What will the year 2011 like? Let us have a brief look at three different scenarios...

The general consensus of the opinion in the national real estate trade is that 2011 will be a good year.

What of course had been expected by the trade (at least what had been included in consensus surveys or authoritative experts’ statements) did not proved right. 

It was thought 2008 and 2009 were to be a difficult period, while 2010 a good year with everything going as well as before. Or rather fairly well...

It happened in another way.

Actually, it is bad news that – while things are going still badly – many people think it is the bottom of the pit, we cannot fall further down. Nothing, however, has been practically solved. Bank portfolios have not been cleaned out and the distressed market has not evolved so the processes thereof could not taken place. Big portfolios have not changed hands at new prices and not a large number of developers declared bankruptcy. Furthermore, either negative equity situations have not been disentangled or the real estate elements of no value – accordingly, which might be thrown away – have not been re-priced.

Everything that has happened so far was only the overture.

Meanwhile, the international situation is getting worse. Keeping our eyes open, beside all of our hopes, endurance and confidence, we can say there are not any favourable tendencies. As far as either macroeconomics, politics or global economy are concerned, nothing indicates a remarkable new year.

Let it be admitted, one needs to be quite bold to fantasize about a good year – with the situation of Eurozone being so insecure. Let’s have a quick look at the scenarios for the Hungarian and international tendencies:

“Worst case scenario”: 

At the international level:

Problems in the Irish and Greek financial system will not be worked out. Budget deficit cannot be reduced to a large extent by reason of internal politics. None of the other countries in trouble (Spain, Portugal, Italy) cannot be given powerful help any more as the economically potent countries (e.g.: Germany) will deny to contribute to further help, due to their internal politics. In the countries having big commercial bank systems (Germany, Great-Britain, Italy, Ireland, France, etc.) stress tests turn out to be too euphemistic, consequently, the situation of banks are worse than expected. Greater part of bank portfolios has to be written off. Nevertheless, banks need more governmental support or else they will go bankrupt. The EU will become ungovernable, so more and more countries will secede from the Eurozone while investors escaping to havens to dollar and gold. As far as other financial undertakings – property funds, private equities – are concerned, - it will turn out that most of the invested money has been burned into the air...

In Hungary:

A very long and distressing period will set in, with a great deal of problems and very little increase. In the international chaos – even owing to the failure of its revolutionary activities – is going to slip further into disinterest. The national property market will basically just freeze up for a long time – even for a decade. There will not be yield based transactions p and the housing market will not get under way, either.

“Best case scenario”: - With much luck

At the international level:

There will not be panic. Owing to the European politics, the financing problems of the countries in difficult position will be worked out, even by such countries cutting back their deficit to a large extent, defying their own internal political standing. Making money from dollar and gold investments, investors will take to high-yield investments. The winners thereof might even be the state securities of the developing countries. Dollar is weakening, stimulating the US export activities. China, India and other big developing countries will turn to their own market. German export will start up, helping the growth of the countries concerned (e.g.: the Czech Republic and Hungary). Inflation will rise to a lesser extent in the Eurozone.

Tendency in Hungary:

The Hungarian economy will start growing, first slowly then steadily. Crisis management will turn out to have been successful according to the revolutionary acts. Gaining space and time by special taxes and money from pension funds, the government will start aggressive reforms. Consequently, we would have extremely generous budget for 2012-13.

Housing market will find its legs within a few years and after the bankruptcy of most of the housing developers, gradual increase would be experienced also in the housing development market. Transactions will start up in the investment market but there will be demand only for premium products, resulting in more yields than in Western Europe (do not hope, it may be only at least 8-9%, due to the pressure of inflation). The CF producers will survive with some kind of help, and the negative equity situation will be solved in such a way that the owners do not take out the realised profit for some years but use it for reloading their own equity.

Probable middle course

At the international level:

The situation in Ireland and Greece (even if it is temporarily worsening again) will become stable, owing to the help offered by IMF and Brussels. Countries in difficult position will declare great reforms reassuring investors – even if they aware of the fact that only a small portion of such reforms are going to be implemented. The other southern countries will be assisted by the European Union, even if it is enough for Germany...

Big bank portfolios will be continued to be settled (cleaning) from yearly profits. Therefore, restrained financing market may be expected for quite a few years. As a result of further portfolio devaluation, more local rescue packages will probably be needed. Trust in the common European management and the Euro will waver but the Union and the common monetary policy may be treated as a whole. The Euro will weaken drastically against dollar (despites, the strengthening of dollar might lead into further problems in the global economy). In Brussels, several political questions will fail to be resolved and the member states hardly reach an understanding in economic issues - most of the nations will start a more national (local patriot) politics.  The European economy will stagnate for a long time.

Owing to the huge debts having been resulted from the rescue packages, the Eurozone will be under great inflation pressure, even leading to a two-digit price index. Therefore, the international investors would stay in their countries (where they are more familiar with the economic and legal environment), spend less and carry out investments in more sophisticated ways and with fewer risks but resulting in higher reimbursement. The bolder companies will invest (or keep investing) in the big developing markets and spend in – for example – Asia.

The existing problems of the global economy would not be worked out after the political decisions outlined herein above. What is more, further problems would arise in such a case. The expected boom might keep us waiting even for a further decade.

Tendency in Hungary:

The small and problematic developing countries (including Hungary) may be the losers of the international situation. Inflation and the yield growth expectations incidental thereto as well as the investors avoiding risks will erase the countries having insecure legal and political environment from the international investment map.

I personally believe (hope) that the politics of the government ‘swimming’ against the main stream may achieve success, there will be great reforms in spring and the Hungarian budget policy will also have success (3% budget deficit in 2011 and a very deep decrease in national debt). Consequently, confidence may be given back to us in the market. In this case premium products might have a chance to be sold at over 9-10% (inflation!!!).

Fundamentally changed housing market and – incidentally – housing developments might get under way in 2-3 years’ time, with completely new market players, products and pricing. First there will probably be a narrow market with thin margins, small projects and a lot of work to carry them out.

One thing is for sure, we should go to church and breathe prayers more frequently...

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...