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Record figures and moderate expectations on Hungary’s real estate market

The office market of Budapest saw a huge take-up but also a rising vacancy rate in 2008; Industrial take-up was almost 50% higher than in 2007, whilst retail brands are expanding in the countryside. However the real estate investment market has almost been frozen during the past year. Global property adviser DTZ’s analysts conclude the last year and shared their thoughts about 2009 in a press release.

Before the financial crisis entered the occupational market, the Budapest office market achieved several records during the year 2008. Take-up reached over 330,000 square meters (sq m) of modern office buildings including the largest ever transaction: K&H Bank has concluded the lease negotiations with Trigranit and will move their departments to Millennium City Center in three phases with a total area of 47,000 sq m. Despite the large amount of office take-up, the vacancy rate increased by 460 basis points (bp) compared to the year-end of 2007, due to the record level of new supply, and stood at 16.8% by 31 December 2008. 250,000 sq m of new office was completed during the last year, most of this (Millenium Tower II&III, Haller Gardens, Corvin Offices I) is situated in the emerging South Pest sub-market.

DTZ said it was very successful throughout 2008 representing among others Raiffeisen Bank (8,400 sq m) and a major telecommunication company (7,900 sq m) and contributed to the over 50% of the occupancy in BSR Center, and nearly 90% of the occupancy in Studium office building. “2008 was also an excellent year in terms of the number of deals (37) concluded by DTZ. We will keep up the good work during 2009, though we expect that negotiations will be more time-consuming than before. This year the Budapest office market is still expected to transact, and large requirements will also not be missing from the palette, although the main reasons behind the office leasing transactions will most likely be different from those in financially favorable times. A reasonable amount of new stock will also be launched on the market this year, however, financially less strong developers may decide to delay construction work for an uncertain period of time,” commented Kovács Melinda, senior office adviser at DTZ.

The Hungarian industrial market was not hit by the economic crisis last year. Take-up figures reached record heights and were 45% higher than in 2007. The current modern industrial stock of Budapest and its outskirts stands at 1.4 million sq m, more than 200,000 sq m of new industrial accommodation was handed over to the market in 2008.

However, due to the current economic situation, some developers have put their speculative projects on hold and only wish to start construction upon pre-lease agreements or focus on build-to suit buildings. Many companies have decided to reconsider their expansion or relocation strategy depending on future business, which also results in the slow-down of developer activity.

“As for 2009 and compared to the record-year of 2008, we expect a decrease in both take-up figures and handovers. Though projects that offer a strategic location with easy accessibility and flexible space management will remain successful in 2009. The extension of the M0 ringroad has revalued the Northeastern part of Budapest and we await the increase of logistics projects in this region in the upcoming years,” commented Éva Tamás, industrial & logistics property adviser.

While 2008 was a record year for the office and industrial market sector, the investment market shrank to its lowest level since 2003 with around €400 million of transactional volume. 2007 was almost five times more successful with €1.9 billion. Office transactions were the most notable with almost 73% of investments spent in this sector during 2008. DTZ estimates that initial yields for prime products in the office and retail sector moved out by 125 bps in 2008, with a much larger adjustment among secondary assets.

The two largest transactions of the year were Bank Center (€130 million) and the forward purchase of Krisztina Palace (€60 million). The largest industrial transaction of the year was the sale of Tulipán Park (€21 million) to the German SEB Invest, whereby DTZ represented the vendor, SEGRO. Lindwurm György, senior investment consultant said: “Though the negotiation ended up after the crisis exploded in September, the agreement reached was satisfactory to both parties, which bears testament to the professionalism of DTZ.”

Depending on their own financial strength and ability to raise debt, international investors are likely to re-enter the Hungarian market in 2009 as a number of distressed sellers dispose of assets to free up liquidity.  The increased supply and country risk perceived by investors will most probably induce price reduction. This is likely to narrow the gap between buyers’ and sellers’ price expectations, allowing the Hungarian commercial property market to move closer to fair value.

The almost 800,000 sq m of retail area in Budapest and its agglomeration comprises only two projects completed in 2008. The M1 Outlet Centre and the Luxury Department Store opened last year, while 2009 will see more handovers such as the Allee shopping centre (46,000 sq m) in the 11th district and the Corvin Atrium (34,600 sq m) in the Inner Pest. However, projects in planning status are expected to face delays due to financial difficulties. New brands entered the market such as Motivi, CroppTown or DIM Paris, while already existing brands like the Inditex Group have a strong expansion strategy even in the countryside. Rents were stable during the year, but more and more discounts are granted to new or even existing tenants by landlords.

DTZ’s Egyed Krisztina, marketing manager of the Arena Plaza added that “the Christmas period was even more successful for the shopping centre than we expected. However, we are prepared for a slowdown due to falling consumer spending but we are attracting customers with several programs like fashion shows, prize winning activities communicated by large scale TV campaigns throughout the whole year. (press release)