The conventional wisdom is that the positive fundamentals with regard to supply and demand across the various Hungarian market sectors will continue to attract developers as a wider pool of investors snap up both new and older products. Yields are predicted to compress as investment volumes rise or at least remain on a similar level. However, Hungary still lags behind both Poland and Czech Republic in development and investment volume, with a 175-200 basis point yield differential to the latter.
CBRE expects total real estate investment volume to be EUR 1.6-1.9 billion. JLL predicts EUR 1.7 bln, reflecting a fifth consecutive year of growth in transaction volume. However, this is well below Czech Republic, a similar sized market, which is expected to break the EUR 3 bln investment volume mark again this year. Cushman & Wakefield anticipate that the investment volume will be similar to 2016, which was above EUR 1.7 bln.
Tim O’Sullivan, head of capital markets at CBRE, sees the office sector as the most popular asset class with about 50% of the market, followed by retail and industrial. “The office market will still lead in terms of the number of deals transacted, but there are some large retail projects expected to trade in 2017, which will boost the retail figures. The lack of available stock in the industrial sector will limit the activity in this sector, however there is now a lot of demand for industrial and logistic stock from investors,” said CBRE.
Prime investment yields are estimated to be in the mid-6% level, with high street yields having been transacted at 6% and below. Benjamin Perez-Ellischewitz, head of capital markets at JLL, argues that prime office yields will compress to 6.5-6.25% in the next 12-18 months, retail could fall to 6.25% (although there is a limited supply of prime assets and liquidity) and logistics will fall to close to 8%. Across all asset classes he anticipates a 25-50 basis point compression in the coming year.
O’Sullivan puts turn of year office yields at sub-7% compared to shopping centers at 6.25% and industrial at around 8.25%. He thinks the hotel sector will see compression, although there has been no big transaction to prove this. “Yields are under pressure and will decrease as the very prime stock is traded. However, it is hard to know where yields will finish as the supply of very prime stock driving yields is limited and not necessarily available,” commented CBRE.
A lack of development has brought the supply and demand curve more in line, which will support rental growth and investor interest. “Most of the current office assets under construction will be at least 50% pre-leased before construction is finished. The current pipeline is sustainable, but I would not like to see a lot more. There were significant industrial deals concluded last year, although there is no new supply in this sector to maintain this volume,” said O’Sullivan.
Cushman & Wakefield sees that further yield compression is possible in 2017, if interest rates and finance rates remain supportive.
There are currently six Budapest office projects under construction and due to deliver this year that would easily meet annual absorption figures of around 150,000 sqm, despite some fears of oversupply that have been expressed. A further 12 office developments are planned for delivery in 2018-2019. To put this in context this compares to the Poland office market, the dominant CEE office market, where 1.4 million sqm of space is currently under construction.
Wing is set to deliver the 24,000 sqm LEED Gold accredited Ericsson research and design headquarters at the Nobel Prize Winners Research & Development Park, located on the Buda side of the Rákóczi Bridge. The HUF 20 bln project has been financed by a consortium of banks consisting of UniCredit Bank Hungary, UniCredit Bank Austria and K&H Bank. A further second phase of the project of around 20,000 sqm is planned.
Another established Budapest developer, GTC, is expanding its Budapest office portfolio with the development of the 23,000 sqm Renaissance Plaza, close to Arpád híd. Hungary’s GRT Group is planning the third 18,500 sqm phase of Office Gardens in the 11th district in the third-quarter. In the fourth-quarter, the Belgium Atenor Group is set to complete the latest 14,000 sqm of Váci Greens. The company recently sold the 18,500 sqm building “C” at the phased complex to Slovakia’s IAD Investment.
With no developments currently under way, the next shopping center deliveries will not be until at least 2019, given the necessary development period. Two Budapest shopping center projects by Futureal and ECE are in the pipeline, however. Futureal has valid zoning for the 44,000 sqm Etele Plaza adjacent to the planned Budapest One business park on the western edge of the city at the terminus of Metro 4 and the renovated Kelenföld railway station. The scheduled completion date is 2018-2019 according to Futureal; the company says it is now actively talking to potential tenants.
Demand is rising in the logistics sector as vacancy is falling and developers are undertaking speculative development. The Czech-based logistic park operator and developer CTP is buying up a number of industrial parks.
The profile of investors has changed after the dominance of local investors in the post-crisis period. According to Cushman & Wakefield, Austrian companies like CA Immo (a specialist in office properties in Central European capitals), German based funds and private equity from Asia and the Middle East has appeared for the first time.
“The willingness of banks to lend will allow a wider pool of investors to enter the market. The ability to source bank lending will help drive investor volumes in 2017,” said CBRE.
A continued improvement in the markets ultimately relies on wider political and economic stability. Further, pipeline has to continue to remain in line with demand as the investment and development markets are benefiting from low development levels. “Budapest looks strong due to the under-investment and under-development from the past 6-7 years,” concluded Mike Edwards, head of capital markets at Cushman & Wakefield.