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JLL says property market sentiment is improving

With €110 million in the first quarter, investment volume in Hungary is impressive, but the neighbors are doing even better.

Investment transaction volume reached €110 million for the first quarter of this year, according to international real estate specialist JLL. “The general market sentiment is improving and market fundamentals are strengthening quickly, especially in the office and industrial sectors,” said JLL in its latest research on the first quarter of the year. Poland and Czech Republic remain the leading CEE investment destinations.

The company expects the average deal size in Hungary to increase and predicts an annual total investment volume of at least €750-800 mln for 2015. Total investment for 2014 was €580 mln. JLL sees investor appetite for Hungary increasing with improving macroeconomic indicators, real estate market fundamentals and attractive prices compared to Poland and Czech Republic.

“There are deals in the pipeline that will close in the next three-to-four months. Investors are in general waiting for the completion of arm’s length deals that will provide concrete guidance on pricing,” commented Ferenc Furulyás, managing director of JLL Hungary.

Transactions in the first quarter were completed across all major sectors. In an industrial deal, Prologis (through the Prologis Targeted Europe Logistics Fund) purchased the M1 Business Park Hungary from CA Immo and Union Investment. The now re-named Prologis Park Budapest M1 comprises five facilities of 69,000 sqm. Another local investor, Diofa REIM has purchased the 19,000 sqm Innove Business Park

In the office sector, Erste Asset Management has completed the purchase of the second phase of the 20,000 sqm Vision Towers from Futureal; the Hungarian fund now owns the whole of the complex, having earlier acquired the northern wing of the center.

In the retail sector, the French retail investor Klepierre has purchased three regional shopping centers totaling 19,000 sqm from Indotek.

Czechs on a record pace

Despite this positive outlook, however, Hungary still lags behind Czech Republic, where a massive €760 mln in transactions was recorded for the first quarter, representing a 330% year-on-year increase. A substantial part of this was taken up by the €570 mln acquisition of the Palladium shopping center in Prague by Germany’s Hannover Leasing from Union Investment. “The activity of investors and the weight of money attempting to force itself into the Czech real estate market is promising substantially increased volumes over the coming quarters and some predict, possibly, another record year in terms of transactional volume,” commented JLL research.

In the same time period, €448 mln of investment activity was recorded in Poland. Significantly, office investment in regional cities is expected to reach record levels for this year. For example, the Griffin Group acquired the Green Horizon office building in Lodz from Skanska for €65 mln.

Further south, the Romania investment market is showing signs of recovery. JLL Romania expects investments of between €600 mln and €1 billion, based on a number of key office and industrial buildings that are expected to transact this year. “The weight of money and compression of yields in markets like Poland and Czech Republic have prompted more investors to look at Romania, which translates into the highest level of interest since 2008,” said JLL Romania.

Yields in Hungary are continuing to compress: office yields are put at 7.25%, retail at 7% and industrial at 9%. This provides a significant advantage on Czech Republic, where office yields stand at 6% and retail and industrial at 5.25% and 7% respectively. Prime office yields for Poland are put at 6%, shopping centers at 5.5% and industrial at 7%.   

There were no additions to the office market as the Budapest Research Forum put total Budapest office stock at 3.23 million sqm with vacancy falling for the fifth successive quarter to 15.7%. Net absorption almost doubled year-on-year to 13,000 sqm with rents remaining stable at €20 per sqm per month. JLL describe the volume of new Budapest office supply as “very limited” with less than 30,000 sqm predicted to be delivered this year. However 2016 pipeline is forecast to reach the highest volume since 2010 with 90,000 sqm. Asking rents may also rise, although office space is extremely price sensitive.

Office vacancy expected to fall

“Office vacancy could fall to 13-14% by the end of 2016; this would be below vacancy levels in Czech Republic and Poland,” said Rita Tuza, head of research at JLL Hungary. “With the very low pipeline and the number of pre-lets, office projects are close to 100% pre-leased before delivery. However vacancy in class “B” assets looks set to rise as companies upgrade to class “A” offices. A possible option would be for building owners to upgrade.”

As a comparison with Prague, JLL estimate that 147,000 sqm of office space is under construction and due to deliver this year, although supply is predicted to fall to 29,000 sqm in 2016. In Warsaw, more than 300,000 sqm of office space is under construction according to JLL Poland, where the company has been selected as the sole leasing agent for Warsaw Spire, the biggest office project in the country. Developed by Ghelamco, the building includes a 49-story tower and two adjacent 15-story buildings, providing 100,000 sqm of office space.

Rents for Prague are put at €19.5/sqm/month, while prime headline CBD rents stand at €24/sqm/month for Warsaw. Vacancy for Warsaw office is put at 13%, with the figure 15% for Prague.   

There were no warehouse completions in Budapest in the first quarter with total stock put at a little more than 1.8 million sqm. A fall in the vacancy rate was noted with a drop to 14.5%. However speculative development remains absent, although in Czech Republic the first fully speculative building since the crisis was delivered in Prologis Park Prague Airport and JLL expects the share of speculative development to gradually increase. Almost 400,000 sqm of space is under construction and due to be delivered in 2015.

A further brake on market activity is that office developers are reluctant to develop outside of the capital. This also extends to the industrial sector.