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‘Wait and see’ Characterizes Most Real Estate Sectors at Start of 2023

Analysis

Artist’s rendering of the Dreschler Palace, due to open as a W by Marriott hotel this year.

Investors will continue to show interest in the Hungarian and Central European investment markets with a yield premium for quality, sustainable assets. But the current investor hesitancy reflects the geo-political uncertainty in CEE and the wider European region, says the Budapest Business Journal’s real estate editor Gary J. Morrell.

In this environment, many vendors and investors are adopting a wait-and-see strategy in anticipation of a more favorable political, economic and financial environment and more predictable yields and pricing levels.

Industrial is expected to remain the most dynamic sector with strong demand and a significant pipeline across Hungary. Planned office projects are going ahead, although new developments are not being announced, with uncertainty on the demand side. Hotel projects are going ahead despite rising maintenance charges and differing views of the level of tourism and business travel numbers for the year. Retail development reflects the need for repositioning existing shopping centers in a changing consumer environment; the pipeline is limited to smaller regional projects.

Developers and project owners in all sectors are adapting their assets in order to meet ever more sophisticated tenants’ demands and sustainability regulations.

“A wait-and-see approach taken by many investors is, amongst other factors, a result of the increased costs of financing, caused by rising interest rates and related costs such as interest rate swaps, which have increased significantly year-on-year,” comments Kevin Turpin, regional director of capital markets in CEE at Colliers.

“Early signs of price adjustments in some Western European markets, moving out by between 25-50 basis points, have already been recorded, and we can expect similar pricing shifts to follow in CEE,” he explains.

Domestic Players

Domestic players in Hungary generally dominate the market, and this is not expected to change in the near future, argues Adorján Salamon, managing director of Eston International, on investors active in Hungary.

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 Central Business District can command lower yields, with high-end assets reported to have transacted at a sub-5% yield.

“In terms of yield it is not a general move. Prime assets are not significantly repriced, but on the riskier end of the spectrum, development and value-add opportunities are clearly moving out bymore than 100 basis points,” comments Benjamin Perez-Ellischewitz, principal at Avison Young Hungary.

A sharp slowdown in investment activity is expected, with a large expectation gap between buyers and sellers. In this environment, Perez-Ellischewitz expects annual investment volume to be around EUR 600 million-700 mln in Hungarian commercial real estate for 2023.

“Instead of a dynamic price adjustment, we see a sharp downturn in activity and a longer period of ‘price discovery,’ during which the expectations of sellers and buyers do not match,” he says. “Consequently, the first half of 2023 will be relatively quiet, and this will continue unless we see some platform/portfolio deals happening in the second half oftheyear.”

CTPark Budapest West by CTP is part of the continuing industrial and logistics boom.

Increased Vacancy

Total supply in the Budapest office market has reached 4.17 million sqm, according to the Budapest Research Forum 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 had traced a new office supply of 370,000 sqm of office space under construction in the Budapest office market as of the third quarter of 2022. Colliers has traced around 238,000 sqm of space due to be delivered this year.

Office service charges have started to increase significantly, primarily in less energy-efficient office projects. Staff are expected to spend an average of three days a week in the office, according to research conducted by Colliers and Skanska. The office market is seen as going through a “hybridization of work styles.”

Well, the accreditation system dedicated to interiors and related elements, is increasingly being utilized in the high-end office sector as developers react to changing working practices, use of space, and increasingly stringent sustainability regulations.

Leading office developers such as Skanska, Horizon Development, and Futureal are committed to developing their projects in line with Well accreditation in addition to the more established Leed and Breeam systems.

Highest Rating

The first 25,000 sqm phase of Budapest ONE has received Well “Platinum” certification, the highest rating available from the third-party sustainability accreditation organization, according to developer Futureal. Further, the first (12,000 sqm) and second (8,000 sqm) phases of its Advance Tower have achieved Well “Gold” certification.

“Futureal aims to be at the forefront of sustainable development to create healthy, environment-friendly, creative, and productive spaces that attract and retain talents as well as improve ESG performance,” says the firm’s chief architect, Gábor Radványi.

“The Well Building Standard will define the next decade of the real estate industry, and we are committed to building all of our forthcoming office projects in line with a focus on advancing comfort, well-being and health,” he insists.

In a significant office completion due this year, Skanska has achieved Well and Breeam “Platinum” pre-accreditation for the first 26,000 sqm phase of the 67,000 sqm H2O complex in the Váci Corridor. The EUR 65 mln project will consist of three interconnected buildings designed by the Danish Arrow Architects Studio.

“Financial institutes need to report about their portfolio’s EU taxonomy ratio, and projects which comply with the taxonomy criteria are eligible for financial incentives,” points out Zsombor Barta, president of the Hungary Green Building Council.

“This will definitely have a huge impact on the real estate stakeholders and will also push the entire sector towards a more energy-efficient and sustainable future. In my view, this was a big step in 2022; maybe this is not yet visible, but it will become a very important issue very soon,” he says.

The first two phases of the Advance Tower by Futureal have achieved Well “Gold” certification.

Boom Time

The boom in the industrial and logistics sector continues as demand remains high and vacancy stands at a record low. Analysts see this market in Hungary (as elsewhere in Central Europe) as being in a positive position in the post-coronavirus period, 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 the take-up demonstrate the continued developer and tenant appeal of the market,” says Cushman & Wakefield.

The total industrial supply in Hungary has reached 4.4 million sqm, 1.4 million sqm of which is located in regional hubs, with more development expected outside of the capital. Overall vacancy stands at around 5%, and Colliers has traced about 276,000 sqm of industrial and logistics space scheduled to be delivered across the country in 2023.

“Due to the strengthening inflationary pressures, combined with a weak currency, construction costs will likely rise further, meaning that BTS [built-to-suit] and prelease rents will remain subject to upward pressure,” Cushman & Wakefield comments.

In the retail sector, no large-scale shopping centers are currently planned in Budapest. Instead, most retail development is as part of mixed-use projects, smaller regional retail formats, and the renovation of existing Budapest shopping centers.

Disposable income in Hungary will continue to be weak as inflation has hit 20%, the highest rate over the last two decades, and the forint is weak. However, online sales fell year-on-year in the final months of 2022 while bricks and mortar retail sales increased, proving that demand for physical retail is prevalent, according to Cushman & Wakefield. Food and beverage and sports brands retail openings are expected in the coming year.

Hotel Pipeline

A number of hotel projects are at various stages in the preparation and construction process in Budapest and elsewhere in Hungary. However, the pipeline is difficult to estimate, with schedules slipping in the current uncertain market environment.

“The major bottleneck for developments going forward is the combination of the rising cost of hotel operation (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 projects going ahead,” says Attila Radvánszki, director of Horwath HTL Hungary, giving a cautiously optimistic perspective on the hotel market.

Horwath HTL has traced 3,500 hotel rooms in Budapest due to be delivered in the next three to five years, out of which 1,500 will be in luxury hotels. Scheduled openings for 2023 include the Dorothea Autograph Collection by Marriott in Vörösmarty tér, the W by Marriott at the Dreschler Palace, the Radisson Collection adjacent to St. Stephen’s Basilica, and the Radisson hotel component of the BudaPart development.

“We believe competition is going to increase greatly, where competitive advantages such as location, physical condition, quality of service, distribution channels, together with the ownership’s financial strength, will play a crucial role in the next 12 months,” adds Radvánszki.

This article was first published in the Budapest Business Journal print issue of January 13, 2023.

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