CBRE anticipates that favorable demand fundamentals will continue in the office, retail, industrial and hotel sectors. The company has traced a large pipeline in both the Budapest office and hotel market sectors. However, there is a limited retail supply to meet increasing demand from retailers, and a very low speculative industrial pipeline. The investment market recovery is expected to continue, although the question remains as to whether there is enough investment grade stock to meet rising demand from investors.
“CBRE is involved in EUR 700 million in investment transactions that are expected to conclude in the first half year,” said Lóránt Kibédi-Varga, managing director of CBRE Hungary at the Re-View 2016 event at the Brody Studios. “Vacancy in the office market is below 10% and industrial vacancy is less than 5%. Around 2,000 new hotel rooms are due to be delivered. Unemployment in Budapest currently stands at around 3% and one concern is that, as the markets take off, there is the possibility of a labor shortage,” he said.
In a sign of the growing presence of institutional investors, Corpus Sireo has purchased the earlier generation 25,500 sqm Park Atrium office center for a reported figure of more than EUR 50 mln, and the Germany-based asset and investment manager, KGAL acquired the 23,000 Eiffel Square office center.
The leading consultancies predict around EUR 1.7 billion in investment volume for 2017. Most bids are for lot sizes of between EUR 100 mln and EUR 50 mln. German and Austrian funds are now active in addition to Central European focused equity such as Czech insurance funds. The average deal size is EUR 30 mln, which is still below pre-crisis levels.
“Besides the usual Western European investors and the Hungarian and American institutional funds, new actors have also appeared in the market. These are investment companies from Greece and the United Arab Emirates, and the German closed-end funds have also returned to Hungary, which all played a role in the turnover growth in 2016,” said Tim O’Sullivan, head of capital markets at CBRE. “German funds bought the benchmark Park Atrium and Eiffel Square office buildings in Budapest. The acquisition of Váci Corner was the third significant transaction in the Budapest office market last year. We can truly state that Hungary is back on the investment map,” he added.
He puts office yields at 6.75%, retail at 6.25%, High Street retail at potentially sub-6, and industrial at sub-8%. “The office market will still lead in terms of the number of deals transacted, but there are some large retail projects expected to trade in 2017. The lack of available stock in the industrial sector will limit activity in this sector; however, there has been a lot of demand for industrial and logistics stock,” he said.
Judit Varga, head of office advisory and transactions at CBRE Hungary argues that a significant proportion of the 2017-2018 pipeline is pre-leased. With regard to demand, it is now difficult to source 1,000 sqm plus spaces and therefore pre-leases need to be concluded. Vacancy is expected to remain below 10%.
Retail sales for Hungary remain robust although fewer retailers are entering Hungary than elsewhere in CEE due to higher VAT, rising labor costs and high rents, the latter driven by the lack of new construction. Hungary has the lowest retail pipeline in CEE, with only strip mall conversions and high street projects forecast to deliver before 2019. It is, therefore, a challenge for shopping center owners as to how to accommodate new brands looking to enter the market.
“Continued strong retail fundamentals in 2017 should overcome the reluctance of new retail brands to enter the Hungarian market despite higher VAT and rental rates than our CEE neighbors and increasing labor costs,” commented Anita Csörgő, head of retail at CBRE Hungary.
Gábor Borbély, head of research at CBRE Hungary, describes the hotel sector as a neglected market sector, although it has seen 5-7% annual growth as Budapest is seeing 80% annual occupancy. An estimated 2,000 plus rooms are due to be delivered in the next two-three years. Refurbished classic buildings are seen as a win-win situation with utilized listed buildings attracting tourists.
The industrial sector is regarded as being in a strong position due to rising demand and low vacancy. According to CBRE, vacancy in the circa 2 million sqm Budapest market has fallen to 7.6%; while there is no availability in the largest regional hubs, the company puts total industrial space in Hungary at 7.8 million sqm (including owner-occupied space). However speculative development is limited. “New facilities are being built to serve expanding industrial production plans. Speculative development, however, remains sporadic,” said Gergely Baka, head of industrial and logistics at CBRE Hungary.
“We are expecting a strong turnover in the Hungarian commercial property market also for 2017. The stable economic growth and the increasing household consumption make the country attractive for investors, and moreover, all three credit rating agencies graded Hungary ‘suitable for investment’, thus more institutional investors may enter the market. The investment sales have quadrupled since 2013 in Hungary,” concluded Kibédi-Varga.