Hungary Evades ECB Ire as Central Bank Splurges on Property

(Bloomberg) -- On an empty lot upriver from Budapest’s historic center, beside an abandoned factory and a faded outlet selling Italian lingerie, the country’s monetary guardians are making a bid for real-estate riches.

There, a development with an estimated value of $300 million and spanning more than 200,000 square meters is being marked out, under the management of six foundations set up by the National Bank of Hungary in 2014. The planned offices, apartments and retail spaces would be the biggest extension yet of the foundations’ growing property portfolio, and a further foray into controversy for a central bank often in the headlines for reasons other than interest rates.

That’s partly because the foundations were set up with around $880 million in central-bank funds -- as much as Hungary’s annual military budget -- and partly because the venture is funded by the sale of government bonds ordered by the European Central Bank in Frankfurt. Under suspicion of being a front for monetary financing, banned under European Union law, the central bank’s satellites are now trying to make amends by doubling down on what could turn out to be risky property bets.

“This might be one of the biggest office investments in Hungary -- I don’t know of a bigger one,” Zoltan Fekete, Chief Executive Officer of Optima Befektetesi Zrt., the foundations’ investment arm, said in an interview in his Budapest office next door to a former casino. “In the long run, we may become one of the biggest investors in Hungarian real estate.”

Budapest Skyline

In fact the one-time casino, a 19th-century neo-Renaissance building on the banks of the Danube, is one of more than a dozen existing properties dotted across the city now in the ownership of the foundations. The building, at the foot of Castle Hill, originally housed the machinery that pumped water up to the royal palace that commands the Budapest skyline.

The investment strategy puts the foundations under renewed scrutiny. Governor Gyorgy Matolcsy set up the bodies against the wishes of his own supervisory board, ostensibly to fund education and research from the interest earned on the original endowment. The source of the money, and the uses to which it was actually put, rang EU alarm bells.

Credibility Questions

The ECB is still conducting a probe into suspected violations of monetary financing after the foundations stocked up on government bonds. Eurostat, the EU’s statistics agency, is investigating whether outlays on education constitute fiscal spending, which may force the nation to recalculate its debt data.

The new real-estate punts raise further question marks about the position of the central bank, according to Marcel Fratzscher, president of the German Institute for Economic Research and former head of the ECB’s international policy research division. Under EU law, the ECB is responsible for policing the prohibition on monetary financing in the bloc.

“Credibility is the most important asset for any central bank,” Fratzscher said in an e-mail. “Protecting its credibility requires that a central bank not invest in any financial or real assets whose value is directly influenced by its monetary policy decisions.”

Governance Doubts

While central banks around the world have stretched the limits of monetary policy in an effort to fend off deflation, when it comes to investment on their own account, conservatism is still the order of the day. Real estate investment, either direct or indirect, is very rare -- although the central bank in neighboring Austria has a portfolio worth about 700 million euros ($745 million). Those assets include 34 properties, mostly in Vienna, but also in Budapest, Amsterdam and Brussels, the Vienna-based regulator said in an e-mailed response to questions.

The Hungarian foundations and the central bank aren’t one and the same, but there have already been doubts about their governance. The central bank’s supervisory board said in September that the institution has “significant influence” over them. Matolcsy, the central bank governor, originally argued that the bodies, whose staff include his friends and family, shouldn’t be publicly accountable. Fekete says the investment strategy is sound, and addresses the ECB’s concerns by cutting holdings of state debt. The investment risk is also low, comparable to that of the Hungarian sovereign, he said.

Not everyone agrees.

The office-center development is risky, according to Ferenc Furulyas, managing director of Jones Lang LaSalle in Budapest.

Price Sensitive

The planned project will be adjacent to Vaci ut, a thoroughfare that’s become a corridor dotted with similar office buildings erected by developers such as Skanksa AB, and Hochtief AG. Indeed, one of the Austrian central bank’s investments is on that street. “For rent” signs hang in the windows of office buildings on both sides of the road.

“This is a very ambitious project in an area with significant competition and with tenants that are extremely price sensitive,” Furulyas said in an interview.

The office vacancy rate in the city, while still near an all-time low, rose for the first time in nine quarters to 10.9 percent in the third quarter, according to the Budapest Research Forum, which compiles data from the biggest international realtors in Hungary.

The foundations plan to create a new ecosystem in the area, one that will be “much greener and much more livable” than those of the competition, and that may bring about a “significant change” in the office property market in Hungary, Fekete said.

Even if the investment turns out well, it’s not the central bank’s job to play real-estate tycoon with taxpayers’ money, according to Eva Kujbus, an employee at a retailer selling men’s suits out of a warehouse where the foundations plan their mega-project. She would prefer that any extra cash that the state may have be spent on the nation’s dilapidated health-care system.

“I don’t feel comfortable with the central bank spending so much money on building offices,” Kujbus said. “If the state has so much money to spare, why can’t they improve the awful conditions of hospitals instead?”

--With assistance from Boris Groendahl and Neil Callanan To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net, Gabriella Lovas in Budapest at glovas2@bloomberg.net. To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Jeff Black