygone century as well as billions of Euros having been spent on such policy and the work invested therein are vanishing into thin air or not. Will you kindly tell me what a bank maintaining a national network employing thousands of people but – in spite of all these –not placing loans will live on? (It was truly a poetic question.)

According to Andreas Treichl, there are not any problems as Erste has financed real customers (i.e. it invested not in commodity or money market products but in crediting). You can drop the same way, although not so quickly and spectacularly. There is an immediate depreciation on the purchase of a commodity market product, while the flop a defaulting customer – having even negative equity – is concerned in might be prolonged for years. Furthermore, such customers may be saved or wealth kept.

The situation can be simply described. It is not good to be a bank nowadays. All the banks are “perching” on a pile of deteriorated “products” while the value of the products cannot be written off on the balance sheets. Consequently, everyone is trying to oppose a little write-off to his current profit in order to have a narrow squeak to prevent bankruptcy.

It was the first thing – i.e. the usual business policy on the market – the Hungarian government has stirred in with the eviction moratorium. The second one was the bank tax. Instead of opposing the profit made to loss (write-offs or provision for expected liabilities), banks now have to spend on the bank tax. Today it is not good to be a bank.

Only to avoid misunderstandings: the Hungarian economy, of course, greatly needs the banks giving loans. On the other hand, in order to make profit, banks, will need the inhabitants and enterprises of European countries with 10 million inhabitants.

I think the Erste chief’s warning was a blunder. I mean it is a blunder if they (i.e. Erste bank) really intend to stay in Hungary and be determining market players. Our country has a(n) aggressive determined government having wide authority. Nobody/not any organizations should keep sending messages to this government, in my opinion. Austria is not too far and we could believe that a neighbouring country knows how things are getting on in Central Europe these days. Things seem to be doing it in a way other than earlier. We will experience even bank consolidation (through an asset management company or bad loan bank) or nationalization of banks (MKB Bank) and who knows what else. Therefore, the new political situation is going to lead to new market scaling. New players, new market sharing, new regulators and then new products. As I think, they should focus on all these and not join the ones clamouring outside. I make bold to say, diplomats should be employed instead of journalists.

The crisis will be over at some time in the future. Not now but surely some day. If it comes about, market presence will be important again.

P.s.: these days it is not only uneconomical to be a bank but also unpopular. This is a well-known fact in politics, too...

Do you think the crisis is over? No, it has not begun yet.

New info is coming out every single day. I usually read the papers and various websites. Stock indices go up...and down. One day a great politician declares the crisis is over. The day after another one says we are facing hard times and will crash.

Yesterday I was up and had a look at significant experts’ and analysts’ statements in the authoritative real estate journals. Such statements draw the same picture as the professional “conjuncture” indices constructed by research companies. By way of illustration, the ‘Current Situation and Outlook of the Real Estate Market’ index of GKI Economic Research Co. and the trade magazine ‘Ingatlan és Befektetés’ (Real Estate and Investment) is created in such a way that a pile of real estate market players are questioned whether e.g. rents go up or down. Such opinions are summarized and the dead cert is said by finding the average. The only problem is that the market players’ wishes never correspond to the facts. Therefore, the only thing I can recommend is not to draw a conclusion from such indices if you would like to see the market situation clearly.

Accordingly, making opinion of the crisis is like the opinion index. The published articles suggest that the majority thinks “yes, we have reached the bottom, from now we go up”, “rents must rise next year”, “investment market will get under way soon and be flooded by capital”. These “prognostications” are more wishes and not forecast tendencies resting upon a fundamental basis.

The thing is not that we have reached -  the nadir of the crisis. The crisis has not even really started yet.

(Or we can say there is no crisis any more. What we are in is a new situation staying unchanged for a while. We have to live in it – with this number of buyers and such prices – and must adapt ourselves to the situation in the long run.)

Actually, the nadir of the crisis is manifested in the fact that many companies are becoming ruined, prices are drastically falling and there are enormous loan and investment write-offs. Big write-offs and bankruptcies have not occurred so far. It is not the crisis that firms under liquidation are victimized by. I make bold to say that the companies having been liquidated so far – (i) were urged by the owner, (ii) otherwise had problems and the crisis was only icing on the cake, (iii) were urged by the partners or financiers to be liquidated, owing to the personality of the client (e.g.: the client has disappeared, simply was not cooperative with the bank, or in worst case it was some illegal operation in the background).

What about the others?

Everybody seems to feel fine. The sad truth is that everyone has nothing.

CF producers (e.g.: operating office buildings)

Prices (rentals) have drastically fallen. The vacancy rates show record values. These data mean unexpected expense by themselves as the value of such properties is proportioned by the triangle of yield-netincome-propertyvalue. If the income is less, the value of a property will also decrease. At the same time, the freezing of the investment market has lead to the increase of virtual yields which will keep on eroding property values (there will be a post about this topic).

Finally, we have reached the point where the lowering of prices means negative equity. I.e.: the majority of the clients do not have own equity in the property they hold. Moreover, banks have more money in the property than the value of the property itself.

Developments - Offices, Retails, Logistics

What is written above applies to this paragraph as well. It is not worth developing such premises. Unfortunately, if you have started to make such investment, it is a problem. It is not worth finishing. How much value is in the properties started to be built but not finished or in the ones which are completed but standing empty? Besides, how much is the debt on them?

And what is the value of the preorganized building lands?

Housing market

It does not practically exist. There are not adequate purchase loans. People do not trust in the future (trust, however, is needed to undertake long-term debts). People do not have cash. Developers sell their stock under break-even and spend their revenues on operation and interest payment instead of settling the capital situation of loans.

Everyone on every market is waiting for the great boom, the rents to increase, the block of flats to be full of occupants or tenants and all the flats to be sold at an atractive price. All the debts will be settled from that money. Due to the global situation, such boom, however, lacks the fundamental basis. There are simply not any real scripts according to which there will be so great boom that demand markets take shape.

Does anyone really think that e.g. next year buyers/tenants will queue up for flats or offices?

What is the main point? The balloon was punctured two years ago but we tried to fill up the perforations with all our fingers and blew a little air into the balloon – so we saved it. The balloon still exists.

Property investors’ and developers’ wealth has been eroded. Banks have rescheduled the loans to avoid writing-off them. Wealth has flown away, debts have remained unchanged. Or rather they are increasing as not all of us are able to pay the rescheduled loans.

What will come of it?