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Post-pandemic Real Estate Winners and Losers

Construction

BREEAM Excellent and LEED Platinum MOL Campus headquarters in Budapest under construction.

An overview of the prospects for real estate development must consider the availability of financing, demand and pre-leasing, sustainability and design and investment, with an exit strategy for a developer at a time and price that makes a project viable.

From a sector perspective, there are strong pipelines in the office and the industrial and logistics markets, while for hotel and retail, they are less robust. This reflects estimates of demand, the prospect for pre-leases, and the availability of debt finance if required. 

Atenor has three office developments under construction: Aréna Business Campus B, RoseVille, and BakerStreet I. There are also two further buildings at the Aréna Business Campus and the second phase of BakerStreet in the pipeline. Despite that, the company is screening for new office and residential development possibilities.

Skanska is developing the first 26,000 sqm phase of its latest Budapest office project, the 67,000 sqm H2Offices in the Váci corridor.

Demolition works for the new ParkSide Offices project by Horizon Development have been completed, and construction works are scheduled to begin in the first half of 2022. Indictive of an emerging trend, the developer is also preparing a logistics project in Szigetszentmiklós (21 km south of central Budapest by road).

Several office developers are moving into the logistics sector, reflecting the improved longer-term attractiveness of this market.

Seven new logistics facilities were handed over in the greater Budapest area in the first half of the year, including 40,000 sqm at CTPark Budapest East, 32,000 sqm at CTPark Budapest South, and 34,000 sqm at Szabadkikötő.

The industrial pipeline in the Budapest agglomeration has increased to a record volume with 420,000 sqm of industrial space under construction, according to CBRE. Similarly, the consultancy says that the office sector is likely to reach or exceed its peak, pre-pandemic volumes.

Office interior by Cresa.

The Favorites

“Pre-lease requirements have tightened generally. Logistical and warehouse developments are the current favorites, and hotels are the least popular with commercial banks,” comments Tamás Ádány, business development director at Horizon Development, on the availability of debt finance. 

“Below a 30% pre-lease, there is no life currently. Finance is available, though we must stress that commercial banks operate in a pro-cyclical way and, currently, we are experiencing tightened conditions for project- and real estate financing,” Ádány adds. 

CBRE has traced 2,300 hotel rooms in the active pipeline, and an estimated 1,140 rooms are due to open in Budapest this year. There are currently no new shopping center projects in the pipeline in Budapest, following the opening of Etele Plaza, the first significant opening in several years. That said, there are several regeneration projects of existing centers ongoing or expected to commence.

In addition to the commercial viability of projects, developers need to meet tenant and staff demands in the post-pandemic era, not to mention increasingly stringent national and international environmental regulations.

Third-party sustainability accreditation is “a must” to provide an international benchmark and lease a project at the quality end of the market and, ultimately, sell it to investors.

Office and industrial interiors are increasingly being integrated into the concept, design, leasing strategy, and property management of new developments. This makes the product more expensive, although savings can be achieved in the longer term (on utility costs, for example), and adherence to sustainability regulations is, in any case, a legal requirement.

Developers are now expected to contribute to the wider environment by providing amenities to attain development permits. Office and hotel developers are employing more leading international architects to improve the look and feel of the city. The development of viable products is fundamental to creating a functioning investment market in all market sectors.

Money Wants a Home

“According to our experience, the capital is there, trying to find the best quality assets in most major asset classes, with offices leading the volume statistics, so an exit strategy can definitely be found,” comments Melinda Kovács, development and leasing manager at Atenor Hungary.

“Most investors are still looking for well-leased buildings with quality tenants and five-year plus leases, and developments with sustainable features are sought after. For this kind of quality assets, an exit strategy is relatively straightforward to be established,” Kovács adds.

CBRE expects the total investment volume for Hungary to be in the range of EUR 1.2 mln-1.4 mln. Hungarian capital is likely to remain the dominant force in the near term, although foreign investors from the CEE region and Western Europe are stepping up their activity.

The booming industrial sector is attractive to developers and investors; however, investment activity is low due to the lack of available assets. Industrial developers and park operators tend to hold onto their products longer term, a common problem throughout the CEE region.

Concerns remain regarding the hotel and retail sectors as investment destinations, reflecting the viability of new development projects regarding average hotel occupancy rates and footfall, respectively.

“At this moment, other asset classes than retail are much more attractive for investors, especially industrial and logistics. But this is also driven by retail, not directly, but through e-commerce,” says Erika Garbutt-Pál, head of retail at CBRE Hungary.

“Retail was, is, and will always be an investment with higher risk, especially now rental conditions (for example, shorter lease terms, high fit-out contributions, turn over rents) are not helping to attract investors into this asset class,” she concludes.

This article was first published in the Budapest Business Journal print issue of October 22, 2021.

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