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More and more experts are comparing the current crash to that of 1929, and expect a domino effect to take place, says Péter Számely, an expert at HYPO Investment Bank AG's property financing division dealing with priority clients in Central and Eastern Europe. Hopes of the credit crisis' relative fast progression have now crumbled to dust, and if the bankruptcy wave buries additional large market players underneath it, and a chronic crisis develops, then a slow decline in property values and rising yields will become inevitable.
Properties financed above the conservative level will be put on the market en masse from collapsing banks' portfolios, and the big question is, who will buy these properties and at what price. If creditors decide not to wait - or if the players holding up demand so far disappear from the market - and then prices continue to fall then which attitude will be stronger, the one to hold off on buying, speculating on further declining prices, or the one to buy up the product freshly put on the market?
If many decide on a wait-and-see stance, that could have very dire consequences, Számely stresses.
Last year, 1.8 billion euros were spent on investment properties in Hungary. The big question is, how much will they spend in a period of rising funding costs, falling yields and tightening liquidity? So far, 2008 has only one transaction to show for itself, and not a very big one at that, the sale of a four thousand square metre office building by Terrapark. However, several other deals are also nearing completion.
In this situation, the minimum that can be expected is that projects are delayed. This is not only because many decide to wait until the investment environment becomes more favourable (cheaper funds, bigger demand), and let plots rest that were sometimes bought too expensive, but also because securing and organising financing is a difficult task even in the case of a good project.
According to Számely, banks will protect their liquidity at all costs, and therefore will strive to spread the risk around even in the case of promising investments, for example by organising syndicated loans. This in itself is already more time-consuming than providing the financing alone, but in the current environment it could be very difficult to hammer out such a cooperation, and even if it succeeds, the deliberate nature of the decision-making process also slows down the investment.
From a real estate market aspect, as various experts have already noted, developers should prepare for having to shift their emphasis away from selling and more toward operating their properties. They should attempt to reach an adequate occupancy ratio, which not only improves their cash-flow position, but also makes the property an attractive investment target. In such a situation, an important role is played by real estate consulting firms that have the experience and the client base to at least partially fill up a given property.
There is no consensus on the market as to what the further progress of the crisis will look like, but analysts mostly agree that Hungary, the Czech Republic, Slovakia and Poland are in relatively safety because of their markets’ stable development so far, while in Romania, overheating could become a source of serious problems. In any case, while the prices of prime products will decline only minimally, there will be significant changes in other segments. Regarding the opinion that funds and other investors will primarily re-discover Germany as their first investment target, Számely said that it is true that prices did not spin out of control there, therefore one can invest without any speculative premium. However, the same can be said of Hungary.
