Developers Juggling Multiple Demands and Challenges
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Development in the various real estate markets in Hungary is impacted by concerns about demand and concluding the preleases that enable a project to go ahead, the availability and cost of financing, the increasingly protracted planning and permitting process, rising construction, maintenance and utility costs, and, finally, the opportunity of an exit strategy with a sale onto an investor at an appropriate time in the business cycle of an asset.
These wider political, economic and financial issues also impact real estate development markets in the broader CEE region and other European markets.
Another factor is the impact of ESG on the market processes and the imposition of increasingly stringent regulations by national governments and the EU. These processes aim to create more energy-efficient buildings using recyclable materials that lower the negative environmental impact of the structures. The problem is how these measures will be met financially and how this cost is divided between developers, tenants and contractors.
Despite these processes, only a minority of assets are ESG and EU taxonomy compliant today. Further, relatively few developments meet the changing needs of staff, customers and guests.
New developments and standing assets in all market sectors must be designed or redesigned to meet these changing needs and evolving environmental regulations. Moving forward, only those buildings designed, developed and maintained in line with ESG requirements will be commercially successful.
Further, a definition of what constitutes “environment,” “social,” and “governance” and an international accountability and benchmarking process are needed, as well as qualified property professionals to undertake the work.
Budapest Business Journal real estate editor Gary J. Morrell spoke with some of Hungary’s leading real estate professionals about the challenges facing the industry.
Tenants are attracted to efficient and sustainable office space in a market where vacancy is rising. The Atenor model is based on selling projects after development and using our own equity across the 10 countries in which we operate. We therefore took measures to dispose of maturing products in Hungary and some of our other countries.
We have sold RoseVille to an international investment group with a Hungarian fund. The sale was quick and aligned with current market conditions. This was the first real estate acquisition by the group in Hungary, and we see it as positive that we have attracted new equity. However, in the current investment environment, only opportunistic investors are looking at Hungary.
There is interest in the acquisition of BakerStreet I, although we will not dispose of it unless the offer meets our expectations. At the same time, BakerStreet II holds a valid building permit and is ready for development. We see tenant demand in Budapest, but financing can be an issue in the current environment, and one might consider external financing.
Director of leasing
With regard to investment, the consensus is not in favor of the office asset class, and the majority of investors are still talking about “beds and sheds.” The debate is “contaminated” by the U.S. trend where some office hubs are totally dead. The reality is different in Europe, and we do not experience the same situation on the ground.
However, we are still impacted by the generally negative view that “offices are dead.” Not many acquisition directors dare to take an office opportunity to their investment committee these days. It is contrarian and difficult to finance. Nevertheless, I am convinced this is where attractive deals will be made in the coming months. Of course, one has to be selective and price the risk correctly.
The market will continue to be dominated by Hungarian capital as long as international investors have ambiguous feelings about the market and the debt is not there to finance large portfolio or platform transactions, which is where we usually see the international capital.
Avison Young Hungary
Office construction costs have significantly increased for the last few years and have not been reflected by rental levels over the previous two years. New developments will not start until either the cost is reduced or headline rents break the EUR 20 per sqm per month limit. Conversely, it is a “must” that new projects have proven evidence of meeting high ESG standards, preferably sustainability certified. The cost of financing will also need to decrease.
The biggest issue among the development-related factors is definitely the construction cost level; more precisely, the fact that the currently accepted headline rents do not reflect the development cost of a new project. Changes in the rental level can be expected only if the vacancy level of the office segment begins to decrease again, and thus, the pricing of new schemes can be differentiated from standing buildings.
Chief asset management officer
Demand and supply have decreased significantly in the office sector, while ESG-driven requirements have increased extremely. That can motivate developers to satisfy these needs.
On the one hand, GTC has ongoing developments, and, as mentioned above, there are tenant inquiries driven by ESG requirements. On the other hand, we see a slowdown in building both in the region and in Hungary. I believe it is driven mainly by the relatively high cost of financing and cost of capital.
The major issues facing developers in Hungary are the costs of financing and stricter conditions and loan limits for the CEE region. In addition, there is a lack of experienced professionals and still high prices due to high margins on the contractors’ side and low affectivity, home office and lack of ESG-compliant buildings, and very few international investors, if any.
Group development director
Predicting tourism growth rates, especially in a dynamic city like Budapest, can be challenging due to the various factors at play. 2023 has been a remarkable year for Budapest, with prominent events such as the Harley Davidson festival and the World Athletics Championship propelling the city into the spotlight. Such events have undoubtedly played a role in attracting a significant number of tourists this year.
While 2023 has set a high benchmark, 2024 is anticipated to see a more moderate, potentially single-digit growth rate in tourism visits and room nights. One reason for this moderation is the natural ebb and flow that follows any period of exceptional growth. It is worth noting that despite this year’s surge, visitation numbers are still tracking behind 2019 levels, which we hope will be met by 2024.
The ongoing recovery and increased optimism from Budapest Airport is certainly a positive sign, with more international flights resuming, signaling a gradual return to pre-pandemic operations. However, the tourism landscape is interconnected, and Budapest is not immune to global events.
Horwath HTL Hungary
The supply of new buildings is getting very slim as there has not been new construction starting in the past 12 months; only the previously launched constructions will be finished. Beyond that, there will be a dry period in terms of new building delivery.
It takes at least 24-30 months to see new larger office project delivery appear on the horizon. Some mid-sized projects may occur in districts needing regeneration in capital cities such as Budapest, in particular. Demand for classic office space has been derailed by remote and hybrid work and flex offices/co-working spaces.
Good ESG performance is becoming a more serious and complicated job to deliver. It is becoming a “must-have” criterion for tenants, landlords and investors. There should be a dedicated team and a responsible director on board to oversee this process.
Developers will have to switch from their core activities of building brand-new buildings to redeveloping existing assets. However, such projects require special knowledge, as the properties may produce several unexpected technical problems that endanger profitability. There will be some great success stories, and there will be left-alone buildings as well.
Newmark VLK Hungary
The demand, and therefore the pace of development, in the industrial sector is steadily slowing, and vacancy rates are rising. Several factors are needed to revive the market, such as an appropriate inflationary environment, an increase in general consumer propensity, and a reduction in financing interest rates. If the general economic indicators return to somewhat “normal,” developments will eventually resume.
Price is still one of the most critical factors in the leasing decision, but more flexible terms, such as contracts of less than five years, are also increasingly attractive. In addition, professional management and partnership are the reasons why customers choose Prologis.
ESG is part of our DNA, so we can cater to all the needs in this area, such as alternative energy sources, smart devices, or electric car chargers. Based on our experiences, this is highly relevant to international companies with strong net-zero targets, like Prologis.
Director of leasing and customer experience
The logistics and residential sectors should remain in focus due to market fundamentals. There is much room for e-commerce to develop in Hungary but also for logistics providers to cover even neighboring countries from Hungarian locations. The strong growth in manufacturing also supports the warehouse market as suppliers to these plants also need property to operate in.
The continuing structural housing shortage supports the need for residential developments in all segments from lower to more premium categories. The only caveat is that the Hungarian market is significantly influenced by the availability of state financial support for homebuyers. Thus, any developer should have a clear view of this for their investment horizon.
The hotel segment also merits developers’ attention. Tourism and arrivals are back to pre-pandemic levels and are expected to grow further. Occupancy and room rates are continuously edging upward, while new product is more in demand by travelers.
Chairman and CEO
This article was first published in the Budapest Business Journal print issue of October 20, 2023.
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