The devaluation of real estate funds could
destabilize the Hungarian mortgage market
Analysis on the risks and tendencies in the Hungarian real estate sector by Political
Capital Institute
4 May, 2009
Key findings
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Due to continued, extremely poor construction-industry and property-market prospects and
the siphoning effect of investment instruments promising higher yields (e.g., bank deposits),
the flight of capital from real estate funds is expected to persist and accelerate.
In itself, the need to satisfy investor claims may place a huge burden on financial institutions behind real estate funds.
The stability of creditor banks may also be undermined as, due to the withdrawal of
assets from funds, the steady devaluation of real properties may have a ripple effect
on the mortgage market as well. If the value of property held in collateral starts to decrease substantially, banks may be forced to demand additional collateral that, in turn, may
lead to the collapse of the domestic mortgage market.
The anomalies facing the housing market may be exacerbated as supplies are starting to
outstrip demand by a large margin. The oversupply may be expanded further by seized
and foreclosed properties left behind by distressed borrowers, as well as properties sold by
real estate funds, dramatically accelerating the devaluation of the housing market.
This may increase the rate of non-performing mortgage loans in bank portfolios, and
eventually one cannot rule out the development of a mortgage crisis similar to the
one seen in the United State.
To avoid that fate, banks’ eminent interest is to prevent the meltdown of the mortgage market, which threatens with unpredictable consequences. Banks can reach that
goal if, instead of repossessions and the unilateral modification of loan agreements, they try
to minimise losses through rescheduling and easing lending terms. If banks try to pass the
bulk of their rising costs to clients, they may face much larger losses in the medium term
due to a potential wave of bankrupt debtors.
Due to guaranteed social unrest and the high cost of crisis management, a mortgage crisis carries high risk for the government as well.
Charges against PSZÁF (Hungarian Financial Supervisory Authority) and fund managements may coalesce into a general resentment aimed at the financial and supervisory system and could reinforce an already existing distrust in financial organisations, especially after the Metropolitan Court of Budapest, in its April 17 ruling in the first instance, rejected the
claims of private individuals challenging PSZÁF's suspension of real estate funds.
1
Background and antecedents
Thanks to the combined effects of the panic generated by the financial crisis and the siphoning effect of bank deposits offering double-digit interest rates, in October 2008 investors rushed to withdraw assets from real estate funds (over HUF 100 billion in a short time).
The trend proved to be lasting and the usual 3-day1 deadline to perform redemption orders became untenable. As a result of the stampede, a number of funds came close to collapse, calling for immediate intervention. This became all the more urgent as at the time some one
hundred thousand investors held their assets in real estate funds with a total portfolio of
HUF 400 billion.
360
Monthly sales by real estate funds and retail investments in HUF
deposits
300
(2008, HUF billion), Source: Bamosz, NBH
240
real estate fund sales
180
deposit transactions
120
60
0
-60
-120
Jan.
Feb.
Mar.
Apr.
May.
Jun.
Jul.
Aug.
Sep.
Oct.
Nov.
Dec.
After consulting with market players, on November 7, 2008 PSZÁF suspended for ten days trade in
investment notes in open-ended real estate funds and funds of funds investing in real estate. In the
following two-week period Parliament passed a legislative amendment granting fund managers the
opportunity to secure adequate liquidity.
Major changes introduced following the legislative amendment:
 The Supervisory ordered fund managements to apply the T+ 90-day performance deadline stipulated in an earlier regulation, i.e., instead of three days, execute investor orders within the three-month
deadline.
 Funds are authorised to convert open- into closed-end instruments. In that case investors have the
right to decide whether to stay or leave the fund.
 The fund management may request suspension of investment note redemption for a maximum of
180 days. If it fails to secure liquidity within that period, the fund is liquidated entailing the sale of its
property holdings.
 The fund management may decide to close the fund.
 Funds may borrow up to fifty percent of the value of their property holding, which, in a departure
from earlier practices, can be used to increase cash balances (in the past only 10 percent of a loan
could be used for that purpose).
Investors who placed a redemption order with their fund following the suspension order gained
access to their investment at the prevailing price in early April, after the expiration of the 90-day
moratorium. However, in most funds the price lagged far behind that quoted in November 2008. As
1
T+3 day, the order must be executed on the third trading day following sumbission at the prevailing rate.
2
a result, clients not only failed to realise expected profits, but they also lost some of their
investments.
Supervisory and fund managements: targets of attacks
Following the PSZÁF decision both funds and the Supervision came under intense attack by investors and the profession alike. Disappointed small investors established the Self-Defence Association of Bank Victims2 (KÖSZ). The advocacy group organised mainly on the internet3 pressured
Parliament's budget committee to review the state of domestic real estate funds at its March 11,
2009 session. Representatives of both Bamosz (Association of Hungarian Fund and Asset Managers) and KÖSZ were invited to the meeting. The civic organisation fights to ensure that investors
gain immediate access to their savings at November prices. In their view, the needed resources
must be guaranteed either by banks behind these funds or the state.
The Supervision and the funds have been the target of strong criticism. PSZÁF is attacked
for having issued an illegal suspension order extending to funds with no liquidity problems, while
earlier regulations granted funds too much scope for action. According to investors, the T+90-day
performance deadline is unfair for, as under its terms, clients gain access to their assets after a
four- month delay and at an uncertain value. PSZÁF has also been criticised for having suspended
trading under pressure from a specific bank, leading to charges filed against an unknown suspect.
According to charges from similar quarters levelled against fund managements, the companies
failed to take into account actual market trends when establishing property values and the price of
their investment notes. However, following the suspension in late November they deeply depreciated their assets leading to a drastic drop in prices. In fact, some claim that prior to conversion
to a closed-end instrument funds deliberately undervalue their assets to keep as many investors as possible “within the fold”.
The criticism aimed at PSZÁF and fund managements has generated widespread resentment against the financial and supervisory system. This may intensify after, in its ruling of April
17, 2009, the court rejected in the first instance the claim of private individuals challenging the
Hungarian Financial Supervisory Authority's November 2008 ruling suspending trading in real estate funds.
Net asset value of real estate funds
(2008-2009, billion HUF), Source: Bamosz
600
550
500
450
400
350
300
Jan.
2
3
Feb.
Mar.
Apr. May.
Jun.
Jul.
Aug. Sep.
http://karosultak.ning.com/
http://www.startnap.com/try/
3
Oct.
Nov. Dec.
Jan.
Feb.
Mar.
Real estate fund
custody manager
net asset value (HUF billion)
price
annualized 3-month yield
Early Sep.
2008
Mid March.
2009
Early Sep.
2008
Mid March.
2009
Early Sep.
2008
Mid March.
2009
Budapest Ingatlan Alapok Alapja
Citibank Rt.
30,7
18,3
1,56
1,32
7,4%
-47,6%
CIB Ingatlan Alapok Alapja
CIB Bank Zrt.
31,7
15,3
1,49
1,18
7,8%
-81,2%
ERSTE Nyíltvégű Ingatlan Befektetési Alap
Erste Bank Hungary Nyrt.
142,0
93,8
1,44
1,50
8,5%
8,2%
Magyar Posta Nyíltvégű Ingatlan Alapok Alapja
Erste Bank Hungary Nyrt.
27,8
22,0
1,20
1,25
7,4%
7,1%
Európa Ingatlanbefektetési Alap A sorozat
UniCredit Bank Hungary Zrt.
35,7
14,9
1,65
1,04
7,0%
-123,8%
134,1
66,2
1,59
1,39
6,8%
-36,6%
84,7
43,9
1,79
1,50
9,2%
-45,9%
OTP Ingatlanbefektetési Alap
OTP Bank Rt.
Raiffeisen Ingatlan Alap
Raiffeisen Bank Rt.
Source: BAMOSZ
Regulation of the real estate market - political context
As around one hundred thousand people still have assets tied up in real estate funds, the
drastic devaluation also carries economic and political risks alike as investors’ anger may
easily turn against public officials (as it happened earlier in the case of the Baumag-case).
Large investors with huge assets in real estate funds may also put enormous pressure on
the legislation and the government to force the adoption of regulations favourable to their
cause.
By the middle of April only one thousand investors joined the advocacy group organised on internet
blog sites, i.e., the organisation has little clout to influence events. Moreover, so far it has failed to
attract major political support: by the evidence of statements by Fidesz politicians4 it is clear that
the opposition party can only support demands for the reduction of payment deadlines, while they
also believe that depreciation losses must be accepted by risk-bearing investors.
Although the demands of small investors are unlikely to be met, in all future debates involving banks and the Supervision critics may constantly refer to the anomalies generated by
real estate funds.
Housing market: gloomy outlook
While the Hungarian real estate market (less overvalued than the Czech market, for instance) has already undergone a major correction, further devaluation is expected in the
future. With declining demand the trend is reinforced by the fact that a permanently weak forint
may trigger a wave of FX loan defaults (the rate of FX loans exceeds 70 percent within the total
retail loan portfolio). In its latest stability report, the National Bank of Hungary also warned that rising loan payments (caused primarily by the ailing forint and banks’ practice of passing rising costs
to their customers) considerably increase the risk of loan delinquencies.
Moreover, the combined effects of declining property market values and the denomination of debt
principals in foreign currencies forces banks to require additional security (supplementary
collateral) from household borrowers. However, the majority of borrowers pushed to the
brink by the crisis are unlikely to be in a position to bear additional burdens. This may reveal
the full depth of the mortgage crisis and the rising number of foreclosed properties will considerably
increase supply on the housing market, aggravating the crisis even further.
4
http://www.fidesz.hu/index.php?Cikk=129654
4
Housing loans to households - end-of-month portfolio
HUF billion, Source: National Bank of Hungary
TOTAL
HUF
4 500
4 000
FX
3 500
3 000
2 500
2 000
1 500
1 000
500
08.01.
08.02.
08.03.
08.04.
08.05.
08.06.
08.07.
08.08.
08.09.
08.10.
08.11.
08.12.
09.01.
0
09.02.
The risk of FX loan defaults persists despite the fact that banks have recently tightened their lending policies and significantly reduced FX-based placements (while due to high interest rates, HUFbased housing loans are not attracting new borrowers).
In short, lately once conservative real estate funds earning solid yields are no longer considered a
good investment opportunity. Instead of investing in further developments, fund managers struggle
to consolidate their portfolios, with a limited chance for success as the flight of investors from real
estate funds is expected to continue. In the first three weeks of April clients withdrew additional
HUF 38 billion from these funds, representing over 10 percent of the total asset value. Banks behind fund managements have an interest in satisfying liquid capital claims generated by
departing clients. However, if unable to do so, they have to sell their property holdings.
This, in turn, further increases oversupply on the market and accelerates the devaluation of
assets, taking the mortgage market on a downward spiral.
Housing loans to households - value of new contracts
HUF billion, Source: National Bank of Hungary
100
90
TOTAL
HUF
80
EUR
70
CHF
60
50
40
30
20
10
08.01.
08.02.
08.03.
08.04.
08.05.
08.06.
08.07.
08.08.
Further information:
Krisztián Szabados
Director
Political Capital Risk Forecast Division
London  Budapest  Sofia  Beijing  Dubai
[email protected]
00 36 20 936 30 33
5
08.09.
08.10.
08.11.
08.12.
09.01.
0
09.02.