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Industrial development needed to meet rising demand

Limited speculative industrial development has returned to Hungary against a background of increasing demand and falling vacancy. Industrial developers are now considering the speculative development option, given increased optimism such projects will be quickly let.

Prologis Park Budapest-Sziget

For now, built-to-suit (BTS) remains the preferred option in Hungary, as developers essentially require a major pre-let before they consider committing to the Hungarian market. Take-up is outperforming development, with a resulting fall in vacancy, as developers land bank as they strive to keep up with demand. In recent years, companies have resorted to developing built-to-own (BTO) logistics and industrial facilities, although the proportion of developer-led building is increasing. However, market activity is far below Poland and Czech Republic.
Regional hubs

Cushman & Wakefield figures indicate that 22,000 sqm of industrial and logistics space has been delivered thus far this year in the Budapest area, with a further 44,000 sqm in progress. This compares to an estimated 1.1 million sqm that is due to be delivered this year in Poland, and an estimated 530,000 sqm of new space in Czech Republic.

According to CBRE, modern industrial stock in Hungary has reached 7.7 million sqm, of which only 34% is considered to be built-to-let or developer-led space; the majority consists of BTO schemes. However, developer-led construction activity is clearly on the rise: whilst this represented 10% of total new completions in 2015, CBRE expects it to rise to 45% for 2016.

Industrial vacancy for Hungary is continuing to fall from a high of more than 20%. The Budapest Research Forum (consisting of CBRE, Colliers International, Cushman & Wakefield, Eston International, JLL, and Robertson Hungary) put industrial vacancy for logistics parks and city logistics centers in the Budapest area at 9.7%.

Prologis is the biggest owner of industrial stock in Hungary, followed by Logicor (the logistics platform of the German investor, Blackstone), Wing, Goodman, CTP and OTP.

“Prologis and Goodman are still the most active in terms of BTS/spec and semi-spec with one project in development each,” says Gábor Halász-Csatári, head of industrial at Cushman & Wakefield in Hungary. “Market entrants such as CTP are very keen to undertake new projects beside their recently acquired facilities in Üllő and the countryside. As the southern Budapest region is very active, we expect land transactions to occur in the near- to mid-term future. Prologis and Goodman will be looking for plots with good locations and access. Other market players have yet to set foot in the market, and we are confident that a BTS project would boost their appetite for Hungary.”

In a recent deal, Prologis has signed a 4,800 sqm letting with Inter Cars Hungária, the largest passenger and truck parts dealer in CEE, at the 21,000 sqm speculative facility under construction at Prologis Park Budapest-Sziget. This is the first speculative logistics project in the Hungarian market since 2008. The park comprises six buildings totaling 128,000 sqm of industrial and logistics space with the capacity for 15,000 sqm of additional development located in the industrial zone at Szigetszentmiklós. “The demand for modern logistics properties has been increasing recently, giving us the confidence to carry out this speculative development,” commented László Kemenes, country manager at Prologis Hungary.

In another transaction the European industrial developer, Goodman, has concluded a letting of around 5,000 sqm at its 22,000 sqm speculative development the Goodman Gyál Logistics Center, located at the junction of the M0 and M5 highways, 15 km from the Budapest’s Liszt Ferenc International Airport. The area around the airport is developing into a major Budapest logistics hub.

CTP has signed a 25,000 sqm letting at CTPark Tatabánya, having extended its logistics park network into both the Hungarian and Romanian markets. “The portfolio continues to grow, primarily through new construction and acquisitions in the new markets of Hungary and Romania,” said CTP. “While we continue to pursue acquisitions which fit our portfolio and investment goals, we plan to focus on growing mainly through new construction.”

Demand is also on the rise. “One can clearly state that the Hungarian e-commerce segment (also known as online commerce) is experiencing a buzz, even though this tendency has been going on in Western Europe for some time,” commented Cushman & Wakefield. “Furthermore, in 2015 the total domestic e-commerce volume topped HUF 319 billion, which is 4.1% of the overall commercial activity. The significant beneficiaries of the above-mentioned trend are companies who provide so-called ‘CEP’ services (Currier-Express-Parcel), from which many international firms are already represented in Hungary. To put this into context, 42% of the total delivery of e-commerce purchases in Hungary were delivered by parcel (CEP) companies in 2015.” DPD Hungary, one of the major CEP providers in the country, has expanded its logistics base with the addition of an operations hub in south Buda.

DHL Express has announced a cooperation with Budapest’s international airport in order to develop a 13,000 sqm logistics center. In another development, UPS Hungary will begin operations of a newly developed 5,200 sqm logistics facility in the proximity of the airport. Jost Lammers, CEO of Budapest Airport, the operator of Liszt Ferenc, sees logistics development as part of a wider upgrade of the passenger facilities and services at the airport.

One concern with regard to market development is the lack of development in regional cities; while in Poland there are regional hubs in, for example, Krakow and Wroclaw, and in Czech Republic there are clusters around Brno and Plzen, in Hungary 90% of logistics is located in Budapest with sporadic schemes only in the regions. Although Hungary has a very good road network, with one the highest highway densities in Europe, the country is very capital-centric.

Cushman & Wakefield forecasts further momentum in the e-commerce sector, escalating competition between CEP providers and increasing the value of industrial/logistics centers. “The positive market sentiment, stable demand, and the aim of businesses to expand their activities and the efforts of existing tenants to gain new businesses, all project further speculative and BTS developments. Alongside the existing and stable developer scene, the last 12-18 months saw the appearance of new international market players, now also in possession of significant property portfolios. This creates a highly competitive environment on the landlord side, while also offering alternatives to prospective tenants. The growth of the Budapest stock boosted by the speculative and BTS developments over the mid- and long-term is clearly shifting developer demand towards greenfield; this is causing an increase in land transactions and a moderate but steady rise of land prices,” concluded Halász-Csatári.