Hungary Real Estate Report Q2 2012

Hungary’s real estate market, like so many others, was seriously damaged by the global financial crisis. An uptick in demand for office and retail space, as well as industrial property will only arise in tandem with a broader economic recovery. Nevertheless, this is once again under threat as Hungary's economy is set to re-enter recessionary territory in 2012 as a combination of slowing economic activity across Western Europe and severe financial stresses at home weigh heavily on all components of GDP by expenditure. Hungary is in dire need of a new IMF/EU deal, which we believe will be attained by the end of Q112 and should help to stabilise financial markets somewhat. On account of the financial stresses facing Hungary and the slowdown in eurozone economic activity, we have lowered our real GDP growth forecast for Hungary to -1.5% in 2012 from -0.5% previously.

In spite of the weak economic backdrop, and a construction sector which continues to be under pressure, our latest data collection from Hungary has revealed a cautiously optimistic outlook over the mediumterm. In terms of annualised performance, top line rental rates experienced annual growth in most of the sub-sectors and cities surveyed, however the market is still a far cry from its pre-financial crisis heyday. We do not anticipate an immediate change in fortunes for the sector, but believe that by 2013 the country will see a much improved pipeline and real estate outlook.  

Key Opportunities:

• Demand for office space is beginning to pick up. Given the very low amount of capacity added over the past couple of years, demand will begin to outstrip supply sooner rather than later.  
• Rental rates are expected to increase through 2012. At the same time, yields will fall slightly, as property values are likely to increase a little faster than rents.  
• Rising property prices in Poland are encouraging investors to once again look at other markets in the CEE area.  
• We expect Hungary will continue to converge, both economically and politically, with Western Europe over the next decade, and will remain one of the more politically and socially stable countries in the emerging Europe region.  

Key Risks:

• Hungary's government will be forced to adopt additional fiscal tightening in 2012, principally in order to meet the EU-mandated 3.0% of GDP target, but also given that it is currently in need of a new IMF/EU external financing package. This will exacerbate the country's economic slowdown.  
• Fidesz's popularity is set to tumble in 2012 as the government is forced to backtrack on a number of controversial policies, and the economy is pushed back into recession. We see strong potential for extremist parties in Hungary to begin realising more robust levels of support in the coming months.  
• Should negotiations with the IMF and EU regarding a new external financing deal prove especially protracted, Hungarian financial markets could once again come under severe strain. This could force the central bank's hand and lead to a significant tightening of monetary policy. In turn, this would result in a much harder landing for the domestic economy.