Interview With Marc Mogull, Benson Elliot

Marc Mogull, the head and founder of Benson Elliot, a private equity company investing solely on real estate markets, was in Budapest at the time of the transaction and talked to Portfolio.hu about the Hungarian real estate market, the intimidating state of the local economy, financing crisis and the conquer of private equity in the real estate sector. 

Why Hungary?

Portfolio.hu: Why Hungary, why Budapest and why Károlyi City Center? 

Mark Mogull: We were not necessarily seeking to invest in Hungary, but equally we were not averse to do so either. This is very important because in certain countries we are in fact reluctant to make investments. So Hungary is a market where we feel comfortable to bring money to and the residential sector is where we have a lot of experience. Currently, the residential sector represents about 40% of our total portfolio. Why this project? I think it has the right concept, the right location and - perhaps above all - the right developer.

Portfolio.hu: Are you not concerned about Hungary's sluggish economic growth? You are also present in Slovakia, so you definitely have a point of reference...

Mark Mogull: It is certainly troubling. We've been monitoring the government's economic reform efforts for some time, in particular the measures to reduce the country's fiscal and current account deficits. These aren't easy issues, but real progress is being made.

As we can see these efforts have a negative impact on short-term growth, but that does not mean that people are going to stop having babies or families are going to stop looking for better quality housing. While the current economic environment does make it harder to find good opportunities on the market [.] It's not one of those markets where you can just buy up everything on offer and look back 12 months from now and feel confident you can make money. However, as I've said, this doesn't mean that you can't find opportunities either.

Portfolio.hu: Why do you think residential real estate prices are lower in Budapest than in most of the CEE capitals?

Mark Mogull: I believe it has to do partly with lower construction costs and lower land values. Another likely factor, I think, was the lack of confidence in the market in recent years. 

For whom credit crunch is an opportunity

Portfolio.hu: Watching your new investment in Újpest you seem highly confident that prices will increase in Budapest.

Mark Mogull: We are value investors, I prefer buying in a market that is seemingly underpriced. If you look at the peer group, if you look around Europe, it is hard to find markets where you can buy good quality housing for 1,500 euros per square meter.

On the other hand, some believe housing is overpriced in some of the other markets. So the answer isn't simply that the price of residential real estate in Hungary will skyrocket. We think that there are certain markets where housing prices have to adjust downwards. We usually do a very simple analysis on housing. We look at typical housing prices compared to medium incomes. This ratio looks quite attractive in Budapest at the moment.

Portfolio.hu: Investment on the property market has fallen quite significantly as a consequence of the credit crunch. Do you see this as a threat or rather as a correction of the overheated market?

Mark Mogull: We definitely view this as an opportunity. We are very well capitalized. What the credit crisis mostly means for the property market is that some of the unsophisticated money is squeezed out of the system. For us this obviously decreases competition. The last couple of years have been actually tough for us because as value investors we have struggled to find value since the market was overpriced. 

Portfolio.hu: The role of private equity has definitely been growing in the last 1-2 years. Do expect this trend to continue?

Mark Mogull: I think that the private equity real estate community has demonstrated that it can successfully deploy capital and deliver the returns they promised. You can't argue with that if you look at the numbers.

However, the last years have been good to invest so investors were able to be indiscriminate as to how they deployed their capital at the different private equity funds. The interesting question is that what happens in the next 12-24 months when the performance starts to diverge dramatically amongst the different private equity real estate fund managers.

This means that either some fall away or that some investors will realize that the sector is not bringing superior returns and start to pull back allocations.

We are definitely not seeing that yet. In fact, it is possibly the opposite in the short term. The stronger private equity real estate fund managers right now are finding more demand for allocation for their funds than they did 12 months ago, because the most sophisticated investors understand that if they thought it was a good time to put money in 12 months ago, it's an even better time today.

Right now Europe may be divided into two types of markets: ones that are in correction and ones that are in denial. I think that unfortunately Hungary seems to be closer to the latter one."

Source: Portfolio Online Financial Journal