Low Liquidity in the 2022 Investment Markets


AirPort City, purchased by Wing.

Hungary has a strong pipeline of asset-grade commercial real estate products to meet both tenant and investor demand, particularly in the office and industrial sectors. The various market sectors are regarded as attractive investment destinations by international, regional, and domestic investors because of a significant yield premium on Western Europe and, indeed, on Poland and the Czech Republic.

While continued interest is shown in the Hungarian and Central and Eastern European markets, the current investor hesitancy reflects the geo-political uncertainty in the CEE region. Many vendors and investors are adopting a wait-and-see approach in anticipation of a more favorable political, economic, and financial environment and more predictable yields and pricing levels.

“We have sellers on the market. The lack of activity today comes from, one, the reduced number of buyers, as a significant number have decided to wait and see the market evolution for a few months before acting, and, two, the limited availability of debt and its increased cost,” comments Benjamin Perez-Ellischewitz, principal at Avison Young Hungary.

“A few months ago, the bottleneck in investment activity was the lack of product, although this is not the case anymore,” he adds.

The Hungarian investor Adventum’s acquisition of the Tesco portfolio was the largest deal in Hungary in terms of magnitude in 2022, according to Rita Tuza, head of capital markets at JLL Hungary.

“We rarely see such large ticket deals happen in Hungary and the complexity of the deal (14 multi-tenanted assets at various locations in Hungary and additional Czech properties) makes it even more significant,” she explains.

Retail Overview

There is currently low liquidity in the retail market due to uncertainty over the level of consumer spending and no immediate pipeline in the shopping center sector, although smaller retail formats are attracting investors.

No large-scale malls are planned in Budapest, and most retail development is as part of mixed-use projects and smaller regional retail formats. In Budapest, the refurbishment of existing shopping centers is the dominant form, as center owners strive to reposition their assets to meet current tenant and consumer expectations, with the increasing availability of e-commerce as a method of consumption.

“The pipeline is unchanged and very weak in the traditional retail formats like shopping centers and retail parks. There have not been any commencements recently; however, delayed refurbishment works dominate in existing centers, and technical and design face-lifts are becoming common practice in the retail park stock, in some cases driven by recent changes in the ownership,” comments CBRE. Currently, prime office yield stands at 5.5%, logistics at 6%, and shopping centers at 6.35%, according to JLL.

Budapest One by Futureal.

Office Overview

One of the most significant Budapest office transactions was the purchase of the classic Akadémia Bank Center by Europa Capital and ConvergenCE for close to EUR 50 million.

“With our investor partners, we buy under-positioned buildings in great locations, which we renovate and refurbish with state-of-the-art technology and services, then reposition and re-let,” says Csaba Zeley, managing director of ConvergenCE. “We pay great attention to ensuring that all our properties have the highest environmental ratings.”

Commenting on the attractiveness of classic Central European buildings such as Akadémia for investors, JLL Hungary’s Tuza says, “Value-add and renovation can be an interesting investment option in the case of very competitive pricing. Financing is not as easily available for such products as in the past; therefore, the potential buyer pool became relatively shallow. That being said, refurbishments or value-add options in the CBD [Central Business District] and downtown locations still fly,” she adds.

“In our opinion, in the office category, the sale of Freedom Palace has been the most significant. This prime CBD building was on the target list of many core investors for several years. Given the building’s unique location and exceptional quality, it is no surprise that it was traded at a record yield level,” Tuza notes.

The purchase by the French Groupama Can REIM from the French developer/investor LSGI of the Freedom Palace, which dates back to 1901 and is located in Szabadság tér, indicates the confidence of institutional investors in prime property in Hungary, according to Péter Takács, investment director at Newmark VLK Hungary.

“Wing’s acquisition of two prime properties in Budapest is also significant; it shows that there are amazing redevelopment projects in Budapest and the local knowledge to bring the value out of them,” he adds.

CBRE puts current prime office yields at 5.25%. A significant yield gap between Hungary and the Czech Republic and Poland remains. Prime offices in the CBD can command lower yields, with the high-end Szervita Square Building reported to have transacted at a sub-5% yield.

Total supply in the Budapest office market has reached 4.7 million sqm according to the Budapest Research Forum (made up of CBRE, Colliers International, Cushman & Wakefield, Eston International, JLL and Robertson Hungary). The overall vacancy rate for Budapest has increased and now stands at 11%.

Cushman & Wakefield has traced a potential new office supply for 2022 of 300,000 sqm in the Budapest office market. In a significant recent deal, Atenor has concluded a 16,000 sqm prelease with E.On at the now fully let first phase of the BakerStreet office project, due to be completed in the first quarter of 2024.

In a significant new-build office transaction, Groupama Gan REIM, on behalf of SCPI Affinités Pierre, acquired the 20,000 sqm Green Court Office from Codic Hungary and Pesti Házak, The complex, consisting of two independent and interconnected buildings, is located in the Váci Corridor. It was constructed in line with Codic’s stringent ESG standards and holds a Breeam “Excellent” sustainability rating.

Logistics Overview

In a major logistics deal, the developer-investor Wing purchased the Airport City Logistics Park, located in the neighborhood of Budapest Ferenc Liszt International Airport, from CPI. The business park contains almost 44,000 sqm of warehouse buildings and 8,000 sqm of offices in six already functioning buildings, with one more under construction.

“In line with its premium quality, the transaction was carried out at a 5.6% yield, which is the lowest ever rate in the Hungarian industrial and logistics property market,” Wing says of the deal.

The industrial and logistics sector boom continues unabated, as demand remains high and vacancy stands at a record low. Analysts see this sector as being in a favorable position in the post-coronavirus period both in Hungary and CEE, given the background of growth in e-commerce and light industrial production in major regional hubs.

“Both the significant amount of new supply arriving to the market and the high proportion of prelease transactions in take-up demonstrate the continued developer and tenant appeal to the market,” say Cushman & Wakefield. The total supply in the greater Budapest area will reach three million square meters in the coming months, with stock in the rest of Hungary standing at 1.3 million sqm. Overall vacancy stands at around 6%.

The first 25,000 sqm phase of Budapest ONE by Futureal has received Well “Platinum” certification, the highest rating available from the third-party sustainability accreditation organization, according to Futureal. This year, both phases of Advance Tower by the developer on Váci ut also received Well certification.

Hungarian money has traditionally constituted around 50%-plus of investment activity in Hungary and represented 80% of investment volume in the first three quarters of 2022, according to Colliers. The majority of the international capital in the Hungarian market comes from within the European Union (especially the Czech Republic, France, and Germany), according to Perez-Ellischewitz.

“Domestic players generally dominate the market, and we do not expect this to change in the near future,” argues Adorján Salamon, managing director of Eston International. Based on volume, the top three countries for investment in Hungary for 2022 are Germany, Austria and the United Kingdom, according to the advisory firm.

Hotel Overview

Several hotel projects are at various stages in the preparation and construction process in Budapest and across Hungary, although pipelines are difficult to estimate, with schedules slipping in the current uncertain market environment. Puro Hotels has acquired the project and land plot at Paulay 23 from Mellow Mood, and development is expected to commence in early 2023, according to RCA Analytics. The project is expected to be a 160-180-key superior hotel.

“The major bottleneck for developments going forward is the combination of the rising cost of hotel operations (energy, labor, cost of food), project financing (increasing interest rates and reluctant banks), and construction (supply chain issues, inflation, etc.) However, even under such constraints, there are still projects going ahead,” says Attila Radvánszki, director of Horwath HTL Hungary.

“Our outlook is carefully optimistic as, against all odds, we believe Budapest will continue to be a magnet for city breakers and sports enthusiasts,” he adds. 

The Growth of ESG

ESG investing (integrating environmental, social and governance factors into the acquisition and exit process) is increasingly a core pillar of investment strategies due to pressure from shareholders and legislators and a broader need to be seen to invest in a sustainable way.

Investors have yields and their return on investment as a central priority, although commercially successful investment-standard buildings tend to have attained sustainability accreditation. Indeed, ESG expectations are now integral to the leasing process and asset management.

The argument could be made that almost all assets at the higher end of the office and industrial sector are sustainability accredited, and market pressures are therefore acting in parallel with sustainability regulations. Building owners and developers need to adopt a long-term sustainable strategy to have the option of an exit strategy with a sale to an investor at the end of the development process.

“Investors need to think of their future exit. Outdated assets are and will be more difficult to dispose of; therefore, the market is definitely shifting towards a more sustainable mindset,” commented Máté Galambos, leasing manager at Atenor Hungary. 

“I see as one of the major sustainability achievements of 2022 the EU taxonomy adaptation on the European market,” says Zsombor Barta, president of the Hungarian Green Building Council (HuGBC).

“Although many local real estate stakeholders might not yet realize the importance of this, in the mid-term and on a larger scale, this is a very important framework towards a more sustainable future and aligned with the ambitious 2050 zero carbon targets as well,” the president says.

“Financial institutes need to report about their portfolio’s EU taxonomy ratio, and projects that comply with the taxonomy criteria are eligible for financial incentives. This will defiantly have a huge impact on real estate stakeholders and will also push the entire sector towards a more energy efficient and sustainable future,” Barta believes.

“According to my view, this was a big step in 2022. As stated before, maybe this is not as visible, but it will become a very important issue soon,” he adds.

In the current investment environment, Perez-Ellischewitz expects around EUR 900 mln to have been invested in Hungarian commercial real estate by the end of the year. A sharp slowdown in activity is expected, with a large expectation gap between buyers and sellers.

This article was first published in the Budapest Business Journal print issue of December 16, 2022.

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