Development Booming Across the Various Sectors
Demand fundamentals in the various commercial property development sectors are regarded as positive, while at the same time supply has been relatively constrained in comparison with past cycles. Then, market optimism resulted in oversupply, which became a significant contributor to high vacancy rates and projects being abandoned.
Aréna Business Campus, under construction by Atenor.
Indeed, there are still several half completed projects around Budapest that are a testament to this over optimism and lack of planning from developers and their financial backers that resulted in ill-conceived projects that either failed to get off the ground or were abandoned at different stages in the construction process.
Today, the regional office market is continuing to thrive, with demand for space continuing unabated across the major CEE European cities, and with record low vacancy rates in Budapest. It is fair to say, however, that developers (perhaps with an eye on previous high vacancy rates of 20% plus) and building owners (previously forced to offer concessions to tenants such as rent-free periods) are undertaking phased development strategies, albeit at some are large-scale.
While long-term retail demand fundamentals in Europe are seen as less favorable and new concepts are having to be devised to meet the perceived threat from e-commerce, international retailers are looking to establish outlets in leading high streets and shopping centers.
Restrained shopping center development in Budapest has resulted in waiting lists at the leading shopping centers, and older malls and second tier schemes are undergoing refurbishment and upgrades with the aim of repositioning in the market. A further trend is the retail provision being developed as part of a mixed-use project alongside office and residential developments.
Ironically, any negative impact of e-commerce in the retail sector also positively impacts logistics, with a particular need for the provision of logistics facilities with easy access to large urban areas. Despite a growing number of speculative projects being undertaken, the further development of this sector is handicapped by the very low availability of large contiguous space.
In both Hungary and the wider Central European region, developers, investors and operators have recognized the potential for hotel development with a rising number of tourism visits.
Hotel occupation rates in Budapest now stand at more than 70% for Budapest, and the city is second to only Prague in the CEE region with regard to annual room occupation numbers. In the Hungarian capital, CPI, Horizon Development, Indotek, Redwood Holding, and Wing all have ongoing hotel developments in addition to the more traditional development/investment sectors such as office, industrial and retail.
With regard to environmental concerns, tenants, staff, customers and guest expectations and demands are exerting an influence on asset owners, and developers are delivering ever more sustainable projects that have a mutually beneficial impact on the local environment.
This improved quality and more sustainable product is applicable to all levels of the development process, from the sourcing of a location, to exterior and interior design, construction and property management.
“It is highly important to evaluate the project also on the community level and not just as a stand-alone project. Sustainable buildings are smart buildings and they are responding to the needs of the building users, but they are also interconnecting with their environment as well. Sustainability should make a city more livable, therefore, in an ideal case, it should also have a huge effect also on the city’s appearance as well,” comments Zsombor Barter, president of the Hungarian Green building council (HuGBC).
The major issue negatively impacting the development process is rising construction costs that, through a combination of increasing construction material and labor costs have been rising by 20-30% per year.
“Although the planned development pipeline has increased to its pre-crisis level, the real-time delivery for this new supply is very sporadic. The construction market is still running above its capacity and remains a bottleneck for the industry. All kinds of real estate projects have suffered or are suffering from delays, and there is an almost constant price increase due to escalating labor and material costs,” says David Johnston, head of advisory and transaction costs at CBRE Hungary.
With regard to an exit strategies, in the current market developers have a choice of whether to agree a forward purchase agreement, exit after completion and a substantial letting, or hold onto the asset and sell the product onto investors at a time of their choosing.
Demand for investment grade product is far higher than supply as an increasing number of international investors from an ever wider variety of counties are targeting Hungary and the CEE region. Further, these are facing competition from Hungarian funds who are in close contact with developers and, therefore, have the opportunity to conclude deals at an earlier point in the development process.
JLL expect 2019 CEE investment volumes to come close to last year’s figures with total volumes of between EUR 13 billion-13.5 billion. With regard to Hungary, investment is expected be in the EUR 1.4 bln-1.7 bln range.
“A limited supply of product can be an inhibitor of investment volumes, but it does not stifle market growth. The region is still performing very well with strong macro fundamentals combined with confident occupational markets in office and industrial in particular. Investors are still heavily targeting this region and I expect this to continue,” said Mike Atwell, head of capital markets for the Czech Republic and CEE at JLL.
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