Orban Banning Hungarian Malls Deepens Property Pain: Mortgages

German discount retailer Lidl applied this year for 14 exemptions to Hungary’s ban on building stores larger than 300 square meters (3,300 square feet). None were approved.

The restriction on large retail outlets, approved by Prime Minister Viktor Orban’s government in January, is adding further pain to a Hungarian commercial property market stung by taxes and penalties that have prompted banks to slash lending. The Economy Ministry rejected 35 of the 96 applications it received this year from companies wanting to build stores bigger than the size limit. Another seven were suspended or closed.

“Unpredictable” policy changes are accelerating cutbacks by real estate investors as funding from the country’s mostly western European-owned banks dries up, Gabor Borbely, Budapest- based head of research at CBRE Group Inc. (CBG), said by phone. The limit on new store sizes “symbolizes the uncertain environment in which developers must work. There is no willingness to finance.”

Hungary’s capital investment level dropped last year for the first time since at least 1995, according to central bank data, as policies to plug budget holes, including additional taxes on companies ranging from supermarkets to phone companies, hurt investor confidence. Hungary ranked as the worst place to do business in the eastern European Union after a “spectacular deterioration” in confidence, according to an April poll of 196 managers by the German Chamber of Commerce in Budapest.

Property Reeling

Commercial property is reeling after the country’s residential real-estate industry ground to a halt. Foreign- currency mortgages, which fueled a boom before they were banned in 2010, saddled homeowners with ballooning repayments as the forint sank to a record and prompted buyers to flee the market. Home construction fell last year to the lowest level since the government started collecting data in 1930 as demand slumped.

Hungarian banks booked a combined pretax loss of 370 billion forint ($1.6 billion) last year on a government policy to force lenders to swallow exchange-rate losses on foreign- currency mortgages by allowing their early repayment at below market prices. The forint has dropped 34 percent against the Swiss Franc since 2007 and 27 percent against the euro.

Orban, Hungary’s most powerful premier since communism after winning a two-thirds parliamentary majority in 2010, introduced retroactive corporate taxes, nationalized private pension fund savings and stripped the Constitutional Court of its right to rule on economic issues. The measures led to the country’s credit rating downgrade to junk last year and forced Orban to seek International Monetary Fund aid.

Second Recession

The economy is on the brink of its second recession in four years after a contraction in the first quarter. The forint plunged 15 percent against the euro, the most in the world, in the second half of last year. It pared losses this year, rising 14 percent, the third-biggest gain in the world after the Chilean and Colombian currencies, as investors speculate Hungary will obtain an IMF loan agreement.

Hungary’s benchmark stock index, the BUX Index, fell 0.3 percent today. The index of 11 companies traded on the Budapest Stock Exchange has gained 5.1 percent this year after declining 20 percent in 2011.

One shopping mall has been opened in the country this year and there have been no new hypermarkets, according to the Hungarian Council of Shopping Centers, whose members include Tesco Plc (TSCO) and Groupe Auchan SA. Retail construction plummeted even before the restrictions came into force, with five new shopping centers or hypermarkets completed in 2011 compared with 33 in 2008, before the economic crisis began, the council said.

Lenders Retreat

About 20 percent more lenders reported a decrease in loans for commercial real estate than said there was an increase in the first quarter, according to a survey of senior loan officers surveyed by the Magyar Nemzeti Bank. The banks in the survey account for about 98 percent of the commercial real estate loans in Hungary. About 10 percent more reported a rise in the year- earlier period. In the same survey, about 44 percent more said the bank is likely to reduce loans for retail in the next six months.

“It’s a standstill, there is no new debt coming on the market,”Benjamin Perez-Ellischewitz, head of Hungarian capital markets for Jones Lang LaSalle Inc. (JLL), said in an interview at his office in Budapest. “With a few exceptions, there is nothing going on. Everything is amplified on our market because of the economic and political background.”

Orban introduced levies on the banking, energy, retail and telecommunications industries in 2010 without consulting the affected companies, pledging to keep the taxes in place through 2013. He then decided to make bank, energy and telecommunications taxes permanent.

Unorthodox Policies

The prime minister’s self-described “unorthodox” policies, which also included the nationalization of $13 billion in privately managed pension assets in 2011, cost Hungary its investment-grade credit rating by all three major ratings companies since November.

Hungary’s economic struggles risk spilling over into euro- area countries because banks from Austria, Italy, Belgium and Germany operate in the country, Mihaly Varga, who is leading negotiations for a second Hungarian bailout from the IMF in four years, said July 15 on Budapest-based HirTV.

Austria was stripped of its top AAA rating by Standard & Poor’s this year partly because of the presence in Hungary of Vienna-based companies Erste Group Bank AG (EBS) and Raiffeisen Bank International AG. (RBI) Erste is the second-biggest lender in Hungary and Raiffeisen No. 5.

‘Agonizing’ Market

“The real estate market is agonizing, transaction volumes are at a low level,” said Zoltan Reczey, a Budapest-based analyst at broker Buda-Cash Brokerhaz Zrt. “The environment doesn’t support banks’ profitability so foreign parents are cutting back, rather than developing their operations in Hungary.”

While the Economy Ministry grants exceptions to the store- size ban, the basis of the judgment isn’t sufficiently clear, increasing uncertainty for foreign investors in an already weakening retail market, said Judit Balatoni, secretary general of the shopping centers’ association.

“There was not much willingness to invest in the first place,” Balatoni said in a telephone interview on July 24. The store size restriction “certainly won’t help the construction sector or increase employment. Participants continue to expect a stagnating retail market, at best.”

Lidl, based in the German city of Neckarsulm, has opened 152 stores in Hungary since 2004. The company will continue to expand there, Judit Tozser, Lidl’s spokeswoman in Hungary, said by e-mail.

Regional Opportunities

“By giving Hungarian suppliers regional opportunities, Lidl had more than 20 million euros ($24.6 million) in exports from Hungary in 2011 and that is growing continuously,” she said. “We hope that these efforts also represent important values for decision makers and that laws will take such criteria into account in the future.”

Tesco, the U.K.’s biggest retailer, said the size limit hasn’t had a “substantial” impact on its investments in Hungary because the company is already focused on building smaller shops after opening hypermarkets in the country over the last 17 years. Tesco plans to file its first two applications for exceptions to the limit “in the coming days,” Hungary- based spokeswoman Marta Palfalvi said by e-mail.

The Economy Ministry rejected 27 applications to build food stores on the grounds that deliveries to the shops pose a bigger environmental burden than other businesses that were granted exemptions to the size limit, the ministry said in an e-mailed reply to questions. The government grants exemptions for projects that improve surrounding infrastructure and don’t create an additional environmental burden, it said.

Total Construction

Total construction output in Hungary fell 15.2 percent in May from a year earlier, the statistics office said on July 16.

Even without the restriction, commercial real estate has been buffeted by the country’s struggling economy, which emerged from the worst recession in 18 years in 2009 only to slip back into decline in the first quarter of 2012. More than 1,200 Hungarian companies went into liquidation in the second quarter, the most on record, and a further plunge in construction is expected in the rest of the year, Opten Kft., a Budapest-based market research firm, said last month.

Hungary’s retail sales have fallen in each year since 2007 except for a 0.3 percent increase in 2011, according to data published by the central statistics office on July 24. Sales are down 1 percent so far this year, the data showed.

Vacancy Rate

Immofinanz AG (IIA), eastern Europe’s biggest listed real estate company, has a 23.6 percent vacancy rate in Hungary, the highest among eight European countries including Austria, Poland and Romania, according to a presentation citing data from January. The Vienna-based company’s vacancy rate is 18.9 percent in the Czech Republic and 3 percent in Russia.

The retail vacancy rate is lower at 9.9 percent. Immofinanz has 144,000 square meters of floor space in the country, including 12 Stop Shop outlets. It has a 9.9 percent retail vacancy rate.

“Because of our strong position in shopping centers, we have actually profited and will continue to profit from the law, because no new ones are opening,” Immofinanz Chief Executive Officer Eduard Zehetner said in an interview.

Still, the company would prefer measures by Orban’s government or the European Union that spur growth in the country, the CEO said.

Hungary’s banking industry became unprofitable for the first time in 13 years in 2011, with central bank President Andras Simor warning in June that he expects lending to decline for two more years, mostly because of a lack of credit supply.

Reduced Loans

Hungarian banks and savings cooperatives reduced their loans extended to companies by 9.8 percent last year, according to data from financial regulator PSZAF. Financing for real estate projects, which was only measured for non-bank financial enterprises, dropped 14.3 percent, PSZAF said.

Hungary’s imposition of new taxes during a European bank crisis had an “unbelievably negative” impact on lending, said Gabor Futo, who has developed 600 million euros ($738 million) of properties as co-founder of Budapest-based real estate group Futureal.

“There’s been a total collapse in investment demand in Hungary,” Futo said in a phone interview on June 28. “This is not only because of Hungary’s economic performance, but also because of a general loss of confidence in Hungary’s economic policies and institutions among international investors.”

A deal on a credit line from the IMF may help restore investors’ trust in Hungary and boost lending, Futo said in the interview. Balatoni of the shopping centers’ association said there is also hope the government will amend rules to make criteria for obtaining building permits clearer. “There would still be investors who would like to build malls here,” she said.

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editors responsible for this story: Gavin Serkin at gserkin@bloomberg.net; Rob Urban at robprag@bloomberg.net

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