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?