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Budapest (and Hungary) Riding an Office Development Boom

How is Hungary’s office market positioned? What are the trends? Will we ever see genuine secondary markets in Hungary? The Budapest Business Journal asked Lóránt Kibédi Varga, country manager of CBRE Hungary, one of the leading real estate consultancies to drill down deeper into the local data.

BBJ: How would you describe the Hungarian office market in Q2 2018? How do you think it will develop across this year and further into the future?

Lóránt Kibédi Varga: The office market is enjoying great activity and momentum. There is a positive expectation regarding business confidence for 2018 and we can confirm that, based on our demand pipeline, we expect take-up level to remain solid in the coming quarters. As of April 2018, vacancy rates are at historic lows across most submarkets and there is a growing need for quality office space. We see that the supply side of the market is changing in 2018: There is a great recovery in development volume and we expect completions to reach 250,000 sqm this year – up from 80,000 sqm last year. Although the majority of the completions scheduled for 2018 are already preleased, there will be new availability coming to the market.

Based on experts’ consensus, the CEE region is expected to produce the strongest economic growth in the coming years, giving strong confidence that the Hungarian economy can keep outperforming the eurozone and converge to the core countries. This momentum will be supported by increasing EU funding in the coming years, in which regard Hungary traditionally excels among the region with high absorption rates. This further enforces our view of a healthy business environment for the coming one-two years, which helps office demand grow further.

BBJ: Most new office developments still take place in Budapest, with relatively very little happening in the provincial cities. Do you see any signs of growing development in the countryside, and when do you think we might be able to talk about genuine secondary markets in Hungary?

LKV: Indeed, the office market has an extreme concentration on Budapest. The business services sector is a significant driver on the Hungarian labor market, as attested by double-digit employment growth registered in the sector in previous years. At yearend, there were approximately 110 business service centers across the country, employing some 42,000 people. The dominant hub for the sector remains Budapest with a share of more than 70% in the total. However, large regional cities are proving more attractive to employers. An outstanding example is Debrecen, which won the “Emerging City of the Year” title in the 2017 CEE Shared Service and Outsourcing Awards. Recently, new target cities such as Szeged, Miskolc and Pécs are also appearing on the map. Most of these regional cities fall into the highest tier of subsidy eligibility across the EU, and local authorities or investment promotion organizations are readily available to assist prospective employers with local intelligence and incentives. It is not a coincidence that these cities had a presence at MIPIM this year and are clearly aiming to attract a higher proportion of new business coming to the country.

BBJ: For an investor considering Hungary, what advantages does it hold over other countries in the region?

LKV: Overall, 2018 could bring similar turnover to that of 2017 based on the pipeline we are now seeing – reinforcing that Hungarian assets are interesting for money seeking good value and return. Yield levels in Budapest still have a clear advantage compared to those in Warsaw or Prague for an investor. Moreover, we see growing interest for assets outside of Budapest at even more attractive yield levels. Financing conditions have eased significantly over the past two years and terms are expected to remain supportive and possibly even improve further. LTV ratios are edging back towards 70-75% with typical margins compressing to 200-250 bps. Having said that, the market is close to its theoretical ceiling – simply because of the size and depth of the market. We asked our clients this question during our “Investment Breakfast” event this April, and the vast majority of the real estate players expect a rather small change in the volumes for this year. This reinforces how strong the investment sentiment is in Hungary now. In terms of deal-flow, there is an increasing chance for larger, regional platform transactions materializing this year, as owners that have consolidated sizeable portfolios may be looking to reap their rewards.

BBJ: Green accreditation is now a given for office developments. What are the upcoming trends in Budapest? How supportive is the government of the construction industry? What more could it do to boost office development?

LKV: All new projects in Budapest aim to achieve a certain level of accreditation using one rating system or more. It is not a marketing gimmick but something that has material savings and benefits for the occupiers over the long-term. However, which accreditation system to choose and what level to target, remains more a decision for the developer depending on the individual project. The market is moving towards more added-value developments. Developing quality projects will be more important as tenants are becoming more demanding and are ready to pay for the upside. On the other hand, they expect operational costs to be as rational as possible.

The construction market is now in a boom. The current economic cycle intensifies the appetite for new commercial developments, while at the same time the Hungarian government also acts as a big market player by initiating large public funded development projects. Besides these two factors, the temporary reduction of the VAT rate from 27% to 5% on new residential developments acts as an administrative distortion and induces extra demand before this regulation is supposed to end in late 2019. Together, these factors put a strain on construction capacity and lead to price increases. I am not sure that the government needs to make any extra effort to boost development activity in the commercial sector.

BBJ: How much of CBRE’s Hungarian business is taken up with the office market, and how has this changed?

LKV: CBRE has a dedicated Office Agency team, comprising six full-time professionals, who specialize in the Budapest office market acting for developers, landlords, and occupiers as well as brokering transactions. The office team falls within CBREs Advisory and Transaction department which also includes Retail and Industrial Agency. Given the activity in the wider market, CBRE’s Investment team are very active on the buy or sell side with office Investments, primarily in Budapest. CBRE’s valuation team enjoys a lot of work in the office sector and we also have a Property Management team who manage nearly 98,000 sqm of office schemes and a Project Management team who are deeply involved with several high-profile office fit-outs. All in all, the office sector remains one of the most important for any multiple service line real estate consultancy such as ourselves.

Mini Bio

Lóránt Kibédi Varga, who has a 30-year track record in international real estate and banking, has held positions in Brazil, the Netherlands, Hungary and Belgium. Previous senior level positions include CEO of both TriGranit Development Corporation, a CEE-based real estate investment, development and management firm, and CBS Property, a major Hungarian landowner. Since 2014, he has been leading CBRE Hungary as its managing director. In addition, Varga is the chairman of the board of the Netherlands-Hungarian Chamber of Commerce and board member of the American International School in Budapest. He considers charity an essential part of his life and has been an avid supporter of Szent Miklós Children’s Home & School for more than 15 years.