Old stuff- My opinion from the past 20.05.2008.

Crisis, political conflict, market restructuring – as we gaze into the crystal ball, we're still smiling

Tamás Járosi - CEU Reality Group

According to economic dogma, bad news does not a crisis make. Instead, it is the result of the combined effects of a number of bad tendencies. Right now, we have a global credit market crisis, international recession, drastic energy and food price hikes, and (in terms of national particularities) a botched domestic policy reform that easily could result in an early election.

There is enough bad news here to start talking about a crisis, still, at the very least we can say that an unusual and heretofore unknown situation has developed which makes statistically-based analyses impossible. What will happen to Hungary's markets in the next 6-12 months? We can only gaze into the "crystal ball" and draw logical conclusions based on these tendencies, making further, more accurate analyses in such a situation impossible. My imaginary crystal ball suggests a positive image, which, though it may mean painful market restructuring for many, creates a desirable and healthy situation in the end.

Credit market crisis

I believe there is no credit market crisis in Hungary. Loans have not stopped, banks have not gone bankrupt. What has happened is that a rather desirable and healthy process, a sudden and drastic abundance of liquidity and its exaggerative effects are now receding at a normal pace. Since Hungary represents a small area on the international financial markets, we are thus subject to all sorts of international influence. Despite this, we are the kind of developing market that boasts the lowest real estate prices even within the immediate region, plus we appear with great economic growth potential and have become desirable ground for both investors and financiers. Today, in addition to the fact that two or three banks effectively stopped financing projects and that active project financers are becoming picky about which clients they finance (and the cost of money has gone up), lending resources for projects still remain available.

And the investment market is waiting it out. It's no surprise that someone who bought at an insane pace (let's say, 5.5% yields) is now in trouble. No one can tell what a realistic yield is today, but every yield increase has caused catastrophic losses for these investors, so a restructuring of the market can be expected. Based on international news, I believe that some of the funds dealing with investments are in big trouble, so they will not appear as buyers. At the same time, new funds will be created. Many will turn towards new - and amazingly liquid - financial markets and refuel themselves with fresh capital, so, again the market will start up. In simple terms, it's no crisis that buyers are not lining up with offers for unjustifiably low yields.

Inner-market restructuring

There was a time when the media covered gigantic purchases by large Spanish developers galore and, before that, there were times when developers (or brokers disguised as developers) of various nationalities arrived in great waves. All eras must end sometime and perhaps a market "cleansing," the end of abundant liquidity, and international market problems (for example, the Spanish crisis) will restructure and steer the development market towards a healthy route. Realizing projects is an ever more difficult task. Increasingly sophisticated local knowledge is required for preparation and, increasingly, for the formulation of products. The tendency I consider good is trackable on every submarket; the presence of Hungarian - primarily Hungarian-owned - companies, (for example, on the residential market, two of the three most active companies are already Hungarian companies). The restructuring can be seen in the decrease in activity, too, which is also quite a desirable process, acquisition activity has greatly decreased and the number of projects at the preparation stage is falling. The effects of the decrease on investments cannot be felt currently underway as yet, however, this is mostly due to the "momentum" which characterizes investments after launch.

Political situation

Over the past few months, I traveled to London and in other cities considered to be financial centers a lot. Nearly everywhere I was asked the question: Why is it that Hungarian newspapers (those published in English too) paint a much more pessimistic picture about us, the economic situation, than international analyses based on numeric data? Probably we see a different picture from the inside and sometimes get a bit more depressed than necessary. At any rate, the domestic political situation is no different or no worse than anywhere else (just look at Italy), but the economy works and people live and consume. We can't say for sure what politics will do, but perhaps we can approach the line where there aren't too many bad choices. According to one desirable scenario, the new government in its first 1-2 years will be able to take some drastic steps (significant shavings off social spending, reforms of the large social service systems) which temporarily affect certain markets (for example the activity of home buyers), but ensure the desirable balance and growth in the long-term.

Prices

Perhaps price is the most important evidence, offering a much better reason than any other explanation for why we can remain hopeful despite the not-so-great news: In the immediate and wider international scope, we are cheap both in terms of rent and in terms of purchase price. While we can expect some small increase in rent in my opinion (whose driving force is the construction industry becoming more expensive, as well as an attempt to compensate for the narrowing profit margins, but is counteracted by the still not-so-great developer activity), real estate prices must rise. Of course, the scissors are still opening, and a bad product in a bad location must behave differently from the premium category. In my opinion (says the crystal ball) yields will range between 7-8% depending on the product, while on the residential market, a 20-30% price change must occur.

Perhaps this is the potential on which many may and should build on, since in a risky international environment, Hungary is a place where it's possible to invest in real estate with the least amount of risk. We are beginning to learn the meaning of the term "land banking." In my opinion, for those who have the means, it's a good idea to buy improvable land at a good price in a good location and wait: The market's restructuring (due to those leaving) and at present there is an opportunity to do so. For small investors, it is also worth investing in a good quality apartment or a well-thought-out piece of land. For institutional investors (buyers of complete products), well, we must wait and see where market prices go.

At the present time, it seems that all tendencies point towards healthy market development, which leads us through a brief (though, no doubt, painful) cleansing period towards a more mature, more stable, and more balanced state.