Nicholas Watson in Prague -

Hungary may be in the headlines for all the wrong reason lately, but that doesn't mean real estate investors are put off. On the contrary, the Budapest office real estate market is expected to perform particularly well in 2011.

Hungarian Prime Minister Viktor Orban is being roundly criticised for a media law that's predicted will destroy press freedom in Hungary - part of a range of populist "reforms" and go-it-alone economic policies which will threaten democracy and individual liberties. But for investors like the Vienna-based real estate developer Sparkassen Immobilien, the more bad headlines, the better.

"We're looking at the Budapest office sector because it's so down and out from all the negative news flow and from high vacancy rates - it's an interesting place to invest," says S-Immo board director, Holger Schmidtmayr.

Indeed, the property consultancy Colliers International said in January that it expects the vacancy rate on Hungary's office space market to fall from 26.6% at present to 20.0% by the end of the year. Akos Balla, who heads the Hungarian unit of Colliers, said that vacancy, yields and rental fees on Hungary's office space market have bottomed out, and property values should start rising in 2011.

Together with the lack of Class-A office supply (in Budapest the amount of office space is about 2.5m square metres for a city with 2.2m people, while Vienna has about 10m sqm for 1.6m people) and a strengthening, though still fragile, economic recovery (GDP is forecast to grow 1.7% in 2011), this makes the market ideal for those who play the cycles. "We're a cyclical player - we have to make money for our shareholders, so we buy low, sell high. Therefore, sell Germany, Austria residential, buy CEE office space," says Schmidtmayr. "Budapest is the ideal place to be and to buy, because it's a difficult market but with good tenants like Citibank and Procter & Gamble."

Hamish White, director of Collier's Hungarian Investment department, says it's clear that confidence in the Hungarian market is slowly returning, with investors quietly scouting mostly for prime investments. "Values have dropped by a minimum of 20% for prime real estate, owners are now realising this. The greatest holdback is not politics or country risk, but the lack of finance. We predict around €500m in open market transactions due to a growing pipeline of transactions."