We asked property experts in Hungary to give us their pedictions for this year. For the most part, the crystal ball reveals a continuation of the positive trends of 2015, though some observors note potential market drags.
Head of CEE real estate finance, HYPO Niederösterreich
We are opportunity-driven and Poland is a very competitive market, so it is difficult to find the right return. Property has become very expensive to buy and very cheap to finance, so it does not make sense for us to finance, although we are still looking for opportunities. Czech Republic is very similar, although the market is smaller and a little more favorable for us. Hungary is interesting, and I hope we will become more active as we have already started discussions with clients. The macroeconomics for Hungary are stronger, and there is strong demand for office and retail. However, the highest demand is for hotels. I would mainly focus on office as, with the lack of delivery, the risk-return relationship is good from the perspective of lenders. If a project is good, then financing can be found and in this way it becomes competitive, although competition is obviously not on the same level as Poland, where there are five lenders competing on one transaction. Here you might find two-to-three banks. With regard to the loan-to-value ratio, I would probably go up to 65% for prime.
Managing director, Colliers International
The attitude towards Hungary at international events is certainly improving. Fundamentals are good, and there is available product. We need big ticket deals of €50 million and above to get investment volumes up, and we know of a couple of major buildings that will be available this year. With regard to office vacancy, if you take away notoriously bad buildings, then vacancy is not worse than elsewhere. Further more, if there is a 5,000 sqm requirement for new modern space, then there are only one or two options, far too limited for a city like Budapest, and therefore we need new buildings. Investors are attempting to pick out the best pipeline or potential pipeline projects and looking at forward-purchase deals. There are a number of obstacles to market development: One is that companies are changing their way of working and require less space, another is the scarcity of qualified staff as people are moving abroad. For example, SSCs have trouble in finding and replacing staff. However, I would rather be a developer in Budapest than Warsaw at the moment.
Partner/head of retail, Cushman & Wakefield
The retail market will continue to move fast as retailers enter Hungary. The target entry point is typically through one of the best performing shopping centers (Allee, Mammut and MOM in Buda and Aréna Pláza, WestEnd City Centre and Árkád in Pest) and central high streets (Váci utca for mass market products and Fashion Street and Andrássy út for high-end and luxury goods). A question remains as to the timing of the two pipeline projects by Futureal and ECE. The Sunday closing laws have not negatively impacted the positive retail figures, according to retailers and shopping center owners, as the indications are that consumers have changed their habits to meet the new opening times.
Head of asset management, CIB Bank
Over the last 36 months, we have seen a steady increase in the level of interest from buyers for the real estate that CIB Bank offers for sale – translating into more than 1,000 transactions since we started the disposal of repossessed property. The bulk of our sales are to Hungarian buyers, given the profile of the assets offered. However, we are experiencing rising interest from “international” players as the upside perception of the Hungarian real estate market gathers momentum. The majority of the assets sold and marketed for sale are a result of foreclosure of loans issued several years ago. However, the bank is currently running a tender for some landmark buildings. Basically there is a buyer out there for every property.
Head of market research, JLL
After the 2008 collapse of the Hungarian investment market, the recovery has gained momentum with annual transaction volumes 30% higher than in 2014. Furthermore, we have recorded increasing activity in every asset class, which signifies that the general Hungarian market environment has become very appealing for investors due to the convincing fundamentals, in parallel with the yield discount that the market offers compared to its peers. Although the final statistics are not available, we believe that 2015 will see the highest volumes in the past eight years, with roughly €750 million traded. We foresee more transactions taking place in 2016 and expect that single, trophy asset deals will drive the market.
Head of industrial, Colliers International
Several developers are already testing Hungary by looking at projects, investment opportunities, plots, and clients. These are mainly companies who already have a presence in CEE. Most of them prefer acquisition or single tenant built-to-suit opportunities to start with, not speculative greenfield development. However, one or two logistics buildings will be developed on a speculative basis in well located parks with high or full occupancy as a further drop in vacancy can be expected in early 2016. Rising demand is mainly driven by the industrial/automotive sector. However, FMCG and 3PLs (companies that work with shippers to manage their logistics operations) may also play a more important role if retail consumption continues to grow.
Managing director, CBRE
Following the 60% growth rate seen last year, we expect the Hungarian property investment turnover to get close to the €1 billion line again by end of 2016. We anticipate not only the further rise of interest from equity investors but also the willingness of banks to provide financing for lucrative investment opportunities. This means that more deals will be possible and manageable for investors, making the Hungarian investment market more attractive. On the occupational side, there is more interest from tenants and therefore the basics or fundamentals are improving in all sectors. Limited acquisition target availability is a problem, especially as owners are holding on to their investments due to improving rents and yield compression.
Vice President, Prologis
I think that remaining vacant facilities will let and the bigger units of 10,000 sqm and above are already occupied. Therefore, the vacancy rate will decrease to 7-8%, and developers will more actively consider both built-to-suit and speculative development, though there will in general be more of a focus on built-to-suit. We are considering the speculative option: We have the development land, which is zoned and has all the required building permits. We will continue to focus on our core locations, and this is defined as the greater Budapest area. We develop all our buildings in line with BREEAM specifications, which we believe is a clear requirement of, for example, blue-chip companies as customers. For Hungary, construction is 15-20% more expensive than in Czech Republic or Slovakia. With regard to demand, e-commerce is a huge emerging sector and the other main source of demand is from the automotive and electronics industries.
Managing director, Gateway Properties
Demand should continue to be strong for residential property in Budapest, with both domestic and demand from abroad continuing to be robust. The reduction in VAT from 27% to 5% on new property purchases should be a significant boost for new property sales. Developers will now be far more confident that building will be profitable and they will be motivated to start new developments. Pent up demand due to undersupply is there, all that is missing is the new apartments. We believe that the Airbnb effect will continue to spur demand for centrally located properties with Districts V, VI, VII, VIII and IX being the most popular. This is due to the popularity of Budapest as an almost all-year-round tourist destination and the number of apartments lost to the long-term letting market reducing supply and pushing up the cost of renting. This has made investment more attractive for those who prefer long term tenants.
Head of capital markets, Cushman & Wakefield
We have seen the return of international investors, however, the key issue holding us back is high interest rates and the strict terms on which banks are lending. People are not going to be convinced to invest in Hungary until internal rates of return are competitive with other markets, and this is the real hurdle that we have to cross. That said, lending terms are improving. There are positive arguments for all sectors, although the key issue holding the retail market back is a severe lack of stock. I think that offices are very under-priced with limited new supply and rents are still suffering from the days of oversupply. When the new genuine class “A” product is delivered, this will lease well and rents will increase. Hungary has five or six years of investment to catch up on, compared to other Central European countries. Clearly there are issues with politics in Hungary, although investors are looking beyond this and considering the economic story. We should not expect parity with Poland and Czech Republic, but the gap is closing.
The real estate market shows signs of stirring, however, there are some years ahead of us before the full awakening. Economic expectations will probably remain above-trend, economic indicators are among the best in the region and investor confidence is growing. While there was only 65,000 sqm of office space delivered in 2015, the 2016 pipeline is almost 90,000 sqm, the highest since 2010. However, the 40% BTS/pre-lease ratio is similar to last year. This could affect not only vacancy but also rents. I also expect large transactions. The “big stars” are all in the region looking for investments. As for the retail market, it’s a shame that, due to the ban on development, no big centers can be developed as there is a definite demand with approximately 270 sqm of shopping center space per 1,000 inhabitants, below the 360 sqm CE average. Budapest is far from saturated. The two known pipeline projects are the 40,000 sqm Etele City Center and the 48,000 sqm Árkád Aquincum, and those are due to be delivered this year. IKEA Soroksár and the Alba extension also underline this demand. I assume that the acquisition of single retail assets will continue.
CEO & chairman, Wing
Obviously there has been very little office development in recent years and so we see very positive trends in the market in terms of enhanced or increased occupier demand. While there is vacancy in the market, there is a lack of large, vacant, contiguous modern space. Overall, vacancy rates have been falling and large quality tenants have needs that are unfulfilled. I think that we started our latest project, V17 office building, at an ideal time, though there was a lot more uncertainty in the market when we began the development. At this point, I see that we have come into the market at a sweet spot in terms of demand and with regard to market development. Although finance is more expensive in Hungary than in surrounding markets, it is available for quality developers and quality projects.
Industrial real estate professional
The coming year will be strong, based on the current pipeline and the general economic conditions as GDP, consumption and industrial output are rising. This makes us consider that demand for logistics/industrial space will continue to increase. Companies considering logistics and manufacturing tenders tend to not only consider Hungary as a location, but also the wider region and therefore Poland, Czech Republic, Slovakia, Romania and even Turkey. Hungary is not so far behind Czech Republic in terms of stock and with regard to the Budapest Research Forum (BRF) calculation, all the agencies should agree on a clear definition of class “A” stock and register all buildings outside the capital. Vacancy is around 12%, which seems to be high, but does not tell the real story as availability is very fragmented: A park can offer 10,000 sqm but this would be split into two or three units.
Managing director, CE Land
The major obstacle is the small size of the Hungarian market and its lack of growth. Furthermore, there are hardly any transparent investment deals – unfortunately. The recent Duna Tower transaction that we concluded was a very rare positive exception, as all participants experienced a fully prepared and pre-defined tender process. Authorities are more focused on small issues and in most cases the big picture considerations are sacrificed. I also think that our real estate market is rather plain, some may say boring, due to size and outlook considerations. On top of that, it has lost its cutting edge for investors – with a few exceptions.
Senior investment director, Bluehouse
Foreign investors are returning to Hungary, including a number of new companies. These are essentially smaller-scale investors, or those who see value-add potential with a higher return, rather than those investors who purchase class “A” office buildings of 100,000 sqm with a decent cash flow and 80-90% occupancy. The investors are 60-70% Hungarian and 30% foreign. The more expensive a property, the more there is a movement towards foreign investors.
Managing director, Raiffeisen Evolution
The essential difference from last year is that investors are returning, but they are only looking for completed, income-producing assets, and are not prepared to enter a project at the development stage. Office developers require a 60-70% pre-let level, as banks are not ready to take a risk. We have two projects with building permits and we are now looking for tenants, as without pre-lets we will not get financing.
Head of Hungary & SEE capital markets, CBRE
I think we will see an improvement on 2015, with a 20% or more increase in investment volume. Office will be the most popular sector, followed by retail. Industrial will see massive growth, although this is coming from a lower base. I think there will be a significant number of industrial transactions due to stabilization in this sector. The gap between Hungary and Czech Republic will remain, but this will narrow. If anything goes wrong in the economy, it will be at the European, not the Hungarian, level.