Bank Austria Real Estate Country Facts:
Hungarian real estate market on the rise again
- Commercial real estate investments rose by 70 percent to EUR 460 million in Hungary in 2014
- Relatively stable economic development, attractive yields and sustainable rents all speak in favour of the Hungarian real estate market
- New economic policies (e.g. prohibition of Sunday opening, restriction of opening hours, new calculation of food inspection fees, etc.) put pressure on the retail sector and cause uncertainty
Last year the volume of investments in commercial real estate in Hungary rose by around 70 percent to EUR 460 million, according to data from CBRE. This made Hungary, along with Romania and Slovakia, one of the countries with the strongest growth rates in CEE/SEE. Hungarian investors commanded a market share of almost 40 percent, and they invested especially in smaller transactions on the office market. International investors displayed interest particularly in larger projects or portfolios. Office and retail trade projects accounted for approximately 75 percent of the investment volume, while the rest was divided between industrial projects (6.5 percent) and hotels (18 percent).
"The Hungarian real estate market is on the rise again. The Hungarian market is likely to stay attractive for investors looking for yields, and it also creates opportunities for developers with good projects, particularly in the office or logistics market. Hungary will always be a core market for us. Therefore, together with our local Hungarian colleagues, we are glad to support investors and developers with their projects in Hungary", emphasised Reinhard Madlencnik, Head of Real Estate Bank Austria. Karla Schestauber, real estate analyst at Bank Austria, added: "The investment pipeline for 2015 is well filled. Yet recent economic policy measures, which affect the retail sector, have caused some uncertainty. It is still unclear to what extent retail trade investments will eventually be affected."
General economic conditions speak in favour of the Hungarian real estate market
"Relatively stable economic development, attractive yields and sustainable rents speak in favour of the Hungarian real estate market", summarised Karla Schestauber. For 2015 and 2016, GDP growth of 2.6 percent and 2.4 percent is predicted, with private consumption and investments being the most important growth factors. This makes Hungary a relatively stable-growth country. Office rentals typically cost EUR 14/m²/month in top CBD locations, EUR 8/m²/month in shopping centres and EUR 3/m²/month in very good logistics centres. The Hungarian commercial real estate market offers attractive yields even by international comparison. Prime yields declined in the office market at the end of 2014 to about 7.25 percent alongside relatively stable rentals and slight growth in utilisation. In the logistics market, prime yields of just below 9 percent were observed with a downwards trend. Yields in top SC remained at about 7 percent.
Consumer sentiment stimulates retail sales – economic policy measures throw a spanner in the works
The mood on the Hungarian trading market is upbeat, though somehow clouded by the recently challenging general economic policy conditions. Looking at the positives first, in terms of demand it seems that the contraction in retail sales that has been going on for several years stopped for the time being in 2013. In 2014 this trend reversal continued, and Hungarian retail sales increased by 5.2 percent compared to the previous year, according to data from the national statistics office. A similarly high figure is forecast for this year. The drivers behind this development are, amongst other things, greater consumer confidence, increasing employment figures and higher available income of households (e.g. due to lower energy prices).
This upward trend, however, is being held back by the general economic policy conditions. At the end of 2014 the Hungarian government adopted new regulations, which have a significant impact on the retail sector and create new challenges. On 15 March 2015 for example, the prohibition of Sunday trading entered into force – with various exceptions – affecting shops bigger than 200 m². Parallel to this, general opening hours in retail trade were limited to between 6am and 10pm, thereby doing away with non-stop markets. Even the new calculation of food inspection fees is linked from 2015 onwards to the volume of sales, which places an above-average burden on foreign companies organised in a branch system (e.g. Spar, Tesco, Lidl, Aldi). As of 2017, retailers primarily offering consumer goods and with sales of over HUF 15 billion will fall under the terms of the trading ban if they incur losses for more than two years. From 2018, shops offering consumer goods will be subject to the prohibition from a certain shop size in world heritage zones. "What effects all these regulations will actually have on the development and structure of the trading market is not yet known, and cannot be reliably assessed for the time being. However, one thing should be sure: uncertainty among suppliers will remain, and thus not get any better", claims Schestauber.
Barely any increase in available space at shopping centres – next new opening not before 2017
In the past two years, 2013 and 2014, there was barely any change on the entire Hungarian commercial market with growth in space of just around 28,000 m². The only noteworthy openings took place in 2013 in Budapest, and involved the extension of Árkád SC by around 16,000 m² to 62,000 m².
The explanation for this is the "plaza stop" adopted by the Hungarian parliament in 2012, according to which new builds or extensions of commercial properties with more than 300 m² of sales space were basically banned. This law was amended at the end of 2014. From February 2015 the construction of retail stores of over 400 m2 must be approved by a competent authority.
Three renowned developers (ECE, Echo Investment and Futureal) managed to obtain exemptions and hence valid building permits for their shopping centre projects. These include the Aquincum Center (55,000 m²), the Etele City Center (43,000 m²) and the Mundo SC (37,500 m²). All three shopping arcades in the pipeline are situated in Budapest and will open in 2017 at the earliest. For this year and next year, available space in shopping centres both in the capital and in other major cities of Hungary is unlikely to increase significantly.
As of 1 January 2015 there were 46 shopping centres with lettable space of around 1.4 million m² in the six largest cities of Hungary (Budapest, Győr, Szeged, Debrecen, Pécs and Miskolc) with about two thirds thereof in Budapest. There are a total of 30 shopping centres in the capital, where shopping centre density at around 516 m² per 1,000 inhabitants is somewhat below the level in Vienna (535 m²/1,000 inhabitants, including Shopping City Süd/and G3 Shopping Ressort Gerasdorf).
Given that there were very small increases in available space in the past two years, well-performing shopping centres have continued to fill up due to increasing demand from international and local retailers. There are even waiting lists in some 1A shopping centres for interested tenants. The vacancy rate in shopping centres in Budapest has declined overall in the recent past, and totalled between 10 and 15 percent at the end of 2014 in all shopping centres, with vacancy rates in 1A shopping centres being significantly less; shopping centres especially in B locations and/or with investment project delays have struggled with high vacancy rates. In the next two years, further declines in vacancy rates can be expected due to a lack of new production projects.
Easing on Budapest office market – Hungarian investors dominate
Budapest is the most important office location in Hungary. Since office space production almost doubled from 2000 until the crisis erupted, and many projects under construction were completed even at the peak of the crisis, the market suffered from high vacancy rates. A combination of lower completion rates and relatively stable demand in past years, however, led to a slight easing in office vacancy rates.
Last year, investments in office properties in Hungary accounted for about EUR 180 million, and thus the volume of investments was somewhat higher than the figure in 2013. The investment market for offices was shaped by smaller deals, where Hungarian investors in particular dominated. There is currently over 3.2 million m² of modern office space in Budapest, spread throughout both Buda and Pest, with local centres and office agglomerations. In terms of office space per inhabitant, Budapest is ranked above the average of Eastern European countries, lagging somewhat behind Prague and Warsaw. The gap to Western European cities has been reduced slightly over the years, but still remains significant. The production of new space in Budapest was just below 70,000 m² in the past year, and is therefore higher than in 2013. Nonetheless, it is still far from the new space on the market in previous years that amounted to 300,000 m².
Modest pick-up in logistics market
The sentiment on the logistics market has further improved over the past year due to increasing demand. New construction activities are moderate: last year only about 20,000 m² of new space was completed in the agglomeration area surrounding Budapest. By late 2014 there was about 1.85 million m² of industrial and logistics spaces in and around Budapest, the majority of which is to the south.
In 2015 the lack of speculative building activity will push logistics further towards built-to-suit solutions/own use. The reluctance of developers to develop new (speculative) industrial and logistics areas, which has been observed for years, has had a positive effect on vacancy rates in and around Budapest. They have fallen from highs of almost 23 percent on average to below 16 percent; local vacancy rates are quite different, and locations south-east of the Hungarian capital have vacancy rates of just around 5%.
Enquiries: Bank Austria International Real Estate Analysis
Karla Schestauber, Tel. +43 (0) 50505 - 54784