The cut in official interest rates in Hungary which announced this week will have a positive impact on the property markets in Budapest, according to Capital Economics.
The company expects interest rates to go into reverse later this year, making Budapest’s retail yields look more vulnerable than office or industrial yields. Prime property yields in Budapest have increased by about 20 basis points while yields in Prague were lower and Warsaw were steady, said Capital Economics.
As a result, the spread between yields in Prague, Warsaw and Budapest is now around 50% higher than at the height of the credit crunch and still growing, suggesting that investors view the prospects for Budapest property as closer to the eurozone periphery than its central European neighbours.
Although the GDP in Hungary has recorded its first quarterly gain in five quarters, Capital Economics does not think that “this will halt the upward drift in Budapest retail property yields”.
Hungary’s high level of foreign currency debt means that the recovery is vulnerable to any depreciation of the forint, which has weakened since autumn 2012. Capital Economics expects the risk appetite will fade as doubts about the survival of the eurozone resurface. This may result in a rise in interest rates to support the currency and Capital Economics forecasts that Hungarian interest rates will end the current year at 5.25%.
Considering Hungary’s expected GDP of around 0.5%, the company does not think that office and industrial yields will rise much further. The company also forecasts a 1% fall consumer spending and expects retail yields to rise by a further 25bps to 30bps over the next 12 months.
