21. Juni 2010 
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Improvements will start in 2011
King Sturge International presented to the media its prognosis for the Hungarian real estate market. According to the company, the market has reached the bottom of the cycle but the recovery will be a slow process. Improvements will start in 2011, affecting first the industrial sector, then the office market and last, the retail sector. This press conference is a new initiative from King Sturge, which is willing to bring more transparency to the market.
Office market
The high vacancy rate (25% in speculative buildings) will decline as of 2011 largely because of a drastic decline of new delivery. This will allow the market to slowly absorb the available space in the next two years, bringing vacancy rate down to 16% by the end of 2012. A more optimistic scenario may see the vacancy drop to 10%, but that assumes a faultless economic reform and bumper global economic growth. Some sub-markets (CBD and Váci út corridor) will recover faster, but the further away from the downtown, the longer it will take to see a significant reduction in vacancy. Rents remain under pressure with a typical Váci út Class A building offering space for €12.5/m²/month headline, with tenants able to obtain a further 15% to 20% reduction through incentives.
The major change created by the 2008-2009 crisis is that new developments will have to be pre-leased from 30% to 50% before construction can start, which historically rarely happened in the Budapest office market.
Industrial Market
The industrial real estate market was faster to adjust to the new economic difficulties. Developers stopped all speculative developments and as we speak only one warehouse is under construction on Built-to-Suit (BTS) basis. Vacancy is high at 19.4%. The market is still suffering from the Rynart bankruptcy which saw vacancy jump from 9% to 17% back in 2008. Rents are also under pressure. Headline rents are between €3.5/ m²/month and €4.5/m²/month with incentives representing a 15% to 20% discount. Future developments will be done on a built-to-suit basis.
King Sturge believes that from an occupational perspective, the Industrial sector will be the first to emerge from the crisis. The Western Europe recovery will support Hungarian exports. In addition, the weak Forint and the excellent road network make Hungary an attractive logistics location. This will contribute to recovering demand for warehouse space.
Retail Market
The retail sector entered the crisis on a more solid footing than the other real estate sectors. Shopping centres are practically never built on a speculative basis and vacancy was always low. However, retailers are suffering greatly from declining consumption and high unemployment. King Sturge does not see any immediate improvements in these two factors. The government reform package will take time to generate jobs and increase Hungarian purchasing power (civil servants will likely have their pay cut by 15%).
Rents in most shopping venues are declining. The remaining retailers in the market have a strong negotiating position. The changes are most visible in the High Street sector where on Andrássy út, retail space can be leased between €35/m²/month to €60/m²/month. This is a €15-€20 decline versus last year. It is important to clarify that luxury brands are not leaving Andrássy út. It is the older local shops which are leaving or closing, thus creating a surge in supply.
Investment
The investment market remains illiquid. 2009 saw less than €300m worth of institutional grade transaction. At this stage, Poland and the Czech Republic are the main focus of investors’ attention. King Sturge perceived some renewed interest in Hungary in Q2 2010 but it is still not sure whether the investors will think of Hungary as a potential next Greece or a country on the path of sound structural reforms. King Sturge believes in the latter.
Many of last years transactions were not “arms length” as the buyers had a strong vested interest in the property (mostly as tenant). These transactions were reputedly concluded at yield of around 7.5%. King Sturge believes that in an arms length transaction, the yield for these properties would have been higher.
Conclusion
Real Estate is by nature a cyclical industry. We are at the bottom of a long cycle, one that since 1992 has seen the emergence of a modern real estate sector. Supply and demand were growing year on year and even if rents were declining, yields were compressing. The global recession ended this cycle.
Historically, all major European cities have experienced the same boom and bust and all have recovered. Budapest is facing its first serious crisis and it will recover, albeit slowly. But in every crisis there are opportunities. Tenants who are planning for growth can secure advantageous lease terms. Developments will have to be considered more carefully, with a better understanding of real market demand (absorption) and not simply the volume of activity (take-up). King Sturge is well positioned to face these challenges and support its clients, be it with their current buildings, projects or their future strategy.
Office market
The high vacancy rate (25% in speculative buildings) will decline as of 2011 largely because of a drastic decline of new delivery. This will allow the market to slowly absorb the available space in the next two years, bringing vacancy rate down to 16% by the end of 2012. A more optimistic scenario may see the vacancy drop to 10%, but that assumes a faultless economic reform and bumper global economic growth. Some sub-markets (CBD and Váci út corridor) will recover faster, but the further away from the downtown, the longer it will take to see a significant reduction in vacancy. Rents remain under pressure with a typical Váci út Class A building offering space for €12.5/m²/month headline, with tenants able to obtain a further 15% to 20% reduction through incentives.
The major change created by the 2008-2009 crisis is that new developments will have to be pre-leased from 30% to 50% before construction can start, which historically rarely happened in the Budapest office market.
Industrial Market
The industrial real estate market was faster to adjust to the new economic difficulties. Developers stopped all speculative developments and as we speak only one warehouse is under construction on Built-to-Suit (BTS) basis. Vacancy is high at 19.4%. The market is still suffering from the Rynart bankruptcy which saw vacancy jump from 9% to 17% back in 2008. Rents are also under pressure. Headline rents are between €3.5/ m²/month and €4.5/m²/month with incentives representing a 15% to 20% discount. Future developments will be done on a built-to-suit basis.
King Sturge believes that from an occupational perspective, the Industrial sector will be the first to emerge from the crisis. The Western Europe recovery will support Hungarian exports. In addition, the weak Forint and the excellent road network make Hungary an attractive logistics location. This will contribute to recovering demand for warehouse space.
Retail Market
The retail sector entered the crisis on a more solid footing than the other real estate sectors. Shopping centres are practically never built on a speculative basis and vacancy was always low. However, retailers are suffering greatly from declining consumption and high unemployment. King Sturge does not see any immediate improvements in these two factors. The government reform package will take time to generate jobs and increase Hungarian purchasing power (civil servants will likely have their pay cut by 15%).
Rents in most shopping venues are declining. The remaining retailers in the market have a strong negotiating position. The changes are most visible in the High Street sector where on Andrássy út, retail space can be leased between €35/m²/month to €60/m²/month. This is a €15-€20 decline versus last year. It is important to clarify that luxury brands are not leaving Andrássy út. It is the older local shops which are leaving or closing, thus creating a surge in supply.
Investment
The investment market remains illiquid. 2009 saw less than €300m worth of institutional grade transaction. At this stage, Poland and the Czech Republic are the main focus of investors’ attention. King Sturge perceived some renewed interest in Hungary in Q2 2010 but it is still not sure whether the investors will think of Hungary as a potential next Greece or a country on the path of sound structural reforms. King Sturge believes in the latter.
Many of last years transactions were not “arms length” as the buyers had a strong vested interest in the property (mostly as tenant). These transactions were reputedly concluded at yield of around 7.5%. King Sturge believes that in an arms length transaction, the yield for these properties would have been higher.
Conclusion
Real Estate is by nature a cyclical industry. We are at the bottom of a long cycle, one that since 1992 has seen the emergence of a modern real estate sector. Supply and demand were growing year on year and even if rents were declining, yields were compressing. The global recession ended this cycle.
Historically, all major European cities have experienced the same boom and bust and all have recovered. Budapest is facing its first serious crisis and it will recover, albeit slowly. But in every crisis there are opportunities. Tenants who are planning for growth can secure advantageous lease terms. Developments will have to be considered more carefully, with a better understanding of real market demand (absorption) and not simply the volume of activity (take-up). King Sturge is well positioned to face these challenges and support its clients, be it with their current buildings, projects or their future strategy.
