Strong Market Fundamentals Attracting Investors

Promenade Gardens by Horizon Development in Budapest.

A number of assets of more than EUR 100 million are in due diligence or under marketing with closing expected this year, which completes the development and exit cycles. Despite the positive fundamentals on the demand side in all market sectors, a limited supply of suitable product is continuing to act as a brake on greater investment activity.

Total commercial real estate investment volume in Hungary for 2018 is forecast at EUR 1.6 billion-1.7 billion according to consultancy CBRE.

“The shortage of investment grade product is not deterring international investors from visiting Hungary; over the last year we have toured the market with numerous existing and new equity sources. However, it has made it more difficult for those already present to increase their exposure, whilst those who are yet to enter have struggled to react in time when a suitable product does become available due to fierce competition from local investors,” said Ben Barclay, senior investment consultant at CBRE Hungary.

Adrián Limp, head of valuation & advisory at Cushman & Wakefield Hungary agrees that institutional investors are now present and potential new entrants are increasingly looking to invest.

“We are in discussions with a number of new players and others that have been less active over the past ten years. Shortage of product is a challenge of course but I would not say it is deterring internationals. They are ready to acquire and are happy that liquidity is strong in the market. Certainly the investment volume is determined by the availability of investment grade product versus capital to invest. The latter is highly available currently, both in terms of domestic and international funds,” he says.

Significant Development

“We are witnessing significant office development today and when a fully leased new product comes to the market it is highly likely to find a buyer. There has been very limited development in retail, so indeed, there is a shortage of new products in this sub-market. In terms of established products though, major centers like MOM Park and Mammut have transacted this year,” Limp commented.

Hungary’s Erste Asset Management has completed the acquisition, agreed last year, of the 25,000 sqm Promenade Gardens from Horizon Development. This transaction reflects the significant role of Hungarian capital at the high end of the Budapest investment market, providing more security for the markets.

Skanska Property has also sold its 36,000 sqm Mill Park to the same buyer. This is the second investment deal between the two parties following the Nordic Light transaction in 2016. Skanska has now started construction of Nordic Light Trio, the 14,000 sqm third phase of the Nordic Light office complex. The latest EUR 29 million project is already 80% prelet.

“Class ‘A’ office developments receive around five bids and the very best product can attract as many as ten bids,” said Skanska Hungary CEO Marcin Łapiński.

Class “A” offices and shopping centers have and will continue to attract a lot of attention, both from a local and international perspective, as Hungary continues to offer attractive returns in comparison to Poland and Czech Republic according to consultants the Budapest Business Journal spoke to.

“CBRE has run open market sale processes over the past 18 months for both types of products and have received in excess of five or six offers. We do not expect more forward purchasers. We have only seen one forward purchase in this current cycle, which was Erste Asset Management’s purchase of Promenade Gardens from Horizon Development, and CBRE does not see that trend changing. Skanska are the other active developer who generally divests as soon as the building is functional (and usually fully leased); most other developers are not regular traders,” adds Barclay.

Continuing Boom

The current office development boom looks set to continue as Hungarian and regional developers such as Horizon Development, Wing, Futureal, Atenor, HB Reavis, GTC and Skanska all able to source finance and conclude the necessary preleases.

In this landlord dominated market, more players are opting for speculative development, with HB Reavis and Atenor undertaking large, phased, long-term projects. Colliers International estimates that more than 20 office projects are due to be delivered in 2018-2019. The market is expected to remain landlord driven until at least 2020 unless there is a major change in the Hungarian economy, Colliers says.

In contrast, Wing has acquired a niche role developing tailored research and development buildings for high-tech companies. It was responsible for the largest delivery of the year, the 57,000 sqm, built-to-suit, Magyar Telekom headquarters. The Hungarian developer is also working on a new 22,000 sqm Budapest headquarters for evosoft Hungary, 100% owned by Siemens, in order to consolidate its activities into one location.

The circa HUF 50 bln Telekom headquarters was financed by Wing’s own equity and a consortium of banks consisting of UniCredit Bank Hungary and K&H Bank. Despite the current low vacancy and strong demand, Wing has been pursuing a conservative office development strategy, only going ahead with office developments once a built-to-suit agreement or a significant prelease has been agreed.

According to Barclay at CBRE, certain office developers are also to undertake developments speculatively, such as Skanska and Futureal, although it is more common to see relatively small preleases of around 20% of GLA triggering development.

“However, such is the strength of the office leasing market, nearly all developments that have entered the market over the past 18 months have been at least 75% leased upon completion. The general trend in the market is that developers have far more success in securing tenants once the project nears completion and the tenant understands the concept of the building. The Promenade Gardens and HillSide Offices projects showcased these dynamics, for example,” he commented.

Serious Bidders

For a newly delivered fully leased office there would be at least a dozen serious bidders, in the view of Cushman & Wakefield’s Limp. “As for retail, a lot depends on quality and lot size, but there is certainly competition for products. We have not seen much forward purchase agreements recently. Equity and debt finance are available to most developers so we do not expect this form of profit sharing to become more common in the market,” he explains.

Futureal have concluded a EUR 150 mln (about HUF 48 billion) loan agreement with UniCredit Bank and Erste Group for the Etele Plaza retail project. The fact that the long-term pipeline retail projects are now going ahead also reflects the confidence of developers, retailers and financers in the Budapest retail market. In the Etele Plaza financing package, the money will be available for ten years for the development and long-term operation of the shopping center.

“Our goal is to satisfy our clients’ financing needs with competitive project and syndicated loans tailored to their individual needs,” said Gábor Vörös, head of financing at UniCredit Bank Hungary.

With falling vacancy rates, there is a low supply of continuous logistics/light industrial space to meet demand. As elsewhere in CEE, industrial developers prefer the more cautious built-to-suit (BTS) development option. Further, industrial companies tend to hold on to product following an acquisition.

“For Grade ‘A’ offices, the local open-ended funds provide a high level of liquidity in addition to the German closed ended funds, and there is still a healthy demand from international equity for best-in-class shopping centers. Just as across Europe, the demand for secondary shopping centers is dwindling. Prime high street retail is arguably the most liquid asset class, as this attracts both high net worth individuals and institutional investors, however this type of asset rarely trades on the open market. Good quality industrial product also tends to trade relatively easily, but is also quite rarely available due to the highly consolidated ownership amongst a few long-term hold players,” concludes Barclay.

Etele Plaza by Futureal.