22 minute read
Market Sentiment
Noah Steinberg Chairman & CEO, Wing
If you look at the way the Budapest office market has progressed in recent years, there has been a lot of development and growth, but there has also been a lot of take-up and we see a good balance between requirements for modern buildings and a diversity of types of new space and the ability of developers to deliver this. We also see that growth in the Hungarian economy and specifically in Budapest is very strongly founded on economic fundamentals and this makes us comfortable.
I think that the quality and specification of the buildings that we develop is completely comparable with Western Europe. Last year we delivered the Telekom building, which is the largest single office building in Hungary, with a long-term lease to Magyar Telekom, the Ericsson building where they have both office and R&D functions, and we are also in the process of developing a building for evosoft; these are projects that conform to the highest international standards in every way. They are modern buildings, environmentally sound, very efficient in terms of space and environmental footprint and built to a very high quality with regard to both internal finishing and infrastructure.
We are present across the entire spectrum of the Hungarian real estate market. Office is our largest single area but we are also active in all the other market segments and I think that this makes us a diversified Hungarian real estate player, which is a good strategy.
Viktor Nagy Country Manager Operations IMMOFINANZ Hungary
The Váci út office corridor has been very popular for years, and we also have well performing office centers there or in its catchment area. However, we are delighted that there is also considerable interest outside Váci út. For example, we achieved outstanding results last year with our Office Campus building in District IX, which is almost fully rented.
New ways of working play a significant role, especially among tenants looking for new office space. The mere representation of the company is increasingly accompanied by the necessity to provide optimal working conditions. The intention of our myhive office brand was to create a friendly atmosphere and welcoming character. We launched the product together with hotel architects and created a hotel atmosphere with several signature elements like a low welcome desk, oversized floor lamps, and seating areas with comfortable armchairs that invite people to chat and relax.
With regard to our properties and brands, we have a high degree of standardization. This means that regardless of whether you visit a myhive office building in Vienna, Budapest or Warsaw, or a STOP SHOP in Austria, Hungary or Serbia, you find the same standards and architectural features. IMMOFINANZ is firmly committed to environmental issues across our portfolio, and more than half of our Hungarian offices now have BREEAM In-Use certification. As responsible real estate owners, we consider this task a priority. Of course, it is also expected by clients, who increasingly see the clear advantages of being in a building that is environmentally-friendly, or environmentally neutral.
Géza Barabás Country Manager, S IMMO Hungary
As the saying goes, three things are crucial in real estate: location, location and location. If you buy the right property in the wrong location, you can change a lot of things, you can remodel and reposition it, but you can never change the location. It is vital for us to have our office buildings on main public transport lines and to ensure the best accessibility for our tenants. S IMMO always strives for having prime located properties in its portfolio, just think about the Budapest Marriott Hotel, City Center, Pódium office buildings.
Usable and well-located development sites have become more valuable and of course, more expensive. On the one hand, there are some new, upcoming office regions in the pipeline, for example Soroksári út. On the other hand, the Váci corridor is still very popular, as 40% of transactions took place there last year. This is the reason why S IMMO decided to expand its portfolio with a property directly located on Váci út, close to the metro where a circa 30,000 sqm sustainable office building will be built.
Development costs are rising and can only be partly compensated through increasing rent levels and decreasing incentives, which are also negatively impacted by the higher fit-out costs. Rising wages, materials and utilities have an impact on rental fees in new developments, but also on FM costs for the existing buildings. Tenants are aware of this and willing to pay a higher fee for a suitable office and a pleasant working environment that helps keeping employees today.
This was reflected by our occupancy rate overall in the portfolio that is above 90%. There is only one larger available area in River Estates and half of it has already been succesfully relet before it has become physically vacant. Therefore we are very optimistic about the future. Mátyás Gereben Country Manager, CPI Hungary
With regard to sustainability, the biggest effort is being made in the office segment where all aspects of development have gone through a sustainability check process, such as building materials used, utility consumption, sustainability on maintenance, alternative energy sources and a decrease in the ecological footprint. Other sectors, such as shopping centers and logistic parks, are lacking in this respect, due to the fact that tenants are more price sensitive on overhead costs.
At the same time we see sustainable initiatives in all segments. Hungary is on the curve to catch up with Western Europe with regard to BREEAM and LEED standards. According to current standards it is a must to develop a new building by taking into consideration some form of certification. Occupiers are looking for modern spaces with a human touch.
Obviously, the CBD is always the number one development location. Available land plots are very limited in Budapest. The extreme construction prices are changing the game. While a few years ago office demand and financing were the weak links of the development process, today a business plan can be ruined by the extreme construction costs.
There is a definite positive trend with regard to the availability of finance, with compressed interest rates on the market; however, CPI’s financing strategy favors bond financing rather than bank financing.
We remain positive and see potential for growth, although there could be a definite slow down compared to 2018.
Ede Gulyás Managing Director, CA Immo Hungary
Positive sentiment is giving an impetus in all sectors but residential and office buildings dominate the development sector. Demand is stable and the forecast supply will have a sustainable market.
Following the crisis a quite positive market sentiment has evolved both in rentaland investment sectors, which revitalized developments as well. Vacancy may increase as a result of the new supply but demand will remain alive ensuring a healthy vacancy ratio in mid-term.
Single, classical sites that offer a sound and safe basis for development schemes in introduced office locations are more difficult to find, therefore, larger and newly emerging areas and zones of developments such as Népliget, Soroksári út, Kopaszi gát etc., remain as opportunities. In the long run, I can imagine refurbishment schemes offering alternative office spaces in central locations. Having a long term view, we always pay attention to common area refurbishment in order to follow design trends. A great example is City Gate, which, in spite of its age, has become a very successful element of our portfolio as a result of our large scale, all-inclusive refurbishment work.
Construction works is a bottleneck for our operations lately, as companies suffer from the lack of sufficient labor. Costs have increased, fit-out periods have extended which require more careful and advance planning from both landlords and tenants.
Green certification is essential. Some form of wellbeing, even if not in a certified form, is also key since employee focus in terms of office services and facilities is a priority nowadays.
Local funds have ruled the investment battlefield in the past years. That dominance may decrease but I expect they will remain important players who have a key role in driving volume again this year again.
Nikolett Püschl Development & Leasing Director Atenor Hungary
Developer are now constructing sustainable and environmentally friendly offices in response to demand, often from large international tenants. With regard to our development strategy we are following this huge demand by developing three projects at the same time: the 50,000 sqm Váci Greens E and F; the 20,000 sqm Building A at Aréna Business Campus; and we have just announce our newest development in Buda. All our buildings delivered in 2018 are fully let; and our projects that are due to deliver in 2020 are already 30% prelet.
We were one of the first developers in Budapest to provide BREEAM accredited office buildings in large contiguous space. We look to create something new and therefore we are continuing to invite different architectural tenders in order to select the most creative and efficient designs. In parallel with this we work with interior designers who are concerned with common areas and green areas.
Accessibility and public transport and metro connections are still the most important issues regarding location for tenants and do not think that this will change in the near future. In addition to a road connection, I think that that the area and the building should be livable and contribute to the economy and therefore we prefer to develop campus-type projects. It is not easy to find such plots but Atenor has bigger challenges in Belgium and Luxembourg and other parts of Europe and in this respect it is easier in Hungary with a better price to value ratio.
Ferenc Furulyás Managing director, JLL Hungary
With a record low level of vacancy of around 7.5% (apart from some less fortunate developments in the periphery with poor public transportation access), all new developments seem to find their clientele. Obviously, those which have direct metro access and a sufficient number of amenities nearby (especially those that are situated next to shopping malls) will prevail. For the time being, we see solid demand; however, due to the high level of activity of large occupiers with HQ projects over the past few years, it is questionable how long this trend can be maintained. On the other hand, besides the traditional occupiers (for example SSCs), we have experienced strong demand from the Hungarian state and other state-owned entities as new entrants.
Suitable development sites are definitely more difficult and expensive to source, especially in the core submarkets such as the Váci Corridor, where available plots fronting the corridor have basically run out (options on secondary streets can still be discovered), and in South Buda, where the main problem is the multiple ownership of the former industrial areas.
Sustainability certifications can be considered as standard and a base condition that almost every developer will apply for. LEED and BREEAM are widely spread and both focus primarily on building technical specifications, whereas WELL focuses on the people working in the building. It is a trend that developers often apply for two, or even for all three certificates at the same time. This will undoubtedly enhance the building specifications and make the projects more competitive to attract the best tenants.
Attila Kovács MRICS Managing Partner, Horizon Development Vice President, Real Estate Developers’ Roundtable Association
With an overarching portfolio covering the office, retail, hotel and residential sectors, Horizon Development has always carried out its projects in the most sustainable way. Our commercial and mixeduse properties are all LEED and BREEAM certified, and we have also started assessing our developments in line with the criteria of the WELL Building Standard.
I believe that market demand for the implementation of innovative, sustainable and smart solutions in the property sector will continue, and become even more omnipresent as a requirement from office tenants. When it comes to residential demand, smart home solutions are becoming a basic need.
With our focus on developing and restoring premium downtown properties in the Central Business District of Budapest, we always seek new opportunities within these parameters. As the number of available plots is becoming scarce in this prime area, competition to source new sites is naturally growing.
Beyond our traditional preference for downtown projects in the Hungarian capital, we have also stepped out onto the international property scene with a luxury residential and hotel development in Marbella, Spain. Our expansion beyond borders, however, does not stop here, as we are also considering launching a Milan-based project. As clearly seen by international investment sentiment towards our country, Hungarian development projects can compete with their Western European counterparts in all areas including design, technical quality, the range of implemented sustainable features and the complexity of integrated building services offered by developers. I am absolutely hopeful and positive about the coming years when it comes to the continuing success of the development and investment sector in Hungary. Both as the managing partner of a premium development company, as well as the Vice President of the Real Estate Developers’ Roundtable Association, I stand behind the point that Hungary’s ongoing quality presence at the two most prominent property expos – MIPIM and EXPO REAL – is the best way to keep the country on the international investment map.
Ecologically conscious and healthier offices are already considered a competitive must. LEED and WELL certifications are, therefore, becoming less of an ambitious edge and more of a market necessity to attract tenants, setting high standards for employee wellbeing and sustainability.
Last year was another strong year for the real estate market in Hungary, from both investment and leasing perspective. Leasing demand has stabilized at a high level for the third year in a row and the investment market reached an impressive EUR 1.7 billion. In my opinion, Hungary will retain its attraction as an investment destination.
As a developer our task is generally to create space that allows the tenant to use it in the most flexible way possible. If the office building is already pre-leased to an anchor tenant, we establish a collaboration between the tenant and the developer during the project, we work together closely on the design and other features. The trend which we observe is that over the years tenants have significantly increased their expectations regarding the quality of finishes and functionality. Office space has become an even bigger factor in retaining and recruiting new employees. The construction industry is dependent on manual labor and, even with the use of construction technology, the sector is having a hard time recruiting skilled blue-collar workers. Furthermore, construction material prices have increased by an annual 10-15% on average for the last two years. This can have an impact on the on-time delivery of projects and results in an increase of construction costs.
David M. Johnston Head of Advisory & Transaction Services CBRE Hungary
Despite mounting risks surrounding the global economic ecosystem and concerns about a looming cyclical downturn, most European economies performed above expectations in 2018. Economic growth in Central Europe at 4.3% strongly outperformed the Eurozone average of 1.8%. Based on the latest full year expectations, with Poland at 5.3% and Hungary at 4.9%, these are the front runners in the CEE region. GDP growth has not been this strong for 15 years.
Activity in real estate markets is buoyant and driven by rising rents and falling incentives. However, rising construction costs of 15-25% over the past year could see a lengthening of the development process. Net absorption in the Budapest office market increased by 63% year-on-year for 2018. Of the circa 386,000 sqm currently under construction, 32% is already prelet. A number of big deals are being concluded with occupiers and gross take-up is expected to be as high as 530,000 sqm for 2019. The CEE office markets are durable with the quality of stock with projects such as Váci Greens of the same quality as in Western Europe. All projects have LEED and BREEAM accreditation, while WELL accreditation is an indication that the quality of projects from the perspective of staff is improving in developments like Budapest One by Futureal.
In general, I think that the Hungarian Investment and Promotion Agency is doing an excellent job of promoting Hungary and the potential to improve Budapest from a working and living perspective is clear. I am very optimistic with regard to 2019.
Christophe Boving General Manager of Codic Hungary
In office developments, the occupier’s comfort and wellbeing, ultimately their work performance, should always be at the center of a well designed and developed project. Accreditation like BREEAM provides evidence that this actually takes place and is the reason why we are committed to having Green Court Office assessed and certified under this holistic assessment methodology. Codic has continuously submitted its office developments for BREEAM assessment since it became the first developer to do so in Europe in 2008 with its Atlantis development in Brussels.
We see the demand for offices and industrial developments remaining strong. The purchasing power of households and salaries are much more the driving factor in the retail and residential markets, and these have also progressed much in recent years. I see only two threats that could spoil the promising outlook: a lack of the labor force essential for the construction sector to keep up with demand, and of educated young people for recruitment in the service sector.
In a city like Budapest, the recent trend of urban reintegration of young households, who see the benefit of living closer to its center, to reduce commuting between home and work, is definitely a positive driver. Our HomeWork project aims to provide an answer to such aspirations.
Construction prices in Budapest have reached levels comparable to these we experience in Western Europe, sometimes even higher. In the last few months, however, we have started to note a slowdown in the increases, not to say stagnation. Tendering for contractors takes much more time than it used to and has become more a matter of finding the right timing and window of availability of a contractor. Stefan Cuvin Development Director, TriGranit
The good performance of the Hungarian economy is still promising, however 2019 brings a slowdown on the real estate market in terms of handovers. Compared to 2018 with 250,000 sqm GLA of office space delivered, only ca. 130,000 sqm GLA is planned to be handed over during the year. This is a much more sustainable, healthier growth, that can be maintained in the longer term. The increase of construction costs and the presence of labor shortage in the region and in Hungary are signs of a real estate cycle topping out as well as important factors, that are obviously putting pressure on the development market and should not be disregarded when planning new developments. From standards, quality and design perspective, the gap between Hungarian and Western European assets have become already invisible. Global companies that are present in Hungary simply won’t and can not rent an office unless it meets the international standards and requirements, leading the developers towards continuous improvement. At the same time sustainability accreditations like LEED Gold, BREEAM Very Good have become expected good practice requirements as sustainability and green buildings has moved to mainstream. 2018 brought an annual investment of EUR 1.85 billion with a remarkably strong H2, while domestic capital stood for more than a half of the volume, so I expect 2019 to remain stable with strong domestic and international investor apetite.
László Kemenes Country Manager, Prologis Hungary
European logistics real estate markets built up strong momentum in 2018, a positive sign for more expansion in 2019. Overall, the strong market fundamentals of positive customer sentiment, robust demand, disciplined supply, land scarcity and historic low vacancy rates will continue in 2019.
The strongest market fundamentals for the past ten years are to be found across Europe, including Hungary. At the moment there is no sign to suggest that rental growth will slow down or stop. We continue to see that locations neighboring the M0 orbital motorway have benefitted most from the prosperity in the logistics real estate market of the past three years. We are experiencing the highest demand for space in the area between the M1 and M5 motorways (for example Szigetszentmiklós or Gyál). These locations are popular for logistics, transportation and light industrial manufacturing companies. New developments are expected along the eastern sector of the M0 in the coming two-to-three years, although in our view the above-mentioned locations will continue to dominate. In terms of new supply, we anticipate that 100,000-150,000 sqm will be delivered in the Greater Budapest market.
The region continues to benefit from the fundamental change of risk perception following the 2008 economic downturn. A more disciplined approach to speculative development has contributed to a better-paced increase in new supply that is more easily absorbed by demand. There is a good chance that more than 50% of new supply will be started on a speculative basis; however, that could change throughout the year.
Emese Kovács Partner and Energy Advisor, MN6 Energy Agency WELL Appraiser
Ideally, interior and exterior design should be part of the same process. The indoor air quality of office space is one of the most important parts of what we call a “healthy building”. Newly applied interior paints and coatings, interior adhesives and sealants, interior flooring, interior thermal and acoustic insulation and all newly purchased interior furniture and furnishings can degrade the indoor air quality, even in a new building. So planning the interior space and building materials use go hand- in-hand. Although standard design and fit-out of office space is still prioritized by developers, the aim of tenants is to support the wellbeing of employees in office spaces, inspiring creativity and strengthening the employer branding of the company.
Tenants in office buildings often face problems with indoor air quality or thermal comfort, and we have to solve problems caused by high sound levels or problems caused by the lack of acoustic planning in office spaces. Some staff have irritated eyes and allergies because of insufficient air filtration, poor maintenance of the ventilation system or extremely low humidity in the office. Tenants are usually aware of the importance of wellbeing in the office, but they think that there is no possibility to make change as a tenant in a building. When we talk about WELL Certification, they are happy to hear that this can be a solution for their problems.
Certification not only boosts the office building sector, as we also see buildings and interiors in the hospitality industry, restaurants, residential and healthcare sector applying for WELL certification.
Bálint Erdei CEO and Founder, Redwood Development
The major issues facing the development markets are construction prices and the development timeline. Planning is difficult and budget controls are virtually nonexistent. The residential market can be differentiated between use for investment purposes and local needs. With regard to investment purposes, price growth can be sustainable in downtown “triple A” locations. Office output and demand is in balance at the moment. Lease prices still have to increase due to development cost increases. In the hotel sector there is room for more quality, new age hotels. Output is constrained due to a lack of available good sized land plots, land prices and development costs. Financing is also lacking here.
If rising labor and construction costs continue, this will paralyze developments. Many of these are not starting and if you do not find the right construction model it is better not to commence development. With regard to the standard of assets, there is a lot of room for improvement, especially with regard to internal space allocation, technology and new design ideas. Certification has become essential if you want to sell your product on the international market. The good part of this is that it has resulted in the design of more sustainable buildings.
Finance is possible for established players but for newcomers it is very difficult to obtain. I believe that a balanced financing model is the right strategy as the future is very uncertain. I expect a stable year; however, global political risk is a systemic risk.
Mike Edwards Head of Capital Markets Cushman & Wakefield Hungary
The last three years have been fairly stable in investment volume terms, but I think that we will be down on these levels this year due to a lack of available stock. Last year’s numbers were boosted by the transactions of two of Budapest’s sizable prime shopping centers and it is difficult to foresee how these can be replaced. I would expect around EUR 1.5 billion to be transacted this year and this is what we should expect moving forward. Typically, the office sector constitutes around 50% of this volume, but this is likely to increase this year since the larger, prime shopping center schemes have transacted in recent years and we do not expect imminent retrades.
I have heard investors imply that the recent dominance of local capital is evidence of an emerging “closed-shop”, but in my opinion this is usually “sour grapes” from investors who have been out bid or left behind by a resurgent market. Local capital has provided a welcome boost to liquidity of the investment market, but clearly core international funds are now competing for the best stock. We are in a healthy, competitive position and I expect activity from domestic investors to slow down later this year, but they will remain players and international investors will pick up the slack.
There is a real mix of investors: the German funds are strongly back; Far East capital is actively seeking opportunities and the global financial institutions remain active. We have already witnessed transactions at or near 5% and I would not be surprised if this is beaten for special or unique products.
