Hungary ‘has come through the fire’ and is now a more attractive destination for foreign investors, delegates heard at the PropertyEU CEE Investment Briefing, which was held in Budapest this week.
The period of concern about the country’s political situation and risk profile is over and ‘investors are now used to the new environment and find there is more political uncertainty affecting the investment climate in Poland and Bulgaria, or indeed in Western Europe with all the upcoming elections', said Mark Robinson, CEE research specialist at Colliers International.
‘My point is that Hungary has gone through this upheaval already,’ he said. ‘It has come through the fire and emerged stronger.’ The country’s attractiveness is mirrored in the increased investment flow into real estate, from €600m in 2014 to a record €1.7bn in 2016 (out of €12bn into CEE as a whole).
The percentage of domestic investment has remained constant at around 40%, but what has changed is the composition of the remaining 60%. ‘It is very interesting to see how Hungary is attracting investors from different countries now,’ Robinson said. ‘US investments were just 10% of the total two years ago and went up to 16% in 2016, second only to domestic investors. Austria is in third place, followed by Germany. There are also significant amounts of capital coming from Slovakia and Greece.’
The economic backdrop suggests a positive environment, with strong consumer confidence, low unemployment and business sentiment rising beyond expectations, tracking the German IFO index which is regarded as a reliable barometer.
‘The charts suggest optimism in the property sector as well, with investments expected to rise further,’ said Robinson. ‘At this point, it looks like a pretty good story.’ The increasing flow of money has led to a compression in yields across all three sectors – offices, retail and residential.
Rising inflation a threat
But ‘the biggest threat in terms of investment flows in the next year or two is the rise in inflation and in bond yields as a consequence,’ he said. ‘Fortunately Hungary, and CEE countries in general, have a cushion, a wide funding yield gap which can allow bond yields to rise without real estate yields having to back up necessarily. This situation, however, will not last forever.’
Another risk is a rise in wages, which have doubled over the last 10 years. ‘In Hungary wage growth could be above 10% this year, which presents a clear and present danger,’ Robinson said. ‘It is not just a problem for an industrial sector struggling to stay competitive, but also for the office sector, as companies may choose to relocate.’
The residential sector would suffer as a consequence. The retail sector, on the other hand, is expected to be a beneficiary because workers who earn more are likely to spend their money boosting shop revenues.
Retail has its own risks to deal with, however, especially the rise of e-commerce. ‘At the moment only one third of Hungarians shop online, but the percentage is growing fast and at double the rate of retail sales, posing a threat to marginal shopping centres,’ Robinson said.
