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After year of records, property market is in transition

Both demand and supply brought records to the Hungarian commercial property market in 2008, real estate consultant CB Richard Ellis (CBRE) said in a press release.

The crisis deepens as investment market comes to a halt in the whole of Central and Eastern Europe and developers prefer pre-lease agreements. Nevertheless, well-located prime properties remain popular and the core markets of the region are still in the focus of the investors.

Demand for modern office space in Budapest reached new record high in 2008 – take-up equaled to 330,000 square meters (sqm) which is some 3% up on 2007 and is by a third higher than take-up in 2006. Especially last quarter of the year proved to be very strong, some 35% of the total take-up was due to the deals closed in the last three months. The biggest lease transaction by far was the lease and BTS (built-to-suit) agreement signed by K&H Bank and the developer TriGranit for almost 47,000 sqm. Pre-lease agreements in general had a very significant share in last year’s demand therefore the 2009 pipeline of office space is already up to 28% occupied before completion.

Developers never before managed to secure tenants for such a high share of future developments which can help to balance potential oversupply in coming quarters. After a record breaking 250,000 sqm newly delivered office space in 2008, further ca. 270,000 sqm available office space is scheduled to come to the market in 2009. Projects already under construction are likely to be delivered according to original timing (or with reasonable delays due to technical reasons) but unconfirmed pipeline (projects not started yet) became much more unsecure. Developers’ reaction on the changing economic climate has been very immediate and significant.  According to current estimation, only 130,000 sqm office development is under construction with planned delivery in 2010, while another ca. 300,000 of office space development has been put on hold.

“We are entering a new era of office occupier market” – commented the new year Adrienne Konthur, Managing Director of CB Richard Ellis, Hungary. “Developers will think twice before kicking off a new project. Current market conditions – financing and real estate fundamentals, both – claim developers to have a significant share of pre-lets. BTS agreements were fairly untypical in Hungary, and this is about to change. We will see much more planning ahead before completion starts than in the previous years. This helps the market to avoid long-term imbalances.”

2008 proved to be a record year in the Hungarian logistics property market both in terms of supply and demand. Several developments were completed and became successfully let. Currently the modern industrial stock of the Greater Budapest area stands at 1.4 sqm. Annual completion level in 2008 was the highest annual completion ever recorded, and more than twice of the completion level registered in 2007. During only one year the modern industrial stock grew by 30%.

Demand for modern logistics space was significantly higher in every quarter of 2008 than in the same periods of 2007. Take-up accounted for 335,000 sqm in 2008, which means more than 50% increase compared to 2007. Pre-lease agreements had a significant share in each quarter’s demand.

Nevertheless, due to the high share of pre-lease agreements in the annual take up paring with massive supply, vacancy reached 16.3% by the end of the year. With deteriorating economic environment logistics market is expected to see significant slowdown in the course of 2009. Falling industrial output and recession in Hungary’s most important trade partner countries have already impacted the demand for industrial-logistics space: Expecting lower demand, developers re-think their strategies meaning less aggressive expansion.

“First months of 2009 we will still see several large developments to be completed.” –added Gábor Borbély, Senior Research Analyst at CBRE. “Currently some 120,000 sqm modern industrial space is under construction, this is the same level as it was in January 2007.  The level of new supply later the year remains questionable given the difficulties in obtaining financing. Developers are hunting for potential tenants with large space requirement well before they would start construction works. We expect the level of speculative developments to decrease significantly by the end of the year.”

The total volume invested into Hungarian commercial properties reached €410 million in 2008. Following the outstanding investment volumes recorded in 2007 the volumes of 2008 represent a market slowdown of 80% which is much greater than expected. The level of investment seen in 2008 is more comparable to the early years of the investment market in Hungary. The decrease in investment volumes is not isolated to Hungary, similar decreases in activity were witnessed across the CEE region; Slovakian investment volume dropped by 80%, with the Czech market falling by 60%. While less mature markets like Croatia saw no recorded transactions in the second half of the year.

The structure of the investment market is changing. The decrease in investment volumes in 2008 was a direct result of several factors but mostly the temporary freeze on the activity by German Open Ended funds, which were the most active in 2007-08. This added with the restricted lending capabilities of the banks as a result of the global financial crisis has resulted in the lack of finance available to companies adding further to the decrease in market activity. 

Looking forward, Tim O'Sullivan, Senior Consultant for Capital Markets at CBRE added: “The days of highly leveraged transactions have gone and the number of investors actively in the market has decreased. With banks retaining restrictive lending policies, the key to successful transactions in 2009 will be Equity – Cash is King as they say!” Loan to value ratios (LTV) have fallen from 80/20 towards 50/50. A light at the end of the tunnel is that banks need to issue loans to support their shareholders’ expectations. Therefore, they are likely to start lending to certain key clients again in the latter half of 2009, but will be restrictive on LTVs and will not finance speculative developments.

CBRE expects to see some assets being put onto the market as vendors are forced to sell. Well let, income producing assets will prove most popular while the sale of secondary assets in terms of location and quality will fall out of favor with investors with further pricing adjustments expected for this secondary asset class.

With fewer transactions and deals occurring in the market higher levels of uncertainty have appeared in the pricing of assets. Correct pricing levels are proving difficult to judge with few comparable transactions available. As a result of this uncertainty the yield profile of assets is proving difficult to demonstrate. However, it is widely agreed that yields are moving outwards. 2008 saw a significant shift in the second half of the year. This outward shift is expected to continue in 2009 as vendors and purchasers pricing expectation begin to align with each other once again. (press release)