Real Estate Review 2020 by Business Publishing Services Kft.

review REAL ESTATE Price: HUF 990

Property Hungary 2020

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CONTENTS INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 4 Market Sentiment . . . . . . . . . . . . . . . . . . . . . 6 OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . 14 Constrained Pipeline Meets Strong Demand . . . . . . . . . . . . . . . . . . . . . . . 16 Inside View: Legal Approach to Smart Buildings Post-pandemic. . . . . . . . . . . 23 New Budapest Business Districts Emerging . . . . . . . . . . . . . . . . . . . 28

HOTEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Inside View: Coronavirus vs. Construction . . . 29

How and When Will Hotel Sector

Despite COVID, Budapest Office

Bounce Back From COVID? . . . . . . . . . . . . 68

Fundamentals Remain Strong . . . . . . . . . . . . . . 38

INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . 72

Interior Issues at the Core

Investment Climate Faces new Challenges,

of a Successful Office Project . . . . . . . . . . . 40

but Fundamentals are Good . . . . . . . . . . . . . 74

50 Years of Pioneering Added Value . . . . . . . . . 42

CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . 78

IMMOFINANZ: myhive Brand Focuses on

Construction Projects Going Ahead

Increased Security and Flexibility for Tenants . . . 50

Despite Emergency Situation . . . . . . . . . . . 80

RETAIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

ARCHITECTURE . . . . . . . . . . . . . . . . . . . . . 82

Limited Budapest Shopping

Development Needs to be Integrated

Center Pipeline . . . . . . . . . . . . . . . . . . . . . . 54

into Wider Environment . . . . . . . . . . . . . . . 84

INDUSTRIAL . . . . . . . . . . . . . . . . . . . . . . . . 58

SUSTAINABILITY . . . . . . . . . . . . . . . . . . . . 86

Industrial Seen as a Leading

Sustainability Development More

Market Sector . . . . . . . . . . . . . . . . . . . . . . . 60

Central to a Successful Project . . . . . . . . . 88

R E A L E S TAT E R E V I E W 2 0 2 0

A B U D A P E S T B U S I N E S S J O U R N A L P U B L I C AT I O N

BBJ Editor-in-chief: Robin Marshall • Real Estate Editor: Gary J. Morrell • Copy Editor/Proofreader: Robin Marshall, Bence Gaál • Sales: Bernadette Oláh, Csilla Lengyel • Layout: Zsolt Pataki • Publisher: Business Publishing Services Kft. • Media representation: AMS Services Kft. • CEO: Balázs Román • Address: Madách Trade Center, 1075 Budapest, Madách Imre út 13-14, Building A, 8th floor • Telephone: +36 (1) 398-0344 • Fax: +36 (1) 398-0345 • ISSN: 2416-0423

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INTRODUCTION Fundamentals at the turn of the year remained strong in the office, industrial, retail and hotel sectors with rental growth, record low vacancy, consistently strong demand, a high proportion of preleases, record tourism visits, high room occupancy rates and strong projected demand. Further, ever more highly specified and sustainable assets were being delivered in response to more sophisticated demands from tenants, staff, customers and guests. In order to successfully build, lease, and sell assets, developers need to deliver product that is sustainable from an interior and locational perspective and in the provision of amenities. Development finance was more readily available and in more mature and sustainable markets, developers were pursuing more prudent development strategies in line with better researched knowledge of market conditions. Further, the expectation is that developments need to contribute to the wider city and environment. In this way market forces can be seen to be operating in parallel to meeting wider environmental concerns. However, skilled labor was becoming scarcer, development costs increasing and well-located development plots more difficult to source. Investors have seen Hungary as an increasingly attractive place to invest as high yielding property investments are more difficult to source worldwide and, indeed, even elsewhere in Central Europe. The investment markets have been very liquid as demand for assets far outweighs supply; owners have the option of holding onto their products and are able to exit at a time of their choosing with multiple bids from a wider diversity of both international and domestic investors.

In response to investor demand, developers have been delivering higher quality assets that meet the requirements of high-end investors. Local capital now constitutes a significant proportion of investment transaction volume, with the majority of acquisitions undertaken by domestic capital. This provides perceived security and liquidity for these markets and makes them less reliant on a positive attitude from foreign investors. The flip side of that is that this makes sourcing product more difficult for international investors as local players are able to exploit long-term relationships with developers and conclude a transaction at an earlier stage in the development process. When consultants presented their increasingly positive market indicators and predictions one question put was what can go wrong? The main potential cloud on the horizon was a wider economic downturn. No commentators predicted a worldwide health emergency, lockdown, travel ban, fiscal deficits and a looming economic crisis. Analysts expect a possible recovery in the investment market next year, although developers will have to adapt their assets to meet the changing circumstances (especially with regard to social distancing) and other sectors are under a more fundamental threat. When the emergency is over, people will still need offices to work in, will need to shop, have packages delivered and require somewhere to stay in their leisure time, so the real estate industries will survive in some form or another, and continue to be a valuable investment asset. Gary J. Morrell Real Estate Editor Budapest Business Journal

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MARKET SENTIMENT Nikolett Püschl Leasing and development director Atenor Hungary As of the first quarter of 2020, Budapest office market figures do not yet reflect the current economic restriction. Net take-up has been in line with the past five-years’ Q1 average and, based on headline rents, there has not been any correction. With solid fundamentals of no oversupply threat and low availability (more than 70% of the 2020 pipeline is already prelet), the Budapest office market will enjoy stable rental levels for the foreseeable future. Ongoing developments are proceeding, no delays are expected. The current construction of all four Atenor office buildings (Váci Greens E and F and Aréna Business Campus A and B) are ongoing as per the original program. Aréna Business Campus Building A has received its occupancy permit, Váci Greens F will be completed in summer, Váci Greens E will be delivered in September and Aréna Business Campus Building B deep foundations works have completed and structural works have started. The retail and hotel sectors are, unfortunately, deeply impacted. Spring and summer are expected to be difficult for most retailers, hence surviving is the prime focus. On the other hand, the current situation has already strengthened FMCG and e-commerce; the volume of online sales increased by 41% in March. Industrial market development activity seems to be unchanged: speculative development is still a no-go, but built-to-suit or partial BTS is continuing. In essence, office and logistics are the least affected commercial real estate sectors.

Christophe Boving Managing director, Codic Hungary Due to the current pandemic situation, the market is in a waiting position. Some deals were put on hold but that does not mean that the market has stopped completely. It is difficult to predict even the midterm effects but, compared to 2008, the Hungarian real estate market is more resilient now. We expect a short-term slow down and a larger number of lease renewals in the next quarters and an increase in the number of new deals from 2021 as we find our way back to where we were before COVID-19. Approximately 60% of the office stock currently under construction is preleased. As a good example, we have signed a lease agreement for 65% of the office area in Green Court Office oneand-a-half years before completion. Budapest remains a sought-after location for international companies and might also benefit from the relocation of currently outsourced functions to Europe. Based on this data, I think the current stock compared to the demand will not result in oversupply. The projects at the planning and licensing phase might take more time before entering into the development phase as a precaution against deteriorated post-COVID demand. It is impossible to predict how the demand is going to change, therefore, as an investor, we should monitor the market and prepare our project so we can react quickly if the opportunity presents itself.

REAL ESTATE review Mรกtyรกs Gereben Country manager CPI Hungary

Adorjรกn Salamon CEO Eston International

The logistics development pipeline remains strong as average demand is still improving, regardless of COVID. Office developments will rely more on preleases and built-to-suit, but most developers are aiming to realize their planned pipeline. Retail was not in the best shape before the pandemic and the current situation has further deteriorated the outlook of the market for the next 24 months, thus current retail developments have slowed down and new ones has been suspended. The hotel sector is a big question mark. Developers will delay their decisions on hotel developments until there is more insight on customer behavior and travelling trends. The impact of demand is the USD 1,000,000 question. How deep the impact will be is difficult to say. For example, one of our international office tenants requires more space to be able to implement international social distancing guidelines, other similar sized tenants want to give back space, as home office operation have proved to be successful. Online sales have gone up significantly, which will have an impact on demand for retail space, but the elementary need for human socializing will shape retail in a positive way. New measures have to be implemented, especially in property management. the proper use of common areas and sufficient air handling will be in focus. Interior design will have to adapt to the new requirements.

Ongoing real estate developments have not stopped, although we have already been informed of some delays regarding handovers. We do not foresee that serious rescheduling will happen. In fact, developer activity is quite strong in the office and logistics segments, with more than 500,000 sqm and 200,000 sqm under construction respectively. The current situation would support an even completion pace and prevent oversupply. According to these, and to the average completion period of three to four years for office schemes, we do not expect a shortage of new investment products either. Obviously, with shorter completion periods, logistics developers are more able to fine tune their activities to changes in demand; in this sector we do not foresee a drop in new projects, although the share of speculative schemes could fall over the next two years. We expect a temporary drop in office demand that could become visible in the second and third quarter of the year. Also, lengthening negotiation processes and an increasing share of renewals are the obvious effects of the situation. Managers are nowadays focusing on softening the hit of the crisis; thus, real estate related decisions have in many cases lost their priority. We foresee no major trend change in the logistics property sector. Demand from logistics service providers is continuing to increase thanks to the dynamically rising e-commerce. In this respect, we forecast the record low vacancy level to last throughout 2020 and rents to further increase.

REAL ESTATE review Atilla Kovács, MRICS Managing partner Horizon Development Horizon Development’s ongoing and planned projects are mostly office and retail focused. We anticipate some shifts in both sector’s former paradigm. While demand for topquality office space has not decreased, we expect new requirements from our tenants when it comes to the design and fit-out of their workspaces, collaboration and representation areas. Retailers will also have to calculate with changes in consumer behavior and an increased focus on e-commerce. Our development company has always been known for its agile way of reacting to new and specific customer demand, so I am absolutely sure that we will reassess, readjust, and continue to deliver exactly what our clients need when it comes to real estate development. Hungary has a strong position on the investment map of CEE and continental Europe, and it will continue to be an attractive destination for both foreign and local investor groups and investment funds. The premium assets planned to be delivered in the upcoming years have already started to generate interest. International property forums including EXPO REAL and MIPIM further contribute to an increased awareness about such prime financial opportunities available in Hungary. I remain positive about the future of the Hungarian development market and our premium development projects having the ability to attract both tenants and investors. When it comes to our preferred Budapest submarkets, Districts V, II and XIII remain our focus locations, where we are determined to bring quality projects to life.

Péter Számely Executive director real estate finance Hypo Noe Landbank The impact of COVID-19 on the investment market is not clear yet. I assume a drop in pricing compared with that of the previous year, the level of which may differ among the various asset classes. It seems that shopping centers and hotels are the most affected asset classes and logistics, offices and residential have proved to be more COVID resistant. If transactions happen at all, they should come from these latter asset groups. Due to negative expectations on economic growth in the second and third quarters, investors will not be active or very moderately active for the rest of the year. I believe the earliest that we can return to normality will be next year. I certainly believe that CEE, and within that Hungary, should perform reasonably well. As discussed above, local investors are better off as the competition from their counterparts from abroad is reduced or has completely vanished. This could have an effect on the price level, as a reduced number of investors will have more choice as to what to buy. The question is, will the willingness to sell at a reduced level remain. If not, the market will dry up. I think the direction of yield movement is clear: it is to the north. The question is, however, to what extent the yield will change. We need a crystal ball to answer that.

REAL ESTATE review Benjamin Perez-Ellischewitz Head of capital markets JLL Hungary

Hubert Abt CEO New Work Offices

In order to attract international capital into real estate investment, Hungary â&#x20AC;&#x201C; as well as the Central European region â&#x20AC;&#x201C; needs to remain an attractive economy (growth, low unemployment) and offer a real estate market with strong fundamentals (dynamic leasing activity) and an integral part of the EU market. It is clear that the COVID-19 epidemic has disturbed the strong market momentum as we knew it. The success going forward depends on the capacity of the economy to rebounce and on the investment opportunities we (JLL and our competitors) can generate for investors. Is it still the case that quality building owners will have the option of an exit strategy? There is a lot of money looking for investment in real estate and this has not changed with COVID-19. On the contrary, quality buildings with good fundamentals (location, construction quality) remain attractive to core buyers. The number of bids is, of course, an indication of the available liquidity on the market, but at the end of the day, one strong bid is all you need for the transaction to happen. Third quarter volumes will be bad as very little could be started in the second quarter, due to the lockdown. For the marketing processes to launch (or re-start) after the summer, we need the travel bans to be over and viewings to be possible again with local and international teams.

COVID-19 has transformed the office property market. Overnight, office buildings became deserted as occupants shifted to home office mode. When the initial pandemic restrictions have been tackled and commercial life begins to resume, it will not be easy to convince everyone to return to their old desks. Companies both big and small will be forced to redesign layouts, decreasing density to safely place workers at least 1.5 meters apart. This will create a space shortage, and some 30% of the work force will need to work from home or somewhere else. Some companies will not extend their leases and will migrate to Space in the Cloud concepts. Renting traditional office space in these unsecure times has simply become too risky, as longterm planning is impossible and funds for capital expenditures are required for immediate core business activities. Operators and landlords who are able to provide the necessary scale of flexible solutions across a range of formats including Core & Flex and Space in the Cloud, and with a wide variety of services and new technologies, will be the winners. Other factors are now increasingly important, particularly the availability of services for occupants in the building, smart systems which optimize energy consumption and efficient modern ventilation systems. Property owners will be forced to address these new expectations and offer their tenants a range of on demand services, including those based on new technologies.

REAL ESTATE review Bálint Erdei Founder & CEO Redwood Real Estate Holding

Géza Barabás Managing director S Immo Hungary

Construction prices could consolidate and tourism is expected to come back in one to three years. The project lead-in time is three to five years, so if banks are about to lend money, development should continue in all sectors right now starting at a moderate pace. Tourism is undoubtedly the biggest hit sector. With regard to office, the big question is of flexibility and reducing office space by deploying home office possibilities. However, I believe home office is not the most efficient solution; companies will understand that it is not a good deal to save money on office space and in turn lose on efficiency. Developers have to react to the higher requirements of tenants, although there are strong limits to how much developers can spend on fit-out contribution. This will be an even stronger limit in the next few years, since rents are capped. There will no change in permitting; it will remain slow and fishy. Municipalities are not changing with the times, unfortunately; they have no answer to COVID and other types of crisis. Interest rates are not going up, so income generating real estate is going to be the favored investment. There is a strong expectation of inflation, against which real estate investment is one of the solutions. I think that Central European and Hungarian investment markets will return to their favorable position in one to three years as local achievable yields are still promising.

The coronavirus pandemic has been an extraordinary challenge for every player on the real estate market and still is. Therefore, it is extremely important to find ways to help each other as partners in such hard times. Although, as a society, we have been able to cope with the disease so far, the economy may face further difficulties. Still, we are optimistic, as even during the period of restrictions we signed new lease agreements for River Estates, as well as expansion contracts and renewals in Buda Center and City Center. In the meantime, we experienced stable activity from potential new clients, although the means of contact changed to some extent. Methods shifted towards asking for more information in advance, while physical visits only take place in shortlisted office buildings. This makes these meetings not only safer, but also more efficient. No matter how quickly we can defeat the virus, office usage trends are likely to change. As an obvious example we can expect that open offices will become less popular, while mixed and cellular layouts will gain importance again. Prime location and sustainability were unquestionable key factors to success so far, now we can add safety to this list. The human factor will be more important than ever, not only in terms of comfort and well-being, but also in terms of health. Let us hope that today’s challenges teach us to create even better offices and use them even more consciously. With a new office development in the pipeline, S IMMO is well-positioned to adapt to the latest requirements and clients’ needs.

REAL ESTATE review Alexandra Tomášková Executive VP operations, Hungary & Czech Republic, Skanska Commercial Development CEE These days our undisputable priorities are the health, safety and well-being of Skanska’s employees, clients and communities. From the Hungarian office market perspective, at the beginning of the year, vacancy rates were still low. Now it is too early to give a forecast for the office sector as there are a number of counterbalancing forces at work. Developers, landlords and tenants will face certain challenges in the post pandemic world; a greater degree of caution regarding decision making may come. However, we expect that futureproof and environmentally sustainable buildings could see increased demand and pricing power. We at Skanska always strive to adapt, but also to drive expectations in the market and in these times a lot of new insights will be generated. We constantly develop our products to meet future demands. We have lived – and still live – in dynamic times, experiencing the largest test of remote working in history. As the government eases the pandemicrelated restrictions in Hungary, companies are reopening working places, ensuring their employees can safely return to the office. To create office environments that limit the spread of infectious diseases and adapt to local regulations, tenants are re-assessing space allocations with an eye toward “de-densifying” and providing more space per employee. We do not believe the demand for office space will drop: occupiers still need their “nest” to have a place to meet and to feel the brand and atmosphere of the company.

Noah Steinberg Chairman & CEO Wing Wing’s longterm strategy is based upon value creation through development of and investment in high quality buildings which meet the needs of the occupiers of those buildings. Wing has a diversified presence across all segments of the professional property market in Hungary. Last year’s acquisition of ECHO Investment, Poland’s leading real estate developer, further diversified the Wing Group’s geographical footprint and portfolio. We were able to respond quickly to the changed circumstances caused by the unprecedented steps taken to defend against the coronavirus. Our strong presence in the office markets along with the quality of our buildings and their tenants such as the Telekom HQ, the Ericsson HQ, the Infopark Buildings and the Siemens HQ reflect our prudent strategy. Our industrial portfolio has been a highlight, with its new leasing in the East Gate Business Park and the Log In property. Even our Budapest Airport ibis Styles Hotel has performed well due to its special situation. All of our construction projects in Hungary and Poland are continuing on schedule including the Liberty Office Building, the Siemens-evosoft HQ, the Gizella Loft, the Brewery in Warsaw, Face 2 Face in Katowice, the B&B Hotel and multiple residential developments under the LIVING and ECHO brands. Our successful bond issue in mid-May of HUF 55 billion is a further expression of confidence in Wing’s strength, professionalism, financial stability and reliability.

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OFFICE

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Arena Business Campus Building A

CONSTRAINED PIPELINE MEETS STRONG DEMAND With strong demand fundamentals, office developers have been able to go forward with office projects with the confidence that tenants can be found and preleases concluded and this is thus regarded as one of the sectors that will be least adversely impacted by the coronavirus crisis. By Gary J. Morrell Budapest office supply has continued to boom, with vacancy falling to some of the lowest levels on record. At the same time, supply has been

relatively constrained in comparison with past cycles. Preleases now constitute a significant part of the market; companies looking for quality, well-located contiguous office spaces have to plan ahead

as there are few opportunities in the Budapest market. Developers have sustainable development policies and this can be seen as market pressures exerting influence on developers and buildingowners to meet the changing and ever more complex demands of tenants. Developers and investors are employing international and leading Hungarian architects and interior designers to deliver ever more imaginative projects to meet these sophisticated demands from building users. With regard to the impact of the COVID-19 virus, Cushman & Wakefield say ongoing development schemes

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“Clients seem to be advancing new lease plans, the only limiting factor is the lack of office viewings. However coworking/serviced offices could be put to the test with the current use of home offices. If companies and workers explore this approach, then it could change not only coworking but the traditional office approach.”

are proceeding with no delays reported, although the permitting processes have slowed down. Office is seen as one of the least negatively affected market sectors, if the traditional long-term leases are taken into consideration, according to Adorján Salamon, CEO of Eston International, an international associate of Savills.

POTENTIAL PIPELINE The Budapest office market has a potential pipeline of more than 570,000 sqm and development of largescale, phased speculative projects by developers such as Atenor, HB Reavis and CPI reflects both the positive indicators in the capital and the longterm market confidence in the ability to let and sell a project onto investors.

Cushman & Wakefield have traced an increased pipeline of 230,000 sqm for 2020, although a large proportion of this space is prelet or will be absorbed by the time of delivery. Around 55,000 sqm of office space was delivered in the first quarter of the year: the first 27,000 sqm phase of the Budapest ONE Business Park by Futureal (which will form part of the Kelenföld urban redevelopment project) and the 18,000 sqm BudaPart Gate (the first office phase of BudaPart by Property Market), on the southern Buda bank of the Danube.

Total modern office stock in Budapest now stands at around 3.7 million sqm, 3.1 million of which is leasable class “A” and “B” complexes according to the Budapest Research Forum (consisting of CBRE, Cushman & Wakefield, JLL, Colliers International, Eston International and Robertson Hungary). The overall vacancy rate stood at 6% as of the first quarter of the year. Total leasing demand for 2019 amounted to 637,00 sqm, which is the highest annual volume on record; annual take-up has been rising since 2016.

JLL has traced 14 office projects that were due to be delivered this year as of the first quarter, the largest of which is the 34,500 sqm Agora Hub and the 34,000 sqm Agora Tower, representing the first phase of the 136,000 sqm Agora Budapest project. In one of the largest lettings in the Budapest office market, BP has taken 22,000 sqm of space at the complex. As of the first

quarter, the consultancy has traced a pipeline of 185,00 sqm for this year. “In my view it is too early to state how the current situation will impact the office market,” cautions Peter Würsching, head of leasing at JLL Hungary. “We see the recent trend that large occupiers are reconsidering their real estate strategies. Some say they have positive experiences with home office and therefore might need less space in the future (20-30%), others state that, learning from the current

REAL ESTATE review

Aréna Business Campus by Atenor.

situation, they are planning to relocate functions from the Far East, so actually will need more office space,” he continues. “It is also an interesting question in the short- and mid-term as to how social distancing can be achieved in the current office spaces; to keep the necessary distance between the existing number of work stations would obviously require more space. However, most probably this will be solved with work shifts (for example

only half of employees will be in the office at a time). In a nutshell, it is hard to predict how will the current situation will impact office developments as it is highly dependent upon the currently shaping tenant requirements,” Würsching says. LONG-TERM PROJECT In an ongoing long-term project, Belgium’s Atenor is developing the BREEAM “Excellent” accredited, 130,000 sqm Váci Greens office in Váci út. “Our Belgium ownership

and management is focused significantly on Hungary and, therefore, out of the 1.2 million sqm portfolio across Europe, 240,000 sqm is in Hungary and this will further expand,” comments Nikolett Püschl, leasing and development director at Atenor Hungary. In parallel with development of the final phases, the developer has started the speculative, phased 85,000 sqm Aréna Business Campus on Budapest’s Hungária körút outer

REAL ESTATE review

BudaPart Gate by Property Market.

“We see a significant slow-down in the processes and new demand is somewhat unpredictable, at least in the short-term, as companies are in the process of reviewing their real estate strategies. What we assume is that there will be a continuous demand for high quality modern buildings [...] but the flexibility of any lease will be a key issue.” boulevard. The first, 20,000 sqm phase of the project is due to be handed over in summer and groundwork has already started on a second, 14,000 sqm phase. Essentially, one of the four

phases of the development is due to complete every year for four years. In parallel with these developments, Atenor has also undertaken two projects in Buda.

“Our development model is that we purchase, develop, lease and sell and then start over again with new projects. Our ongoing developments, Váci Greens F and E as well as Aréna Business Campus A, are progressing as per the original plan. We do not have any delay as of today,” adds Püschl. CBRE puts the supply expectation for the year at 265,000 sqm, which would represent a new high in this cycle. “However, further development delays are likely and, hence, some of the 2020 pipeline is expected to shift later. In terms of leasing status, the volume currently scheduled for handover in 2020 is 70% committed,” says Anikó Kovács, head of office advisory and transactions at CBRE Hungary. For 2021, JLL have traced 280,000 sqm of new

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Balance Hall by CPI .

“Further development delays are likely and, hence, some of the 2020 pipeline is expected to shift later. In terms of leasing status, the volume currently scheduled for handover in 2020 is 70% committed.” supply or space under construction, of which 160,000 sqm is prelet. The long-established Swedish-based CEE office developer Skanska AB is due to deliver the 13,000 sqm Nordic

Light Trio. The complex was designed by Budapest-based architectural firm Paulinyi & Partners and could be one of the first WELL-certified buildings in Hungary, in addition to receiving LEED “Gold” certification.

The company says it has secured sites for further projects, reflecting a long-term commitment to the Budapest office market. WELL-CERTIFIED “Skanska Hungary will complete the Nordic Light Trio office building, our first project to be WELL-certified and sold to a South Korean investor in 2019 and in which 100% of space has been already preleased,” the company says. “As for upcoming projects, our plan is to soon start the development of H2Offices on the corner of Dózsa György út and Váci út,” the company adds. Continued on page 24 ► ► ►

REAL ESTATE review INSIDE VIEW

LEGAL APPROACH TO SMART BUILDINGS POST-PANDEMIC

DR. ATTILA UNGÁR, Partner, Lakatos, Köves & Partners Law Firm

Most of the world has lived in lockdown in the past few months and it completely changed the way people work. Nevertheless, maintaining the economy requires that many people, if not all, will inevitably be going back to work in office buildings. Could smart buildings offer solutions for a healthier and much safer workplace in the long run? They probably can, the question is at what cost. SMART BUILDING TECHNOLOGIES POST-PANDEMIC New ideas on “pandemic-proof” office spaces are emerging. As at airports, thermal cameras can measure the temperature of office workers at the entrance and segregate those who may be infected. Washroom sensors might track whether workers are washing their hands sufficiently. Touchless solutions and voice-mobile device control in day-to-day functions, like touching elevator buttons and door handles, will become a much higher priority. Also, the programmed control of the proper humidity level to prevent the spread of airborne germs and smart cleaning, where technology warns us that an office area requires cleaning, are all realistic options. Smart buildings might even be a tool for enforcing social distancing, as the right applications could inform users in real-time which parts of the office are safe to use and which rooms to avoid as they are too crowded.

DR. KATA MOLNÁR, Lawyer, Lakatos, Köves & Partners Law Firm

Constant space monitoring can help to ensure the maintenance of the required density levels and the even use of space. Smart solutions might collect data not only on how and where we work within the office, but through contact tracing applications, the people we had contact with. The tech giants have already come up with applications that warn us if we were in contact with an infected person. Such contact tracing apps might also be implemented into smart buildings. ISSUES WITH “PANDEMICPROOF” SMART SOLUTIONS The most concerning issue with these solutions is that, in order to function, they inevitably collect a large amount of personal data, which poses a significant exposure from a privacy law point of view. Temperature checks on entering a building necessarily involves a person’s health data, which is sensitive and highly protected. The handling of such data is permitted only in certain cases, for example if a higher, defendable interest justifies it and such handling is proportionate. On the other hand, employers must provide a working environment that does not threaten life and health. It is going to be a task for legislators to draw the line between the protection of privacy and public health; the consequences of the epidemic could prioritize the latter.

Contact tracing apps also involve the collection, processing and transmission of personal data (such as data on geographical location and health data) by the relevant software developing companies and authorities. Currently these applications can be installed voluntarily, meaning that the individuals consented to their terms and conditions. However, it could be that such applications will be installed on a person’s smart phone as a condition of entering a smart building. Furthermore, video and other surveillance solutions that monitor office activities during working hours might also involve personal data on these person’s private life and opinion (such as political opinion, religious belief, browsing history etc.) In order to avoid a breach of data protection regulations, smart solutions should be used strictly in line with the relevant privacy rules and all of the data should be collected and processed only to the extent necessary to achieve the purpose of processing. Individuals should be notified of the data collection and, if possible, the collected data should be anonymized to reduce unnecessary personal data processing. Furthermore, protection against unauthorized use, proper storage and documentation was never more important. CONCLUSION Data protection and data security rules should be considered when using these new smart solutions, as they deal with highly sensitive and large amounts of data. For these solutions to be effective, strict data protection rules will need to acknowledge that protecting health became the no.1 priority for postpandemic modern societies. Developers of smart buildings will need to find the right balance and to achieve that will need effective help from the legislator.

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“We are looking forward to the situation stabilizing when the current challenging global context is more balanced. We live in dynamic times, experiencing the largest test of remote working in history. Corporates are adapting, refining and testing policies, processes and infrastructure to make it happen smoothly.”

Continued from page 22 ► ► ► Another regional developer, CPI Property Group, which has a Luxembourg HQ but was originally Czech-based, has delivered the 15,500 sqm Balance Hall in the Váci Office Corridor. This third phase of the Balance Office Park on Váci út brings the total space at the complex to 35,000 sqm; there remains the possibility for a fourth phase of the development. “Delays could occur towards the end of the year, but it is still early to accurately judge the likelihood of projects pushing into 2021,” says Kovács of CBRE. “The new supply currently scheduled for 2021 amounts to 211,000 sqm, all of which is currently under construction, while the new supply expectations for 2022 is about 280,000 sqm, though the vast majority of the latter volume is still in the planning phase and is therefore at risk of kick-off delays, in addition to the actual timeline dragging out,” she adds. In its latest built-to-suit development, Wing Zrt. is due to complete the 22,000 sqm, Univerzum Office Building, a built-to-suit project that will form the Evosoft headquarters at the Nobel Prize Winners Research & Development Park, located on the Buda side of the Rákóczi Bridge. At the same time, the company is developing

the speculative, 42,000 sqm Liberty Office Building, adjacent to the Magyar Telekom headquarters it was also responsible for (another BTS project) at the intersection of Könyves Kálmán krt. and Üllői út. In what is described by the Warsawbased GTC as the largest deal in an office building that is under construction, ExxonMobil has signed a 27,000 sqm prelease for the whole of the Pillar office building, located close to Váci út in District XIII. The LEED “Gold” accredited project is due to be delivered in the first quarter of 2022. The prelease was concluded with ExxonMobil at an early stage in the development process, thus providing the opportunity for a large amount of tenant input into the design of the project, according to GTC. Another significant prelease was around 11,000 sqm at Green Court in the Váci Office Corridor by Codic. These preleases reflect the growing confidence of tenants and the need to plan far ahead in the office market, as previously companies wanted to see a building close to completion before concluding a letting. NO NEGATIVE IMPACT “We have seen no negative impact from the coronavirus on the letting process so far as we have just signed a lease at Váci Greens and additional transactions are coming soon in both Váci Greens and Aréna Business

Campus. Further we are successfully maintaining our rental levels,” Atenor’s Püschl confirms. “Definitely, there are many sectors that are already fighting to stay alive. But the office market is not expected to be deeply affected. Rentals will not decrease and demand is still there and will be there. Additionally the current home office could create a mind change effect; the importance of modern, efficient and livable working environments will be even stronger,” she argues.

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Budapest One

The larger deals that were ongoing before and during the COVID period are still going ahead in the view of Würsching, of JLL. “However, we see a significant slow-down in the processes and new demand is somewhat unpredictable, at least in the short-term, as companies are in the process of reviewing their real estate strategies. What we assume is that there will be a continuous demand for high quality modern buildings (with high technical standards, for example filtered HVAC

supply), but the flexibility of any lease will be a key issue. Most probably, lease terms will shrink and certain opportunities will be provided for the tenants to contract or expand. The importance of flex/serviced offices will also be expected to further grow, such as developers’ ‘own brands’, for example myHive by Immofinanz,” he comments. Skanska, too, is broadly speaking confident. “From the Hungarian office market perspective, at the beginning

of the year vacancy rates were still low. Demand for office space will likely remain steady, though a greater degree of caution regarding decision making may come. We are looking forward to the situation stabilizing when the current challenging global context is more balanced. We live in dynamic times, experiencing the largest test of remote working in history. Corporates are adapting, refining and testing policies, processes and infrastructure to make it happen smoothly,” it concludes.

SUCCESS STORY CONTINUES

ARENA BUSINESS CAMPUS • Aréna Business Campus is providing 72,000 sq m of “A+” category office space on Hungária Boulevard. • The complex will consist of four buildings with an

exceptional proportion and significance of green areas. • Excellent location: it is only 300 meters from M2 metro, and 5 minutes from Aréna Mall shopping Center.

• The first, 21,000 sqm of Building “A” was completed in 2020 Q2. Building B is already under construction and will be handed over in 2021 Q2.

VÁCI GREENS E & F • A large-scale campus style development with exclusive “A+” class offices in the heart of one of Budapest’s most famous business districts • BREEAM “Excellent” green certification and an extensive green working environment • 5 buildings out of the 6 is already sold (Building A, B, C, D, E). 100,000 sqm out of the total 123,000 sqm is already let. Building F was completed in 2020 Q2. Building E will be handed over in Q3 2020.

Contact: Atenor Hungary Kft. 1138 Budapest, Váci út 121-127.

Zoltán Borbély Country Director +36 1 785 52 08, borbely@atenor.eu

Nikolett Püschl Development & Leasing Manager +36 1 785 52 08, puschl@atenor.eu

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NEW BUDAPEST BUSINESS DISTRICTS EMERGING One of the major challenges for office developers in Budapest is to source suitably-sized, well-located development plots that provide visibility at a time when competition for such space is becoming more intense and driving up prices.

Advance Tower by Futureal.

By Gary J. Morrell Developers need to weigh up the balance between the suitability of plots in terms of the necessary size for a financially viable class “A” office project, accessibility by public and private transport, visibility, the price of the land and the commercial potential of a given district or area of the city.

As a consequence, office hubs are developing outside the established business areas as developers examine new areas of the city with business and development potential away from those commercial districts where competition for space is more intense. “Location is still one of the most important (if not the most important)

criteria of an office building and it will remain so in the near future,” says Valter Kalaus, managing partner of Cresa Hungary. “You can have the best quality building in a poor location, it will not be as successful as a lower quality Continued on page 30 ► ► ►

REAL ESTATE review INSIDE VIEW

CORONAVIRUS VS. CONSTRUCTION

DR. GABRIELLA GÁLIK Partner, KCG Partners Law Firm

DR. DÉNES GLAVATITY Associate, KCG Partners Law Firm

The coronavirus pandemic has affected domestic and international trade and commerce around the world. States have reacted with robust mitigation measures, including closing borders, implementing a range of travel bans and engaging a myriad of internal domestic health and wellbeing procedures. These are causing unprecedented disruption to trade, transport, the labor market, production and supply chains.

FORCE MAJEURE IN GENERAL Force Major (FM) clauses are included in long-term contracts as a way for the parties to delay or take a break in their performance obligations or to terminate the contract in extreme circumstances, typically extraordinary events beyond human control such as wars, riots or natural calamities which would legitimately excuse their performance. Most building contracts have reasonably detailed definitions of what will amount to a FM event. Although the precise terms may vary, the general framework of FM in most construction contracts is similar. However, there are key differences in the treatment and recognition of FM across different jurisdictions.

COVID-19 AND THE CONSTRUCTION INDUSTRY The construction industry is strongly influenced worldwide by Chinesemade goods and materials, including everything from structural steel (China is the number one steel producer and exporter) and other building materials (copper, iron ore, zinc, nickel) to cabinet caseworks and fixtures. China is also the largest producer of photovoltaic power since 2015. Finding and establishing alternative supply chains could mean higher material costs and potentially slower project completions. Given the facts that the construction industry heavily relies on human workforce and on China’s manufacturing output, many companies could find themselves either unable to perform their contractual obligations in time or at risk of not being able to do so at all.

FORCE MAJEURE IN CIVIL LAW SYSTEMS Contrary to English law, where courts do not imply FM in the absence of an express contractual provision, civil law systems have a more developed concept of FM. In these countries, the civil code generally provides that a party is not considered to be in breach of contract and the performance of its contractual obligations will be suspended, if and to the extent it has been prevented from carrying out those obligations by virtue of an event which was unforeseeable, is not attributable to any of the parties and was unavoidable. It is a mandatory

requirement in each law system that the unforeseen FM event has to occur after the date of entry into force of the contract. UNFORESEEABLE EVENT? Since FM clauses in general require that the event was unforeseeable at the time the contract was entered into; some commentators argue that, after previous pandemics (e.g. SARS in 2003 or H1N1 in 2009), it may have been foreseeable that a similar virus could occur again and the parties may not be entitled to relief. Interestingly, the Hungarian courts accepted the H5N1 (bird-flu) epidemic of 2006 as an FM, e.g. where the party either could not deliver the animals due to transport restrictions, or simply had to slaughter them out of precaution. It is important, however, that even if the outbreak of epidemics may not be an unforeseeable event, the unprecedented scale of the lockdowns could differentiate the current COVID-19 pandemic from earlier epidemics, and it is likely that the courts will accept that this outbreak and the response taken does not constitute a foreseeable contingency. The party seeking to invoke a FM clause in its contract will need to prove that there are no alternative means for performing its obligations, or it has taken all reasonable steps to avoid the operation of the clause. Increased costs or hindrances alone will not be sufficient to prevail in an FM claim. Just because a contract has become more expensive, or even uneconomic to perform, that will not constitute FM. CONCLUSION It is clear that this is a historical time from all aspects of life, including the consideration of pandemics as FM in the construction industry. With all the mitigation measures around the world, many cases may serve as precedents for the future and there will definitely be great lessons to be learned for future construction contracts.

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Evosoft HQ project by Wing overlooking the Danube.

Continued from page 28 ► ► ►

It is possible to source development plots in Budapest, the balance to be found is between preferred locations and zoning and the pricing expectations of sellers and buyers according to Noah Steinberg, chairman and CEO of Wing.

INTEGRATED LOCATIONS From a developmental perspective, office development is being undertaken in urban locations that are more integrated into the wider city. Gone are the days when developers planned projects in a green environment in the outskirts, which required staff to commute by car unless a shuttle bus was provided. The conventional wisdom is that staff who often work flexible hours prefer to be in locations that are part of the city, so that they can utilize amenities and commute by public transport or bike.

“We have developed in Districts IX, XI, XIII and XIV and now we have 250,000 sqm of property in the southern part of Budapest,” he says.

This is reflected in figures from the Budapest Research Forum (CBRE, Cushman & Wakefield, JLL, Colliers International, Eston International

building in a very good location. Public transport access, parking availability and local amenities can make a location good or bad, more or less preferred,” he adds.

and Robertson Hungary), which puts vacancy in non-central Pest at a very low 1% compared to a very high 33% for the periphery. With most schemes now located in urban environments, developers are delivering projects that are perceived as providing a reciprocal benefit for staff and residents in the vicinity, both from a business perspective and the provision of amenities and services. “In the past projects were closed developments, developed as an individual entity with no essential connection to the wider society and communities around them,” says Zsombor Barta, president of the Hungarian Green building council (HuGBC).

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REAL ESTATE review “There has now been a major shift; new developments in many cases have internal courtyards that are open to the general public in addition to public green areas, parks and shops. The concept is changing from pure office building to more open and mixed developments,” Barta explains. Developers and urban planners appreciate, therefore, that an office project needs to be assessed on a wider community level and not just as a stand-alone project. An office development needs to provide for the needs of the building’s users, but they are also interconnecting with their environment as well. FAVORED DESTINATION The Váci Office Corridor is the favored development destination with almost 900,000 sqm of stock as of the turn

of the year, according to Cushman & Wakefield, with the sub-market having a vacancy rate of 4% and the highest share of take-up in the Budapest office market. An estimated 175,000 sqm of space is under construction here. However, with the popularity of the area, well-located development sites with direct access to public transportation links are becoming more difficult to source and leading developers are now looking at other areas of the city that provide similar development opportunities. The former industrial area, successfully promoted and transformed into a leading business district by the District XIII Mayor József Tóth, is seen as a model for local authorities and elected leaders of how to actively promote their municipalities to developers.

Get this right, and the projects provide a win-win to both parties by providing employment, redeveloping brownfield sites with direct access to public transport connections and providing amenities. District mayors are participating in the opening ceremonies of developments much more often now, as they promote their respective municipalities at the same time as they welcome the delivery of an office complex. CPI has delivered the 15,500 sqm Balance Hall on Váci út and Futureal has completed the 11,000 sqm Advance Tower, also on Váci út. “Every location is different and a new building has to be adapted to its environment. In order to achieve this, open dialogue is required with municipality, urban planners, other developers, representatives of local

REAL ESTATE review inhabitants. For example, if an area is in desperate need for retail and amenities, this cannot be avoided even if it will affect the business case negatively,” says Mátyás Gereben, country manager for Hungary at CPI Property Group. SPECULATIVE BUILD The first speculative phases of the 136,000 sqm Agora Budapest by HB Reavis, designed by the Londonbased Make architects’ studio and the Hungarian Finta Studio will deliver retail, service space and open squares, which it is planned can be utilized by the local population, as well as redeveloping the area adjacent to the Árpád híd metro station. The concept is of a reciprocal benefit to the developer, the companies that locate to the project and the surrounding population, according to HB Reavis.

“In the past, projects were closed developments, developed as an individual entity with no essential connection to the wider society and communities around them. There has now been a major shift; new developments in many cases have internal courtyards that are open to the general public in addition to public green areas, parks and shops. The concept is changing from pure office building to more open and mixed developments.”

As development plots have become increasingly scarce in the Váci Corridor, the outer boulevard has become an office hub with the development of the 85,000 sqm Aréna Business Campus by Atenor, while Wing is constructing the 42,000 sqm Liberty office complex, next to the Magyar Telekom headquarters it also built. Both complexes are located at road, metro and tram junctions. This provides easy access from it to the center, and from major residential areas to it. In District XIII, Wing is working on the Gizella Loft redevelopment where a lease with TÜV Rheinland, a leading provider of technical services has been concluded. “The site is a former industrial complex where we have put new life into an older building, while preserving its heritage. The business complex altogether has the potential for 100,000 sqm of space to be developed in stages,” comments Wing boss Steinberg.

Agora by night.

Without doubt, developers face their greatest challenges in sourcing development sites in the historic center of Budapest. The few

development sites present are in a compact urban area and the strict planning regulations for historic and protected structures can make the planning and development process very complicated and expensive. All of this and restricted height regulations mean a high-rise Central Business District has not emerged as it previously has in Warsaw and is doing so now in Bratislava. RARE DEVELOPMENT The Szervita Square Building is a rare office development in the historical center of Budapest’s District V. Attila Kovács, managing partner of Horizon Development, which is behind the 15,500 sqm office, retail and residential complex, says the number of available plots is becoming ever scarcer in the CBD and competition is growing. The very strict planning regulations stipulate that developments in the Belváros (Inner City) have to contribute to, and preserve the historic Central European feel of the center of Budapest. The Szervita Square Building project involves the demolition of a rundown office building in the location. Continued on page 36 ► ► ►

Elevated style & multifunctionality Szervita Luxury Residences and Retail Units

When ultra-premium architectural quality pops up in the historic downtown of a European capital it triggers professional dialogue and inspires new business ideas. Szervita Square Building—developed by Horizon Development—serves as an excellent example. The LEED Platinum certified award-winning mixed-use property will be home to offices (floors 1–4), luxury residences (2,200 sqm on floors 5–6) and retail units (1,050 sqm ground floor + 450 sqm gallery). The exclusive 1,500 sqm commercial space offers 8 individual retail units with exquisite visibility, brand appeal and economic potential. Szervita Square—steps away from Fashion Street, Váci Street and Deák Square—is the ultimate retail location in Budapest where premium brands can benefit from exceptionally high footfall numbers to maximize their brand exposure and turnover. The city’s historic, cultural and business center provides the perfect setting for stores, showrooms, restaurants or cafés. The top-floor ‘Szervita Luxury Residences Furnished by Bentley Home’ are the only ones in Europe having earned the privilege of a value-based partnership with the furniture-line of the prestigious British automobile brand. Due to Horizon Development’s unique collaboration with Metrogramma Studio and Luxury Living Group (Italy), future residents will have infinite possibilities in how they fit out their dream interior. Beyond the world-class design the cosmopolitan residences will also offer panoramic views of the Budapest skyline, rooftop gardens, exclusive pool access, a private business center and hotel-style concierge services, delivering on the promise of bringing a new level of downtown luxury to the Hungarian capital.

DEVELOPED BY

www.szervita.com

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Szervita Square Building by Horizon Development, a rare office development in historic center of Budapest.

Continued from page 33 ► ► ► The LEED “Platinum” certified development will consist of office and retail space in addition to high end residential units on the fifth and sixth floors. The modern seven levels are designed to fit into the historic setting of the Hungarian Art Nouveau buildings in this heritage protected area of the city. A park in front of the building is designed to be a public space. Budapest does not just boast a Fin de siècle center; it also has a

river front development area which would be the envy of most other cities. Down on the Danube’s banks, Wing is developing the 21,400 sqm headquarters of evosoft Hungary, part of the Siemens Group. This represents the latest built-to-suit, high-tech development project by Wing in Budapest.

Park on a two-hectare site on the Buda bank of the Danube, in the vicinity of the Infopark technology park and Budapest University of Technology and Economics. Phase one of the project, the 24,000 sqm built-to-suit, the LEED “Gold” accredited Ericsson House, was handed over in 2017 by Wing.

South Buda has established itself as the high-tech hub of the Hungarian capital. The LEED “Gold” accredited evosoft headquarters forms phase two of the Hungarian Nobel Prizewinners Research and Development

One drawback for the South Buda area is that it lacks development sites with direct metro access, which has been one of the major reasons behind the success of the Váci Corridor. Despite that, the South Buda sub-market is the

REAL ESTATE review

Without doubt, developers face their greatest challenges in sourcing sites in the historic center of Budapest. The few development sites present are in a compact urban area and the strict planning regulations for historic and protected structures can make the planning and development process very complicated and expensive. All of this and restricted height regulations mean a high-rise Central Business District has not emerged as it previously has in Warsaw and is doing so now in Bratislava.

second most active development hub, with 173,000 sqm under construction as of the beginning of the year, according to Cushman & Wakefield. The area has a total office stock of around 380,000 sqm, with a vacancy rate of around 5%. Another South Buda development is BudaPart by Property Market on a 54-hectare site on the southern Buda bank of the Danube at Kopaszi Gát (Kopasz Dam). The 18,000 sqm BudaPart Gate, the first office phase of the mixed-use project, has been delivered. The project will

include office, retail and residential in addition to large green and park areas, based on the concept of developing a new city quarter.

projects in Buda. Atenor has projects in Buda in addition to its longer term, phased developments in Pest.

WESTERN BOUNDARY At the western edge of the city, Futureal has been developing the 68,000 sqm Budapest One Business Park located at a transport hub at Etele tér, adjacent to the Kelenföld railway station and the Metro 4 station. Budapest One forms part of the Kelenföld urban redevelopment project that will include a mix of office, retail and services for a combination of commuters and the large residential areas in the immediate vicinity or within a short traveling time.

“Cooperation and discussions with authorities were challenging recently in Hungary, not just because of the lockdown, but due to the recent changes in the permitting processes,” explains Nikolett Püschl, leasing and development director at Atenor Hungary.

As with the Corvin Promenade mixed-use urban redevelopment project, which Futureal was also responsible for, the developer acquired a large brownfield plot within an urban area with direct access to transportation links. Another locational option is the development of single building

“In the beginning we expected that these new structures would be a threat for our timelines, but fortunately our experiences have been very positive. The authorities have done an excellent and super quick job during this challenging period of the COVID-19 pandemic. The key focus for Atenor was always that its developments will increase the attractiveness of cities and shall satisfy the needs and demands of today’s users. We were always working in a close cooperation with the authorities to be able to create a symbiosis with the environment and the citizens,” Püschl concludes.

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DESPITE COVID, BUDAPEST OFFICE FUNDAMENTALS REMAIN STRONG The biggest headline from the 2019 office sector was that it had become “an entirely landlord market”, according to one of the key players in the field, Csaba Zeley, head of asset management at ConvergenCE. He says the COVID-19 pandemic has clearly changed the landscape, but says the underlying office fundamentals are still good.

Csaba Zeley One unknown following the past few weeks is the effect on future bank funding. Back in January, that was not a problem, although lenders were generally still being more prudent than they had been prior to the 2008 crisis. “There may well be changes to financing terms given even two months ago,” says Zeley. “I think it is fair to say that banks will be cautious. Don’t forget the loan repayment moratorium, which was one of the first reactions from the government, although counter balancing that will be the NHP funding initiatives which the government is promoting to kick start the economy again.” Some sectors have seen a much bigger immediate hit than others, hospitality being the obvious example. Prior to the pandemic, the hotel sector had been booming in recent quarters in Hungary (and especially in Budapest, as its reputation as a tourist destination has blossomed). The COVID-19 coronavirus outbreak has, however, had a “huge” negative impact on hotels, restaurants and entertainment in general, Zeley says.

“No-one knows when this will recover to the level it was before COVID. No-one can even estimate when we might see large numbers of foreign tourists again. I do think hotels in Hungary will see more Hungarian tourists, but they won’t be enough to keep every bar and café and restaurant open.” Retail also has big question marks, he says. “Online shopping has become extremely strong. It is a real question mark how many retail outlets will survive, especially in shopping centers.” GROWING TREND That builds on a trend that was already there. Zeley had been to the United States not long before the shutdowns. “I had been asked to bring back a toy

for the child of my partner. I could not find a [bricks and mortar] toy shop in the precincts of Miami. I could not believe it. It is not so extreme in Budapest, but I think we will see the same effect.” For the office sector, the future looks brighter. “I was worried eight weeks ago about what might happen, but now we see tenants coming back. Many negotiations were put on hold, but these have restarted, and we are already signing new lease agreements.” That builds on a period of sustained growth and lowering vacancy rates in the office markets. “The general vacancy rate fell under 10% three years ago and has been falling ever since,” Zeley tells Real Estate Review.

CBC Office Building

REAL ESTATE review Just how much of a landlords’ market it had become by January and February was demonstrated by the fact that existing leases coming up for renewal in older buildings were generally increasing by 15-30% at levels close to EUR 14/sqm/month, Zeley says. That presented a great re-positioning and re-letting opportunity for landlords who struggled through the recession and could now realize good levels of return due to the current level of demand and undersupply of new offices. “Whilst I like to think we are the best at such asset management, it has a lot to do with the general office cycle. Even tenants looking for 200-300 sqm offices are having real difficulty finding any alternatives to their existing space,” Zeley says. The expectation is that offices, at least, will return to that relatively quickly.

Árpád Center Office Building

The obvious answer should the market remain tight would seem to be to build more office space, but Zeley says the market is more nuanced than that, with the construction market having seen massive cost inflation due to the lack of skilled labor constraining or delaying development so that “4,000-5,000 sqm stock will not come in one year, but two or three.” MEGAPROJECTS One factor behind this has been the very active role of the state in the construction of infrastructure and sports stadiums. Megaprojects such as the now finished Ferenc Puskás National Stadium or the ongoing Budapest Zoo Biodome have sucked up workers and resources at the same time as the residential construction boom was created by the amendment of VAT on residential construction.

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“I visited a large office development prior to the shutdown and noticed that the trucks bringing in plaster and gypsum board all had Polish number plates; this wasn’t high end material, just ordinary gypsum board. Developers are having to search across the entire CEE for suppliers and labor, as evidenced by the large increase in immigration from the Ukraine.” As a result of this combination of factors, the head of asset management says the take up of space had never been so intense as it was pre-COVID. “Demand was at a record high, according to the Budapest Research Forum, and had been for some time. If you look back, even to the last economic downturn in 2009-10, the net absorption rate had only been negative in one quarter: the demand has been there continuously. I have seen the figures for Q1 2020, and I see no immediate changes to that,” he says. “The biggest driver behind this has always been the shared service

centers. During more difficult times, when unemployment was high and wages low, that was a real benefit for the SSCs when recruiting people with the appropriate skills, and “A+” offices could be found extremely cheaply.” Has the Budapest vacancy rate bottomed out yet? “I think it will go under 5% unless we see a bigger impact on industry and finance from the COVID-19 virus than expected,” Zeley predicts. The only sectors which are even tighter than office are logistics and industrial, where vacancy rates approach 2%. Does he see any likelihood of offices matching that? “Office will never go that low because we have the historic stock from the “B”, “C”, “D” and “E” classes; in short, much greater supply, as well as an unknown quantity of residential property that is used for smaller offices. If the vacancy rate did drop to 2%, it would be extremely unhealthy, because it would mean nothing had been built.”

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INTERIOR ISSUES AT THE CORE OF A SUCCESSFUL OFFICE PROJECT Office interiors were increasingly being integrated into the concept, design, leasing strategy and Property Management (PM) and Facility Management (FM) of office projects in reaction to tenant and staff demands anyway; now environmental regulations and issues related to the COVID-19 virus have made the area even more pressing. By Gary J. Morrell Indeed, as developers are striving to deliver ever more highly specified and sustainable office complexes, interior and exterior design have essentially become part of the same process. Sustainability accreditation from independent, third-party sustainability organizations such as BREEAM or LEED and, increasingly, WELL have a range of requirements regarding interiors. These incorporate issues regarding the office environment, the provision of amenities and the internal atmosphere regarding the well-being, and its impact on the retention of staff and productivity. As staff return to the workplace, office owners will need to take their needs and new regulations in the post-virus environment into consideration. “With most companies starting to come back to our buildings in May/June, we are preparing a special precautionary protocol to make sure their work environment is as safe as physically possible,” says Attila Kovács, managing partner of Horizon Development. “In the long-term, architecture, design and the fit-out of commercial

interiors will most likely also be touched by the idea of social distancing and increased personal health concerns, which might ultimately result in a more generous use of space in layouts and seating concepts, and an inclination towards implementing more touchfree smart solutions and smart technologies,” Kovács adds. HEALTH AND SAFETY In this way developers, landlords and property managers are expected to pay attention to the increasing importance of health and safety requirements. “Cleaning and sanitizing services as well as management of in-house traffic should be revised, and new regulations should be clearly stated to all tenants and service providers,” comments Adorján Salamon, CEO of Eston International. “According to our experience, tenants are reintroducing regular office usage with limitations on the number of employees who are present in the property, and thus allowing part of the staff to work from home. Having fewer people in the office allows more time for further investigation of interior rearrangements,” he says.

The importance of interiors and working conditions for staff is also underscored by Mátyás Gereben, country manager for Hungary at CPI Property Group, another leading office developer. “In addition to pricing and location as the two dominant decision-making factors, there is an increasing need for ‘human elements’ to serve the comfort and wellbeing of employees. In this way, design is naturally tenant focused. The design process has already taken into consideration the requirements of accreditation and thus we have already incorporated many features such as bicycle racks, shower facilities, rainwater collection systems and disabled accessibility into the plans.” With regard to the provision of amenities, the BREEAM “Excellent” accredited Magyar Telekom headquarters building by Wing, designed by TIBA Architects Studio, provides around 5,000 work places and includes a 300-capacity conference center, 700 sqm fitness center and sauna with a panoramic view of the city, roof top running track, two restaurants, two cafes and launderette.

REAL ESTATE review CHECK LIST “Good public transport access might not be considered as an amenity of the building, but companies want it badly. A high parking ratio can be also important for many users. A good quality canteen and cafeteria is getting more important; an average ‘mediocre quality’ self-service restaurant does not cut it anymore. A concierge-type service is also getting popular among tenants. Car-wash and electric chargers are well-liked by more and more tenants. Fitness access in the building/complex or near-by is also popular,” says Valter Kalaus, managing partner of Cresa Hungary, experts on tenant representation. “When a tenant selects an office building, most of the time the exterior design of the building is a given; an average tenant in a typical situation cannot change that. You either like or

“In the long-term, architecture, design and the fit-out of commercial interiors will most likely also be touched by the idea of social distancing and increased personal health concerns, which might ultimately result in a more generous use of space in layouts and seating concepts, and an inclination towards implementing more touch-free smart solutions and smart technologies.” not. Either it fits your company image or not. On the other hand, the interior design of an office space can easily be changed; it can be custom-made and fitted-out to exactly how that company wants it to reflect its image,

functionality, etc. We see significantly more office lease transactions being done with the involvement of an interior designer,” he adds. Continued on page 44 ► ► ►

Agora showroom

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50 YEARS OF PIONEERING ADDED VALUE Even amid the turmoil and confusion of the coronavirus outbreak, international developer Codic Group, which celebrates its 50th anniversary this year, says it has kept its projects on track in Hungary. “The immediate effect of the COVID-19 pandemic on our industry has been immense, although it appears to be less worse in Budapest than in Western Europe,” Christophe Boving, general manager of Codic Hungary tells Real Estate REview. “As has happened with all of us, our business has continued from home working.” Contact has been maintained with tenants and investors, but operating practices have had to be amended. Progress at Green Court Office, Codic’s 20,200 sqm project on Dózsa György út, just off the Váci út Corridor, has continued. A deal was signed with a major anchor client in December, which means 65% of the project, due for delivery in Q1 2022, is now pre-leased. “It is clear COVID-19 has put a sudden halt on the leasing market,” Boving says. That was understandable, he adds; as the crisis unfolded, companies had to focus on more immediate demands, looking after their own staff and working out how they were going to function. Despite that, work on actual construction was able to continue after Codic’s general contractor

introduced health and safety measures such as extra disinfectant points. Fortunately, the project is at such a stage structurally that it does not require large numbers of people in close quarters. There has been much talk about the future requirements from offices once the pandemic passes. Boving says flexibility is the key. “We already like to integrate in our planning anything that offers very varied and safe work spaces. Many things will happen after this crisis that could be for the better; offices will have much less dense occupancy and will be more about the quality. Basically, as a developer, you have to adapt to the human factor.” For Hungary at least, Boving believes this crisis could resolve much quicker compared to the global financial crisis in 2008. “The fundamentals prior to the pandemic were much better. I do not think it will develop in the longterm into a negative spiral. But it is going to be a very difficult economic period and will take time for the financials to recover.” Green Court Offices is not the only development Codic has ongoing in Budapest. It is part of a bigger mixeduse office and residential project with some retail and services. Green Court

Christophe Boving

Residences was started in 2017 and is planned for delivery this year. “Sales reached 95% at the end of last year. Even under the present conditions, we have been selling shop units and client services; there has been no problem in that respect. We expect to hand over on site in the next two months.” CODIC DOING ITS HOMEWORK There is a third boutique development which was launched last year, called HomeWork. The name is a play on the history of the site; the project includes the renovation and repurposing of one of the capital’s first school buildings. Overall, the building will offer 3,600 sqm of premium offices, 15 high-end apartments and 126 sqm of prime retail space at the corner of Margit körút and Rómer Flóris utca, mixing classical and contemporary architecture. Given the historical nature of the building, and the location of the site itself, getting all the necessary permissions has taken more than a little time. Work, not least on the restoration and expansion of the square Codic will maintain to “give back some splendor” as a public space for tenants and the neighborhood, is

REAL ESTATE review finally visible. “We will come to market in the next few months with delivery not before two years.” For now, Codic Hungary has more than enough on its hands dealing with these projects and the next on the drawing board, the V48 building, which will offer class “A” office space with some retail and service outlets, right at the start of the Váci út Corridor. As Budapest develops, is it getting harder to find good development plots? Somewhat, Boving says, but all is not lost for a developer with ambition. “There are still quite good opportunities for brownfield development. Margaret corner, the HomeWork site, is a good example. The difficulty is you must make your business model work. The more central a plot, HIRDETÉS

“The effect [of the pandemic] on our industry has been immense, although the crisis appears to be less worse in Budapest than in Western Europe.”

the higher the costs all round, including the construction costs.” But Codic has been taking those challenges in its stride for 50 years. Similarly, it has long been committed to BREEAM environmental certification, with its Atlantis building in Brussels the first to be certified in Europe for Access and Bridge buildings, under the “BREEAM Europe for Offices 2008” method. Such determination surely should be celebrated, though Boving

admits current circumstances will make that more of a challenge. “For our 40th and 45th anniversaries there was each time a gala event in Brussels for all our international partners. This year, considering the epidemic, I do not yet know what we will do. We have to think of the best way to celebrate it as it deserves.”

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According to the Hungarian Green Building Council (HuGBC), it reflects the importance of interior design and property management that around 10 projects are in the process of assessment for WELL precertification or certification. The wellness of workforce and staff retention for a longer period has become a central concern for building owners, and this involves the provision of a healthy and esthetically appealing working atmosphere, according to Zsombor Barta, president of HuGBC.

Kalaus of Cresa says that office tenants have become significantly more educated and demanding over the few past years. According to this argument, office space has become a major HR-tool to retain and attract talents, so the requirements have changed drastically. The key is flexibility and high quality to foster creativity, team-work and productivity in the office. The interior design and the atmosphere have to reflect clearly what the company is all about.

Again, flexibility is key, having multifunctional areas where people can work effectively Analysts see the necessity for changes in the organization of the office, spacing and lay out as a consequence of the long-term impact of the current health crisis. â&#x20AC;&#x153;In the current situation, almost every company has been forced to reorganize or re-plan their business. While a significant portion of office workers are now working from

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Liberty interior by Wing.

“Cleaning and sanitizing services as well as management of in-house traffic should be revised, and new regulations should be clearly stated to all tenants and service providers. […] Having fewer people in the office allows more time for further investigation of interior rearrangements.”

home, many companies are looking to the flex office market to provide temporary quiet accommodation in individual or small team offices in a bid to maintain employee productivity. We have also seen a number of major occupiers turn to the flex office market to support their business continuity plans,” says Hubert Abt, CEO of New Work, one of the major providers of serviced office space in Hungary and Central Europe. Continued on page 48 ► ► ►

1134 Budapest, VĂĄci Ăşt 35.

(+36 1) 429 5050 www.simmoag.hu

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Balance Hall atrium by CPI.

Continued from page 45 ► ► ► THE AIR WE BREATHE “In the medium- and long-term, we certainly expect a change in the use of office premises, becoming more like social places where employees can meet and collaborate. This will put emphasis on the services provided by the building itself so, for example, the already ongoing trend of WELL certifications will become even more common. Health and safety will remain an issue of key importance in every sense, from the food provided in the canteen not till the quality of air breathed in by employees,” says Peter Würsching, head of leasing at JLL Hungary, with regard to the impact of the coronavirus on sustainability issues in the office market. Against this background of a growing complexity of demands

from tenants and staff, total fit-out costs (including soft and additional costs) are rising. The hard fit-out cost elements are generally split 80-20% between the developer and tenant, according to CBRE. On top of this, the remaining cost elements (such as furniture and various soft costs) are covered by the tenant. This requires PM and FM systems and professionals that are able to adapt to sustainability requirements. PM is the operation, control and oversight of real estate management while FM is a professional management discipline, focused on the efficient and effective delivery of support services for the organization it serves according to Barta. More duties, more responsibilities and more liabilities are to be expected for PM/FM staff. For

example, Legionnaires’ disease (legionella) is an issue which many asset FM mangers are facing already due to the lack of regular water system operations in the buildings. The same applies for humidification systems or air conditioning equipment as well, but the simple drink water pipelines are also affected. Further, strategies are being developed by PM/FM for the future to manage and mitigate pandemic situations properly. This is seen as bringing more responsibility, and more duties for PM/FM. “We are already experiencing some tenant interest related to fit-out corresponding to social distancing, especially in the social areas of an office space, so this pandemic will influence design and fit-out. Naturally PM and FM have to adapt and we have to ensure that

REAL ESTATE review building systems, especially air handling, and operational processes correspond to a higher level of health and safety requirements,” said Mátyás Gereben. In this way, PM is seen as facing fresh challenges as staff return to new circumstances, due to the impact of the coronavirus. Some of this will fall to the PM experts, but from the tenant perspective, a change in the behavior of staff is also needed. The questions remain as to how we will react to the changed circumstances and how interior design can support changed habits and needs, in the view of Barta. KNOWLEDGE TRANSFER “We see how many aspects need to be taken into account when creating a strategy for buildings to meet the social distancing measures and cleaning requirements,” comments international consultancy Frank Knight, which is working on transferring the experiences of the company in Asia to Europe. “It is not just about keeping the right distance between people or providing the right disinfection regime, but above all changing the behavior of the people as they return to a very different workplace,” the consultancy adds.

“In the medium- and long-term, we certainly expect a change in the use of office premises, becoming more like social places where employees can meet and collaborate. This will put emphasis on the services provided by the building itself so, for example, the already ongoing trend of WELL certifications will become even more common. Health and safety will remain an issue of key importance in every sense, from the food provided in the canteen not till the quality of air breathed in by employees.” on the merits of office-based work and working from home from the perspective of company budget, productivity and the convenience and retention of staff. However, the evidence is that staff are returning to company offices.

“Although it is too early to assess the impact of COVID-19 on market trends, I think that employees have gained a greater appreciation for the value of collaborative work in an office environment and the creative process of teamwork,” concludes Noah Steinberg, CEO and president of Wing Zrt.

The safety of employees who are already gradually returning to their offices and the adaptation of buildings and office spaces to new requirements is seen as one of the key topics for discussion across Europe. This issue will inevitably continue to impact on costs, as one of the key challenges of property managers is to optimize the management of their operating budget so as to achieve savings while ensuring that the property functions properly. The coronavirus and subsequent lockdown have initiated a debate

myHive interior by Immofinanz.

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IMMOFINANZ: MYHIVE BRAND FOCUSES ON INCREASED SECURITY AND FLEXIBILITY FOR TENANTS Whether you are looking for modern bicycle parking, green outdoor areas, fitness facilities or restaurant and shopping opportunities, myhive Haller Gardens meets all of these requirements. In addition, major upgrades are coming soon to this building in order to meet the latest need for more security and flexibility and combine it with the latest state of the art of modern working. keep the necessary distance and catch some fresh air. In addition, it has five different reception areas, which can be used by those tenants who have their headquarters in the building. Returning to office should give everyone enough space to avoid a crowded entrance. The building is fitted with the latest technology and has received a BREEAM certificate for meeting the highest standards in sustainable construction. Access4you certification is currently underway, which will show how well the building meets accessibility criteria.

public and common areas, in every office building, introducing appropriate solutions and procedures. Among them will be, among other things, new rules for using elevators, along with the designation of places to wait for the elevator and to regularly disinfect all touch elements (every two hours). This also includes the resumption of the community-building aspect, which is the hallmark of the myhive office brand that has been successfully rolled out by our company for more than three years,” continues Nagy.

THE LOCATION The modern office location of myhive Haller Gardens is situated in the Budapest district of South Pest, a popular area with a growing demand and a high occupancy level. Whoever enters myhive Haller Gardens for the first time will be impressed. The linear, minimalistic window facades meet nature: the planted inner courtyard with a water installation is a small oasis, very popular with tenants, in the midst of the working community.

THE EXPERIENCE “Thanks to its location, its fittings, and our comprehensive service and community offer, myhive Haller Gardens receives very good feedback from tenants,” says Country Manager of IMMOFINANZ Hungary Viktor Nagy. He and his team conduct regular surveys among their tenants and integrate the feedback into their offer. The objective is to create an ideal working environment in a pleasant and safe atmosphere.

“Every day errands should be made easier, and the work-life balance improved. The services at myhive Haller Gardens include parcel delivery, flower delivery, and much more. This allows tenants to concentrate on other things. Tenants’ wishes can vary strongly from location to location; at myhive Haller Gardens, for example, there is strong demand for sporting facilities, so we have a popular fitness club here.”

On an area of around 34,300 sqm, myhive Haller Gardens not only has extensive office spaces, but also boasts a planted roof terrace, inner courtyards and terraces with a view of the Danube. That offers plenty of room for tenants to

“We know that our tenants are preparing individually to return to work in their offices, adjusting the conditions and mode of work on the occupied areas in our properties. The task we set ourselves is to ensure maximum security in all

Viktor Nagy, Country Manager of IMMOFINANZ Hungary The myhive leasing concept offers flexibility, which is further increasing in importance for major tenants in the current environment.

More offers are currently being planned, such as an additional conference room, and a new flexible parking system, which is already being implemented. “After the restrictions driven by COVID-19 are removed, we will start

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the modernization of the frontage and lobby this year, as well as the common areas, the restaurant and cafe, but the garden will also be renewed and we will implement major energy and technical improvements as well,” says Nagy. These events will continue to be important for community building, and we were happy to see that our tenants welcomed our online events during COVID-19 as much as our live events before. The myhive app is one of the most important communication tools with tenants, as it informs them about events and services on a daily basis. Tenants can chat with each other and sign up for upcoming events and activities, and it is used regularly by more than 1,000 users in myhive Haller Gardens alone. Our Facebook group has several thousand users. That demonstrates the very active

and growing community at the Haller Gardens location, a trend that has been fostered during the Covid-19 epidemic. SECURITY AND FLEXIBILITY The current economic environment will create a higher demand for safe and more flexible workspace, therefore our office brand implements protective measures in its buildings, such as special covers at reception desks or safe distance lines. Cards and passes for tenants’ guests in a given building will be disinfected after each use. On top, additional disinfectant dispensers (over those that already exist) will be installed in the building lobby and other common areas. Another new aspect is increased flexibility for all tenants. Myhives’ new features, coming in fall will offer a modern and attractive workspace of any size and on flexible terms. This will

help tenants to provide a workspace that suits their employees, whether they need a fixed desk, more space to have their employees sit with a safe distance or to work from different myhive locations. Also, the myhive app will soon be able to do much more. The new update will give tenants more flexibility, for example by allowing individual workspaces and meeting rooms to be booked spontaneously by app – also in other myhive locations. All of these services place the focus clearly on the tenants and their staff, and Nagy is convinced that is behind the success of the brand. “It is important to provide tenants with different offers, so that they can position themselves as attractive employers and thus attract talented staff. For this reason, we also cooperate closely with their HR managers and managing directors,” he explains. Thanks to myhive services, tenants do not need to worry about community building for their employees. “And all of this comes without any additional costs, as these extras are included in the rent,” says Nagy. Since companies have to be increasingly flexible, there will now also be shorter terms for rental contracts. Companies grow and shrink in phases, and their workspaces should be able to adapt flexibly to these circumstances. This is now possible with myhive. “We therefore have our finger firmly on the pulse, and are meeting the demands of our tenants,” Nagy says in summary of the new features.

RETAIL

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LIMITED BUDAPEST SHOPPING CENTER PIPELINE Retail, along with hotel and hospitality, is seen by analysts as the most severely hit real estate market sector. Although hotel is expected to make a comeback, the retail sector is faced by the long-term challenge of the growing use of e-commerce. By Gary J. Morrell Hungary had been recording positive retail indicators as retail sales have been increasing steadily in recent years according to the Central Statistical Office (KSH). At the same time, Budapest shopping center development had been close to zero with developers wary of the longerterm level of consumer spending and increasing us of ecommerce. In spite of these concerns, retail has continued to attract investors with several Budapest schemes changing hands and a number of these centers are undergoing refurbishments and repositioning in recognition of changing demands from consumers with regard to tenant mix and design. Private consumption has been a major driver of economic growth and this has filtered through to the retail property market according to Cushman & Wakefield. “The change has been a restructuring on the retail market, and as a result, strengthening of other specific profiles and concepts, such as leisure or F&B,” comments the agency. It puts shopping center stock in Budapest at 770,000 sqm, with the pipeline represented by one sole major shopping center development. The major retail project under construction and destined to be

the first new shopping center in Budapest for several years, is the 55,000 sqm Etele Plaza by the Hungarian developer, Futureal, with a rescheduled handover of 2021. The complex has been designed by the Hungarian Paulinyi & Partners Zrt. and Dyer, a multi-award winning architectural and design practice with a legacy dating back to 1964, operating in the United Kingdom and internationally, with studios in Moscow and Budapest. It will include around 180 retail outlets located at a transport hub at the Kelenföld railway station, metro line 4 and the approach section of the M1-M7 motorways. In addition to the retail and service elements, the complex will include the phased, 65,000 sqm Budapest One Business Park. According to Futureal, the complex has 236,000 people within a 10-minute traveling distance and 500,000 plus within a 20-minute distance. A further 165,000 commuters are estimated to travel through the transport hub on a daily basis. GOING WELL “The project is going well and the remaining space is under negotiation. We are not pushing to close the remaining deals as there we have to do the fine tuning in terms of tenant mix,” says Tibor Tatár, commercial & retail development manager at Futureal Group, on the project.

The retail sector has had to adapt to changing consumer habits and preferences in the threat of e-commerce with regard to both new development and the redesign of existing retail projects. When it comes to design, rapidly changing consumer habits, the development of digital technology and the possible changes in the functions of buildings results in the creation of flexible and futureproof spaces according to István Vámossy, project designer of Paulinyi & Partners and co-designer of Etele Plaza. “We provide the background for development, transformation and even changes which cannot yet be anticipated,” he said. “Etele Plaza will be the first major scheme on the Budapest market having a strategic location since 2011, when KÖKI shopping center opened. The center will most likely affect the shopping center market in general, due to its overall size and planned fresh trade mix, which will not only focus on the latest, and most popular brands, but will also accommodate new profiles based on changed customer needs, such as a larger food court and restaurant area, and more leisure elements,” adds Cushman & Wakefield. JLL put total modern shopping center stock in Budapest at 720,000 sqm, which is low by European standards,

REAL ESTATE review and represents a total shopping center density of 440 sqm per 1,000 inhabitants with an average shopping center size of 30,000 sqm; around a third are centers of more than 60,000 sqm according to the consultancy. The leading centers are generally considered to be the 47,000 sqm Allee, the 58,000 sqm Mammut, the 30,000 sqm MOM center, the 66,000 sqm Arena Plaza, the 45,000 sqm WestEnd City Center and the 68,000 sqm Árkád center. These all have waiting lists for tenants and are therefore able to command the highest rents.

purchases, Aréna Plaza and Allee in response to the perceived market need to upgrade existing shopping centers with a strong focus on the food and beverage and leisure elements. NEPI Rockcastle acquired the 66,000 sqm Arena Plaza and an

adjacent 22-hectare development plot adjacent to Arena Plaza. TENANT MIX “The tenant mix of most schemes has always been mixed-use; however, focus on the F&B sector

Photo by posztos/Shutterstock

In addition to Etele Plaza, a number of center owners are planning refurbishment of their acquisitions. One example is the regional South African investor/developer, NEPI-Rockcastle, which is set to modernize and expand its recent

“The [Etele Plaza] center will most likely affect the shopping center market in general, due to its overall size and planned fresh trade mix, which will not only focus on the latest, and most popular brands, but will also accommodate new profiles based on changed customer needs, such as a larger food court and restaurant area, and more leisure elements.”

Mammut Shopping Center

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“The tenant mix of most schemes has always been mixed-use; however, focus on the F&B sector and unique leisure elements is stronger nowadays. Both profiles are logical reactions to the changed retail market environment, such as the strongly growing e-commerce.” and unique leisure elements is stronger nowadays,” says Cushman & Wakefield. “Both profiles are logical reactions to the changed retail market environment, such as the strongly growing e-commerce. People may buy more and more products through internet, but they will surely leave their homes for good quality food and unique leisure experiences.” With the easing of the governmental regulations against coronavirus in Budapest, NEPI Rockcastle Group, the owner of both the Arena Mall and Mammut Shopping and Entertainment Center, is striving to get back to more normal operations at its shopping centers. “For NEPI Rockcastle the safety of its customers and tenants is priority. In favor of this, by accepting the government’s regulations, the company introduced further safety measures in their Budapest shopping centers with which shopping can be safer and enjoyable again,” says Erna Balla, operations asset manager at NEPI Rockcastle in Hungary. She explains that the buildings are frequently ventilated and additional cleaning and surface disinfection protocols are performed regularly; frequently used furniture and equipment are disinfected hourly. There is limited access to furniture in common areas for visitors to decrease the possibility of getting close.

“Besides the above, the owner placed hand sanitizing dispensers at numerous busy points in the properties. Shoe sanitizing mats are laid at all entrances of Mammut and mobile germicide lamps are disinfecting the air at the restrooms, while in Arena Mall this is done by ozone ionic machines,” Balla says. “Social distancing rules are enforced through sticker markings in seating areas, corridors, elevators, and escalators. Operational staff, management staff, sales staff and all visitors are obliged to wear face masks and apply all other precautionary measures when entering the scheme. Both for Arena Mall and Mammut, it is extremely important that visitors feel safe and secure, so we are implementing the highest hygienic measures in our buildings,” Balla adds. In Budapest, ECE’s 68,000 sqm Árkád center is currently the largest mall, the complex having been completed in 2002 and extended and renovated in 2013. LONG-PLANNED One long-planned mixed-use development including retail is Central Park by the Hungarian developer Granit Polus, located in suburban Budapest. According to the development plans, the project will consist of retail, office and residential elements. Negotiations with the planning authorities are ongoing.

From a retailer perspective, the Swiss chocolatier Lindt has extended its presence in Budapest with a new outlet at the Arena Mall shopping center. This is the first Lindt store in the Central and Eastern European region to feature the company’s updated store design. “Although the basic part of the preparation of the Arena Mall lease took place last year, the first quarter of 2020 brought an unprecedented event affecting the whole world, which had a significant impact not only on the new store opening, but also on the whole economic

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Etele Plaza retail project by Futureal.

life, especially commercial trade,” comments Éva Sréter, head of retail at JLL Hungary, who represented Lindt on the deal. With regard to regional development, Indotek, one of the most active shopping center owners at present in Hungary, recently acquired the Kleppierre shopping center portfolio. With this latest acquisition, Indotek now owns 14 large-scale shopping and commercial centers in Hungary, most of which the company plan to revitalize by refreshing their trade-mix, as well as undertaking refurbishments.

At Debrecen, Szeged, and Szolnok Plaza, such work is already under way, whilst other projects are in the planning phase. Almost 200,000 sqm of retail assets have changed hands outside of the capital according to CBRE. In addition to the Indotek portfolio, a number of other schemes are planned to be refurbished or are undergoing redevelopment in the capital as well, including the Mammut, Eurocenter and Campona shopping centers. Adventum International plans to undertake refurbishment of its recently acquired KÖKI center.

“It is a general trend on the Hungarian retail market that the older shopping center schemes are now under repositioning and concept change. Part of the reason is the fact that a larger number of centers are truly outdated, not only from a tenant mix perspective, but also from an appearance and design point of view. A typical example for the most recent modernization is Shopmark (former Europark), which was one of the first centers on the Budapest market. Allee shopping center is also planning major changes,” concludes Cushman & Wakefield.

INDUSTRIAL

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INDUSTRIAL SEEN AS A LEADING MARKET SECTOR The industrial market is seen by some analysts as the sector in the most positive position for the post-coronavirus crisis period. Continued low vacancy rates and stable rental levels are forecast due to high demand; however, the lockdown environment and its impact on the development and construction processes mean most speculative projects have been put on hold, despite the previous demand for space.

Airport City by CPI.

By Gary J. Morrell Some analysts anticipate a boom in activity once the crisis is over and restrictions are lifted. Some large builtto-suit (BTS) requirements are in the pipeline, although the decision-making process has slowed in the current crisis. Demand from logistics service providers is continuing to increase, thanks in large part to the dynamically rising use of

ecommerce. In this respect a very low vacancy rate is expected to continue with upward pressure on rents. The market also faces challenges with regard sustainability specifications and the need to change procedures to combat the coronavirus. “Retailer active in grocery, healthcare, consumer and diversified products

will lead to a sharp rise in demand for logistics real estate in the next two to three years as industries implement lessons learned from the COVID-19 crisis pandemic,” says Prologis on the demand for logistics space. Similarly, Mátyás Gereben, country manager at CPI Hungary, sees high demand as continuing in the logistics sector despite the crisis. The company

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“The industrial sector is somewhat in a different situation. Record low level of vacancy has been fueling new construction and, although the current situation has hit some segments (for example automotive suppliers), some others are actually benefiting from the crisis, most importantly online sales and parcel delivery.” has an ongoing development, the Airport Logistics Park, in Vecsés, in the vicinity of the Budapest Ferenc Liszt International Airport.

both BTS and speculative space. Apart from warehousing, the complex also has the capacity for light industrial development,” he adds.

The area around Ferenc Liszt has developed into a logistics hub, with developers able to attract tenants who conduct a significant amount of business through the airport. Before the onset of the coronavirus crisis, cargo traffic through the airport had achieved new records in terms of cargo volumes, providing muchneeded employment and income in the surrounding municipalities.

Adorján Salamon, CEO of Eston International, sees the industrial market in Hungary as the least negatively impacted by the medical emergency. It has recorded low vacancy and no fall in demand has been seen, although this could change if the crisis situation lasts. In spite of governmental public health measures and downsizing by manufacturers, client companies are continuing their long-term plans of acquiring development land.

How logistics companies and Budapest Airport adapt their business models to meet new challenges remains to be seen. “The increasing shift towards e-commerce has contributed to positive results in our industrial portfolio,” comments Noah Steinberg, chairman & CEO at Wing. As with CPI, Wing has moved into the industrial sector due the perceived high demand. BTS AND SPECULATIVE “We have recently concluded leasing transactions in our LOGIN and East Gate Business Parks. We have acquired a further site adjacent to the East Gate Business Park with the potential for the development of 60,000 sqm of space in the next phase. Our strategy is for the development of

Péter Würsching, head of leasing at JLL, also expresses a positive view of the industrial market. “The industrial sector is somewhat in a different situation. Record low level of vacancy has been fueling new construction and, although the current situation has hit some segments (for example automotive suppliers), some others are actually benefiting from the crisis, most importantly online sales and parcel delivery,” he says. “We assume that online sales will gain momentum and actually also benefit from the current situation. In our view, this will create more demand for city logistics schemes and a growing

requirement for parcel services,” Würsching adds. Cushman & Wakefield has traced a pipeline of six schemes representing about 125,000 sqm that is scheduled to be delivered this year. “BTS projects are proceeding, but face delays due to slower permitting processes. The availability of construction material is stable for now. Continued low vacancy and reasonably stable demand levels are expected going forward, coupled with

REAL ESTATE review

East Gate Business Park by Wing.

the suspension of most speculative projects,” said Cushman & Wakefield. LABOR DEPENDENT By its nature, the logistics and light industrial sector needs the majority of staff to attend the workplace in order for the industry to function. “Adaption to home office is difficult, especially where administration and manual labor (logistics or manufacturing/production) are strongly connected to the site,” the consultancy adds.

Cushman & Wakefield is forecasting at least 40,000 sqm of industrial deals for the second half of the year, a significant proportion of which are expected to be renewals. Large BTS requirements totaling around 100,000 sqm are still in the pipeline for the year, albeit with slower materialization. Although there are several ongoing speculative developments by both international logistics park operators and Hungarian developers, the Hungarian industrial sector is generally

regarded as underperforming in comparison with other established Central European markets. Further, a developer-led market is mainly limited to the Budapest area and a functioning commercial industrial market has not been established outside the capital. In Hungary companies establishing light industrial facilities have tended to develop their own facilities. “Contrary to the multipolar industrial markets of the neighboring

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“Contrary to the multipolar industrial markets of the neighboring countries, the Hungarian industrial market is still rather unipolar and highly Budapest focused. While in the countryside production facilities are more common, logistics facilities dominate the market in Budapest. There are no speculative projects in the countryside. Further, there is still a limited number of available, good quality warehouse/manufacturing buildings for sale both in the Budapest region and in countryside locations.” countries, the Hungarian industrial market is still rather unipolar and highly Budapest focused,” says Tamás Beck head of industrial agency at Colliers International Hungary. “While in the countryside production facilities are more common, logistics facilities dominate the market in Budapest. There are no speculative projects in the countryside. Further, there is still a limited number of available, good quality warehouse/ manufacturing buildings for sale both in the Budapest region and in countryside locations.” However, demand is present and there are development opportunities, with Hungary having the lowest vacancy rate in the Central European region at 2.8%, an historic low in the greater Budapest area with a total stock of 2.3 million sqm. LIMITED SPACE Few existing logistics schemes have 5,000 sqm plus spaces available according to the Budapest Research Forum (BRF), consisting of CBRE, Colliers International, Cushman &

Wakefield, Eston International, JLL and Robertson Hungary. Demand for 2020 is put at 415,000 sqm. Colliers had traced a very limited availability of space at around 40,000 sqm with contiguous units of only 3,500 sqm as of the turn-of-the-year. “New developments for speculative and BTS purposes are often fully leased by the time of their handover,” comments Beck. The consultancy estimated that, as of the beginning of the year, there was 166,000 sqm of industrial space currently under construction with a further 66,000 sqm at the planning or preparation phase. From a demand perspective, developers are demanding at least five-year leases at existing warehouses, while seven- to 10-year deals are required for BTS projects. “The Hungarian market produced high vacancy levels during the years 2007-2014, but since then the market has performed nicely, and Hungary now has very low vacancy, which means more construction is needed,” comments Ferdinand Hlobil, head of

CE industrial at Cushman & Wakefield. “In Hungary expansion outside Budapest will continue. Compared to the surrounding countries, Hungary still has further potential for development in the regions.” As said above, a developer-led market is mainly limited to the Budapest area in contrast to Poland, the Czech Republic, Slovakia and Romania, where a functioning commercial market has been established in logistics and industrial hubs outside the capital. Registered stock is spread across the counties elsewhere in Central Europe while in Hungary stock is collated in the Budapest area. Indeed, Hungary is lacking the largescale projects that can be found in Poland and the Czech Republic, in the view of Rudolf Nemes, country manager at CTP Hungary. The 23,000 sqm DNHI building at CTPark Budapest South is due to hand over and a further 36,000 sqm building is planned. “We have almost zero vacancy in the industrial sector, which means that there is huge demand. In order to satisfy this , we need to offer competitive rents but in order do this we need to somehow deal with the high construction prices, while at the same time meeting tenants’ requirements. This is the challenge in Hungary,” Nemes explains COUNTRYSIDE INTEREST CTP currently plans to develop around 100,000-130,000 sqm in Hungary this year in both the greater Budapest area and the regions. “The countryside is still an interesting location for CTP. We plan to commence development in prime countryside locations by busy motorways and large city junctions. We have development plots in Győr, Komárom, Kecskemét and Tatabánya with a total of more than 125,000 sqm. Despite the above, our planning focus remains on the Budapest proximity market. I see that demand for countryside locations will be

REAL ESTATE review dominated by the manufacturing and distribution sectors,” Nemes adds. The other major regional industrial developer and park operator active in Hungary, Prologis, has a major construction underway at Prologis Park Budapest-Harbor. The company has an occupancy rate of more than 99% in Hungary, compared to 95% in its Central Europe portfolio. “Prologis expects to see outperformance in Europe from its stay-at-home economy customers, led by the F&B industry, which was a key driver of an increase in short-term leases during the lockdown.” The company’s assets in Europe are located in the largest consumption markets and key logistics hubs, which it believes will prove to be most resilient in an economic downturn as e-commerce levels are increasing, says Prologis. With regard to further developments, the state-owned NIPÜF (Nemzeti

Ipari Park Üzemeltető és Fejlesztő or National Industrial Park Management and Development Company) has a landbank that covers most regional cities across Hungary. The company aims to deliver logistics parks in areas not currently provided for by the market. Regional industrial developers and park operators are developing highly specified projects in reaction to changing tenant demands. Third party sustainability accreditation, such as BREEAM and LEED, is increasingly necessary as tenants are looking to save on utility costs. For example, Prologis has five BREEAM accredited buildings in Hungary; four buildings at Prologis Park Budapest-Sziget have been awarded BREEAM “Good” accreditation. CTP is also committed to developing BREEAM buildings. The company has achieved BREEAM In-Use “Excellent” sustainability certification for the B1A2 building at CTPark Budapest West. Currently two buildings at CTPark

Tatabánya and CTPark Budapest West (Biatorbágy) have been accredited and new additions are in the pipeline. CTP plans to have all 300 facilities in its portfolio across six countries BREEAM In-Use certified by 2020. “The certification process requires long-term effort and investment on our side as these certifications need to be renewed every year. Nevertheless, we believe that BREEAM In-Use is worth the effort. CTP Hungary is committed to energy efficient and sustainable operation, also to the benefit of its tenants, and we believe that all the players of the commercial market share the same view,” says Nemes. Although the logistics sector is perceived as being in a positive position in the face of the coronavirus pandemic, the sector still faces challenges related to the need for automation, sustainability and energy efficiency, new safely and hygiene procedures and the need for open borders in Europe.

Prologis Park Budapest-Harbor.

HOTEL

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HOW AND WHEN WILL HOTEL SECTOR BOUNCE BACK FROM COVID? Developers, investors and hotel operators have seen strong potential for hotel development in recent years against a backdrop of rising tourism and demand indicators. However, the hotel and the hospitality sector has been one of the most severely hit by the coronavirus pandemic, with the impact of the crisis on tourism and international travel. By Gary J. Morrell Prior to the appearance of COVID-19, the sector had begun to attract developers and investors from the more traditional commercial property sectors seeking long-term partnerships with hotel operators for the day-to-day operation of the hotels. A number of projects at various stages of preparation and construction are in the pipeline in

Budapest and the wider Hungary, although pipelines are difficult to estimate in the current environment. Heading into 2020, Hungary had good expectations of exceeding the 16 million in airport passenger traffic that visited the county in 2019, the type of figure that has helped hotel become a mainstream development and investment market sector.

When the sector might recover from a development and investment perspective remains to be seen, although the importance of the industry to national income cannot be underestimated. Further, hotel development has contributed to the redevelopment of the infrastructure and enhanced the atmosphere of Budapest and other areas of Hungary.

Hilton Garden Inn interior.

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Airport hotel by Wing.

“The global economy is under enormous strain as it deals with the fallout from the COVID-19 virus,” comments the hotel and hospitality consultancy, Horwath HTL, which bills itself as the world’s largest and most experienced hospitality consulting brand, with 47 offices around the globe. “All industries and all sectors are affected, but none more than hospitality. By its very nature the hospitality business is entirely dependent on the movement of people and a fall-off in demand of this magnitude has never been experienced before,” it adds. OCCUPANCY RATE Before the onset of the international coronavirus emergency, CBRE had monitored a pipeline of 3,750 hotel rooms across 32 schemes in Hungary, 85% of which were in Budapest. The capital had an overall hotel occupancy rate of 85% for the second half of 2019, second only to Prague in the CEE region according to Hungary’s Central Statistical Office (KSH).

With the very different skills required for hotel operation from, for example, the office sector, developers tend to operate a complex in partnership with a specialized hotel operator; an estimated HUF 260 million was invested into the sector last year, and it is now recognized as a mainstream investment asset class. “The majority of hotels are closed. However, investors are still looking for opportunities, especially when it comes to distressed assets,” Borivoj Vokrinek, head of hospitality research for Europe, Middle East and Africa at Cushman & Wakefield, points out. After years of relatively limited supply, the total volume of new hotel deliveries finally took off in the second half of 2019 as CBRE registered 590 modern rooms delivered. In total, 1,120 rooms were handed over across Hungary, three times higher than the preceding year. In addition, a number of projects shifted into 2020 and were

scheduled to be delivered this year, before the onset of the coronavirus emergency. “Budapest, and particularly the central districts on the Pest side, still form the most desired location for developers to proceed, predominantly in the three- and four-star category, with a handful of premium five-star hotels,” says CBRE. ATTRACTING THE LOCALS As the lockdown comes to an end and hospitality outlets open up, some analysts see hotels that could attract domestic traffic as being in a more positive position in the shorter term, and some hotel owners are marketing their hotels in this way. Hotels that rely on international air travel will have to look to a longerterm recovery in tourism and argue that the government should undertake policies that facilitate this in recognition of the importance of the industry to the economy and the development of the country.

REAL ESTATE review The other major issues facing the industry will be health measures that will have to be introduced before businesses can return to some semblance of normality in the view of analysts. “What is positive about this crisis is that, for the first-time, travel and tourism has been named as an industry that is vital in any functioning economy,” adds Horwath HTL. Due to the complexed development process and labor issues, hotel delivery dates have long been very difficult to estimate and completions have been slipping back. Commercial property developers such as Wing and Redwood Real Estate Holding have ongoing hotel projects, while DVM is working on the construction of a hotel project for a regional hotel developer. Major hotel brands such as Hilton, Hyatt, Marriott and Accor Hotels all have planned hotel projects in Hungary. Almost all Budapest hotel projects are located in Districts V, VI, VII and VIII. JLL has traced a pipeline of eight hotel projects under construction in District V that were scheduled to deliver by 2022, the biggest of which is the five-star, 250 room Marriott Autograph Collection. The largest project outside the capital is the 123 room Hunguest Hotel Sóstó in Nyíregyháza, 230 km east of the capital, and 55 km north of Debrecen, and the nearest international airport. HIGH-END PROJECT In a high-end project in the historic center of the Hungarian capital, the local Accent Hotel Management has delivered the four-to-five-star, 214room Hilton Garden Inn Budapest Center in District VI. Accent Hotel Management has agreed a franchise agreement with Hilton Hotels for the Lázár utca complex, which is located close to the Hungarian State Opera and Andrássy út.

In a renovation/regeneration project, the Hungary-based, Jordanianowned hospitality developer, Mellow Mood has opened the long-awaited, 110-guest room and 18 suite Párisi Udvar Hotel in the historic center of Budapest. A franchise agreement has been concluded with Hyatt Unbound Collection. Another top-end hotel historical reconstruction by the Turkish Özyer Group, Matild Palace, a palatial fin de siècle building, is scheduled to deliver the first 130-room and suite Marriott The Luxury Collection branded hotel in Budapest on the gateway to Erzsébet híd. In the mid-range segment of the hotel market, the German Deutsche Hospitality in conjunction with the B&L Group is developing the 300-room and six conference room, three-star InterCity Hotel Budapest, its first CEE InterCity Hotel, at Keleti Railway Station. The company has a policy of developing the brand at what it sees as key train stations and airport locations; the Budapest project is scheduled to be completed this year. A contract with DVM Group has been agreed for the design and construction management of the development. Wing, which is active in all commercial development markets, has agreed a forward development contract to build a hotel in Boráros tér in District IX for the French B&B Hotels chain. The project is a conversion of a former office building with a view overlooking the Danube. Wing delivered the 145room Ibis Styles Budapest Airport Hotel in 2017, which is the only hotel at the Ferenc Liszt International Airport. (The property has remained open during the crisis due to its special position as the complex has been used by cargo aircrew under isolation regulations imposed due to the COVID-19 virus emergency.) NEW IDEAS NEEDED Hotel developers see the necessity for the development of new or

innovative concepts. The Hungarian Redwood Real Estate Holding has agreed a management contract with Hard Rock International for the operation of the 140-key (including suites) Hard Rock Hotel Budapest in Nagymező utca in District VI, due to complete later in the year. This four-to-five-star “life-style” hotel and Hard Rock Café, located in a party hub in Budapest, reflects the growing sophistication of the hotel market and the need for different models of hotel development. The hotel and leisure complex, designed by the Hungarian

REAL ESTATE review

Párisi Udvar Hotel Budapest, Residence Living Room.

Studio 100, will include a restaurant with a seating capacity of up to 120. “Hotel operation is a completely different skill to office operation and therefore we are developing the project and, upon completion, it will be operated by Hard Rock International. Tourism is the biggest hit sector, no doubt. A recovery will depend on flight capacities. Trust and safety come first,” comments Bálint Erdei, founder & CEO of Redwood Real Estate Holding. The hotel market is increasingly attracting investors who were

not traditionally involved in hotel acquisitions. One such example is the Hungarian-American owned investment manager Indotek, which has purchased the 230-room Art Nouveau Gellért Hotel overlooking the Danube. The fund plans to refurbish the landmark building and upgrade the hotel to five-star status, for which it is looking for an international luxury branded hotel operator. In another deal, a K+K Hotel was purchased as part of a European portfolio acquisition by

a joint venture between Event hotels and InterGlobe Enterprises. “The focus for the hotel sector has been on finding a temporary solution to navigate this process, rather than drastic and irreversible measures and hoping for a recovery in the second half of the year,” concludes Cushman & Wakefield’s Vokrinek. “There is no doubt that government support across Europe will be critical for hotels to be able to overcome this crisis.” The questions remain as to when the hotel and hospitality sector will make a comeback and under what conditions.

INVESTMENT

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INVESTMENT CLIMATE FACES NEW CHALLENGES, BUT FUNDAMENTALS ARE GOOD Having recorded increasingly positive investment volumes in recent years, the coronavirus emergency and subsequent national and international lockdowns and the expected economic downturn have combined to severely hit investment activity, with volumes for the year expected to be significantly down. However, in the longer-term, developers argue that there is a strong pipeline of asset grade products to meet investor demand and once the current emergency situation is lifted, then deals can be completed as investment fundamentals in the Hungarian

and the wider Central European markets will continue to be perceived as positive. Analysts consider that the office and industrial markets will be the favored investment destinations, while questions are being asked with regard

to the longer-term positions of the retail and hotel sectors. Further uncertainties abound regarding the price of debt finance, loan-to-value ratios and prelease requirements for investors and developers. It is believed some developers will need to reconsider their development and exit models.

Nordic Light Trio by Skanska.

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Arena Plaza in Budapest.

In the pre-crisis period, analysts estimated that investment volume for Hungary could have increased to EUR 1.8 billion for the year, as Hungary had significant office, hotel and industrial pipelines with low vacancy and consistent demand, and investor sentiment towards Hungary was positive. Total investment volume for 2019 for Hungary stood at EUR 1.7 bln, according to CBRE. Significantly, domestic activity constituted more than 70% of activity, although more foreign investors were said to be considering the market. As elsewhere in Central and Eastern Europe, activity is limited by the relatively low supply of investment grade product and increasing competition for available assets from both domestic and international investors. As regards a recovery in the investment market and the conclusion of transactions, Benjamin Perez-Ellischewitz, head of capital markets at JLL Hungary, argues that third quarter volumes will be very low as very little business

“Sales transactions are ongoing. It is true that those negotiations which were in the due diligence phase are ongoing slower, but we do not expect a freeze of the investment market. When travelling will be allowed, we believe these transactions will speed up again.”

could be started in the second quarter, due to the lockdown situation. GOOD TO GO Further, for the marketing processes to launch or re-start after the summer, travel bans will need to be removed and viewings need to be possible for investors, as is the norm in a functioning investment market. Despite the current crisis, most developers in the office market have confidence that products will continue to attract investors. “Sales transactions are ongoing. It is true

that those negotiations which were in the due diligence phase are ongoing slower, but we do not expect a freeze of the investment market. When travelling will be allowed, we believe these transactions will speed up again,” says Nikolett Püschl, leasing and development director at Atenor Hungary. A fall in pricing is anticipated and these changes could differ depending on the asset class. The expectation among most analysts is that shopping centers and hotels are the most affected

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Advance Tower by Futureal, sold to Erste Real Estate Fund.

asset classes, while logistics, office and residential are proving to be more COVID-resistant. Where transactions are concluded, they are expected to be in these latter asset groups according to Péter Számely, executive director of real estate finance at Hypo Noe Landesbank, one of the oldest and largest regional banks in Austria. “The outlook is subject to how long the pandemic will continue to impact on our lives, to what extent of damage is caused economically and how all active players can recover and adapt to the changes that will certainly come,” comments Colliers on a potential market recovery. “After all, whether you are a developer, bank, investor, occupier or advisor, there will be an impact for all.”

The big three Hungarian funds, OTP RE Fund, Erste RE Fund and Diófa RE Fund, have been dominant in the investment market, notably at the top end of the office, hotel and retail sectors. In addition to these established domestic funds, an additional strata of closedend investment funds and private property companies have become increasingly active. Futureal Group has sold the Corvin Technology Park, the fifth office complex at the Corvin Promenade office, retail, leisure and residential complex, to the Hungarian OTP Prime Real Estate Investment Fund. KEEPING IT LOCAL In another deal involving both local developers and investors, Erste Real Estate Fund purchased the 20,000

sqm Advance Tower from Futureal, the second transaction between the two companies after the Vision Towers deal, also in Váci út. “Local investors are better off as the competition from their counterparts from abroad is reduced or has completely vanished. This could have an effect on the price level, as a reduced number of investors will have more choice to buy,” Számely notes. “The question is, if the willingness to sell at a reduced level remains. If not, the market will dry out. I am not sure how good an idea it is to start a development now. Financing for speculative developments will be very limited nowadays, if it is available at all. A project with a realistic strong cash flow might be able to attract financing at

REAL ESTATE review a level allowing a dynamic repayment schedule,” he says. “The crises has certainly had an impact on the LTVs. First of all, due to the lack of transactions and due to the different expectations of investors, it is difficult to say what is the market value today. Valuations applying pre-crises yields and estimated rental levels with the caveat of the potential impact of COVID-19 are less helpful. However one may say that, based on pre-crises values, LTVs equal to or less than 50-60% could be the basis of a discussion,” Számely adds. Some leading developers, however, see the markets in a more positive light. “Due to the current economic uncertainty, most of the investors prefer a wait and see approach until the uncertainty will gradually decrease,” confirms Alexandra Tomášková, executive vice president of operations for Hungary and the Czech Republic at Skanska commercial development CEE. “However, there is a lot of capital waiting to be deployed. Investment into real estate is a good investment even in the tougher market situation. Deals are happening for us now in Poland. Other Skanska properties are being prepared to be put to the market and we sense investor´s interest. Skanska has a different business model; we are backed by a strong financial position. Typically, we invest our own equity and in a majority of cases we invest speculatively, without the prelease. We operate in strong markets with solid fundamentals, which Budapest, no doubt, is,” Tomášková adds. ASIAN INTEREST In Budapest, Skanska has sold the 14,000 sqm Nordic Light Trio office building to JRAMC, a South Korean real estate investment trust. This is the first office investment in the CEE region by the investor. Asian investors have become increasingly active in the Czech and Polish markets, and this interest has now moved on to acquiring assets in Hungary.

“The outlook is subject to how long the pandemic will continue to impact on our lives, to what extent damage is caused economically and how all active players can recover and adapt to the changes that will certainly come. After all, whether you are a developer, bank, investor, occupier or advisor, there will be an impact for all.” Prime yields were compressing prior the coronavirus crisis, although this is not expected to continue, in the shorter-term as yields move up. Yields as of the turn of the year were put at 5.25% for office, with shopping center and high street retail at 5.5%, hotel at 5.5% and industrial at 7%. However, one high end office asset has recently traded at sub-5%. Office was the leading investment sector in 2019 with 49% or EUR 834 million of the total, according to CBRE, followed by retail with 28% or EUR 428 mln, hotel with 15% (EUR 260 mln) and industrial at 8% (EUR 144 mln). The rise in hotel investment activity and demand for industrial was significant. Colliers also puts a more positive spin on current situation. “Investment perspectives have been changing in the last few weeks as restrictions have been lifted and there is a new sense of optimism,” commented Luke Dawson, managing partner and head of capital markets for CEE at Colliers, at the New Investment Cycle in CEE/ SEE – If & When web seminar. “Capital is being deployed to CEE and, in the last few weeks, we have had three new mandates. With regard to sectors, we are seeing investors looking at industrial more than ever,” he added.

Noah Steinberg, chairman and CEO of Wing, is also optimistic regarding the longer-term perspectives for the market. “Through our stake in Echo Investment, we have experienced a higher level of activity in the investment market in Poland throughout this period. This augurs well for Hungary. The fiscal and monetary responses to the crisis are providing capital, which will in turn seek investment in yielding assets. This will lead to continued demand from local and international investors,” he insists. Számely, of Hypo Noe Landesbank, points out that rational investors invest in a country where they can achieve a higher return at a given level of risk. If the economic impact of the virus in CEE is less than that in other regions, then this certainly gives Central and Eastern Europe a comparative advantage. “However, as the countries of Europe are very interconnected, the possibility of higher growth depends on the economic relations of the given country. Hence, the small countries with open economies are more dependent on larger economies, which can limit their own growth,” he concludes.

CONSTRUCTION

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CONSTRUCTION PROJECTS GOING AHEAD DESPITE EMERGENCY SITUATION The number of cranes around the city provides evidence that construction work is ongoing at development projects despite the lockdown situation. Rising construction costs and the scarcity of labor have been seen as major obstacles to development and, therefore, market growth across the different private and public property sectors. By Gary J. Morrell Many construction workers had been taking advantage of the considerably higher salaries they can earn in Northern Europe. The construction industry now faces further challenges with further safety and hygiene regulations that have been imposed due to the COVID-19 virus. Developers are reporting that projects are going ahead as scheduled, although there are some delays in the permitting process and the delivery of materials from abroad, due to the lockdown. “Fortunately, the current pandemic situation did not result in any delay of our office projects, neither building-wise nor leased premises wise,” says Nikolett Püschl, leasing and development director at Atenor Hungary.

“By the time of the start of the lockdown, we had already achieved a very advanced status in all of three ongoing constructions. On the one hand all materials were already in place, furthermore our development strategy, of not using a general contractor but working with subcontractors who are fully managed by our in-house project managers, proved to be the most secure and professional choice in this case as well,” Püschl adds. Building “A”, the first at the Aréna Business campus, has been completed and received its occupancy permit. The handover of the 21,000 sqm office building met the deadline of the original schedule. In parallel, the construction of the second,

Libery office project, under construction by Wing.

Building “B” is in full swing and should be completed by the second quarter of 2021. “Aréna Business Campus Building “A” and Buildings “E” and “F” in Váci Greens are being built continuously. We introduced the strictest health and hygiene procedures; obviously, we try to give everything to the contractors who work for us according to their requests. Of course it is one’s own decision whether they wish to work further on the site; for now, I can report that contractors perform their contracted commitments to nearly 95%, which is very good news,” she says. SAFETY MEASURES As with other areas of the economy developers have to conform to additional safety and hygiene measures due to the coronavirus. “During lockdown, certain official procedures slowed and we also experienced minor labor shortage as many foreign workers decided to return home,” Skanska reports. “Building material flow also slowed down as outputs were reduced and delivery times were growing. Nowadays, the situation appears to have stabilized. Nevertheless, social distancing, face masks, hand sanitizing stations and other

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Aréna Business Campus by Atenor.

precautions are the new normal for the industry,” said Skanska. The certification systems put great emphasis on the communication of the safety measures within the buildings and at the construction sites, by implementing signage and promoting policies, training and mental support for employees according to Edina Hornok, head of sustainability consultancy at DVM. The signs are that the development cycles are at their peak and more than 60% of the 300 construction and development professionals at the “Portfolio Construction Industry 2020” conference at the New York Palace hotel expected construction activity growth to stagnate. At the same time, the overall view was that industry has to adapt to the changing needs of tenants, building occupants and environmental regulations and improve its productivity so that projects can be completed on schedule. With regard to sustainability, the construction industry requires a

certain percentage of renewables that have to be integrated into a project according to Zsombor Barta, president of the Hungarian Green building council (HuGBC). DIFFERENT THINKING “This will require a different way of thinking on the part of developers as the range of renewables they can calculate with is also limited in an urban area like Budapest. These are huge issues as developers have to rethink their whole developments from a design and building engineering perspective if it is located in, for example, an area where district heating is not available and you can no longer count solar-gain within the calculation of renewables for a project. This will have a major impact on developers as they and designers are now being pushed to think in more innovative and more energy efficient ways,” he says. From the perspective of a developer, Tibor Tatár, commercial and retail development manager at Futureal

Group, comments that the challenge facing developers over the last three years has been deadlines and quality. “We do not expect a fall in construction costs but a major step forward would be an improvement in construction quality and the keeping of deadlines. These are the most important issues for the industry,” he says. He thinks that, in the medium-term, the construction industry has to not only think about quality but also shortening deadlines. “This is the main challenge for the next four to five years. Fortunately, an increase in rentals came at the same time as the increase in construction costs and there was space for an increase in rentals as Hungary has the cheapest in Central Europe, 25% cheaper than the Czech Republic and Poland. For a 20,000 sqm office project the construction time is two to twoand-a-quarter years; this is too long and should be one-and-a-half to one-andthree-quarter years,” Tatár concludes.

ARCHITECTURE

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DEVELOPMENT NEEDS TO BE INTEGRATED INTO WIDER ENVIRONMENT The development process in Budapest brings in environmental issues relating to the capital as a business center, locational issues, the look and feel of the city, architecture, heritage and public transportation. By Gary J. Morrell Budapest has a number of business districts throughout the city, although no clearly defined central business district. Therefore, locational issues are an important part of the planning processes and, by the very nature of the city, business complexes are expected to integrate into their surroundings by offering services and public squares and green areas. “It is highly important to evaluate a project also on the community level and not just as a stand-alone project. Sustainable buildings are smart buildings as well and they respond to the needs of the building’s users, but they also interconnect with their environment,” comments Zsombor Barta, president of the Hungarian Green Building Council (HuGBC). With regard to the development of an

office project, for example, the most important factors are the proximity and variety of public transport, the amenities within walking distance, the business nature of the district and also accessible green areas nearby. With regard to transportation links, the most favorable is a metro within 400 meters; however, other fixed track modes of transportation are also advantageous in the view of Edina Hornok, head of sustainability at DVM. Office developers have a number of priorities when sourcing a development site, however the overriding priority is location, services and transport links that serve the needs of tenants and staff. “Our base criteria for the location of a good development site is unchanged. Metro and other kind of public transport connections as well as the services and facilities of the micro and macro environment are key factors,” comments

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Nikolett Püschl, leasing and development director at Atenor Hungary. “Sourcing development sites is our daily job, which is challenging, but as we experience there is still significant potential in the different parts of Budapest,” she adds. For Hornok, public transport systems will have to accommodate different usage patterns post-COVID, as people now feel less comfortable using crowded, shared facilities. FOCUS ON CONGESTION “They have to focus on managing congestion in peak times: passenger counting smart technologies can be used, service frequency should be increased, but with reduced capacity, with seats that are at an appropriate distance from each other. Sanitizer points at the stations and appropriate signage are also important,” she says.“One downside of the crisis is that people now prefer to use their own cars; however, this could change due to economic issues. In city centers, pedestrian traffic and biking has to be promoted, which means that cities have to invest in cycling infrastructure and provide wider, safer streets for cyclists and pedestrians through limiting car traffic at downtown areas,” Hornok adds. Office developments in the historic center are rare, although there are a number of boutique hotels, of which Párisi Udvar Hyatt Collection is an obvious example of the renovation of an historic listed building, providing a

REAL ESTATE review business role for the building while at the same time attracting investment. Another example along similar lines, but of an office, is Eiffel Palace by Horizon Development. “Through the restoration of architectural values, the smooth integration of quality contemporary architecture and respecting zoning, regulations and heritage protection guidelines will support the preservation of the historical values and further elevate it. Infrastructural development is a cornerstone of heritage conservation. Tourism, though, carries a high risk for local society. If we can keep the city alive by supporting local businesses and residents, the historical center will remain a living part of the city,” comments Ida Kiss, head of design at DVM. The Central European University campus development is seen as another good example of how a modern real estate development project can be imbedded into historic Budapest. Old, refurbished and new elements are combined in an aesthetic and appealing way and the community is also invited into the new spaces, as publicly accessible areas form a significant part of the development. “The regeneration of the historic center of Budapest is an ongoing process, with lots of successful projects, but still more to complete,” comments Éva Beleznay, architect, planner and senior sustainability consultant at the HuGBC. “The energy-efficient retro-fitting of old buildings, while preserving their historic character, is a great challenge. There are quite a number of urban development opportunities in Budapest for developers and investors. The so-called transition zone surrounding the center city also holds an immense under-used and brownfield area that could be developed into urban spaces,” she adds. STRIKING A BALANCE The question remains how the look and architecture of Budapest can be improved and maintained while

Eiffel Palace atrium

development takes place. “Urban development in historical areas should reflect and respect this heritage. But developments outside of the heritage ‘circle’ should also reflect their environment and location properly,” says HuGBC president Barta. “An environmentally friendly and sustainable development has an active dialogue and relationship with its neighbors and surroundings in order to increase sustainability and energy efficiency, but also in order to integrate the community as well. For me, the look and architecture of urban developments should represent all of this,” he adds. With regard to how city authorities and national governments should promote and facilitate the sustainable development of the city, Hornok argues for maximizing the quality of life for the inhabitants. “Alleviating factors such as improving the cycling infrastructure and limiting car traffic at central areas can, at the same time, offer positive effects on carbon emissions too. Providing more livable, walkable neighborhoods, and quality green areas enhances the emotional and psychological wellbeing of inhabitants, and also helps improve air quality, which is a key factor in the fight against the pandemic. “It is important to promote communitybased mutual aid networks and local businesses, and smart technologies

should be applied for risk mitigation and efficient and safe service delivery. An affordable, low-carbon public transport is also an indispensable part of a sustainable city; however, in the current health crisis it can work only with the implementation of specific safety measures,” she says. Ida Kiss argues that architects and urban planners are the minds who hold the big picture of the city development and longer-term goals. They have to lead developers towards creating a livable and not just economically, but environmentally and socially sustainable city. The lessons learnt from the current situation could drive the city towards becoming more green, walkable, cyclable and therefore, becoming more resilient. Budapest will not change much, as developments will also slowdown in the coming years, but it will be better organized and cleaner, Kiss hopes. “As a developer with an architectural background, I have always considered developing individual buildings and shaping entire neighborhoods the greatest personal and professional responsibility,” says Attila Kovács, managing partner at Horizon Development. “Leaving your mark on the urban fabric for at least 50-100 years means that you will touch generations of people with your design preferences and the way you respect the historic setting you build in.”

SUSTAINABILITY

REAL ESTATE review Photo by Wang An Qi/Shutterstock

SUSTAINABILITY DEVELOPMENT MORE CENTRAL TO A SUCCESSFUL PROJECT Sustainability accreditation from an independent, third-party sustainability organization such as the U.K.-based BREEAM, the U.S.-based LEED or, increasingly, WELL, have become the norm for development in Hungary. Indeed, in the office and logistics sectors, they had become almost a prerequisite for a successful development prior to the COVID-19 emergency. By BBJ Staff Sustainability consultants and practitioners are bringing to the fore issues regarding the life-cycle of a building, the perceived wellbeing of staff and the relationship

of a building to the wider urban environment. These issues are integrated into the concept and design of a project in reaction to environmental concerns, governmental and municipal regulations and market pressures

such as letting, securing preleases and exit strategy with the sale of an asset to an investor. Leading developers such as Skanska, Horizon Development and Futureal are committed to developing their projects

REAL ESTATE review in line with WELL accreditation in addition to the more established LEED and BREEAM systems. “Skanska Hungary will soon complete the Nordic Light Trio office building, our first project to be WELL-certified and sold to a South Korean investor in 2019 and in which 100% of space has been already pre-leased,” reflects Alexandra Tomášková, executive vice president of operations for Hungary and the Czech Republic at Skanska commercial development CEE, on the necessity for sustainability throughout the development and investment cycle of a building. With regard to the influence that LEED, BREEAM, WELL and other sustainability organizations have on the new health, work and social environment, Zsombor Barta, president of the Hungarian Green Building Council (HuGBC), argues: “The new challenges show that systematic thinking and therefore sustainability is the direction which should be focused on. The systematic approach was always included into the international green building certification schemes; however, often the sustainable approach was not fully followed during the design, construction and PM activities in the CE region.”

almost all is accredited. According to HuGBC, around 10 projects are in the process of assessment for WELL precertification or certification. A further element of sustainability in development and building operation is the concept of “circularity”, which brings in issues of the need for a low carbon footprint, low energy use and the use of none toxic materials in construction. This is increasingly being incorporated into, for example,

Foundation, which promotes the concept of a circular economy and sustainable societal systems. “A sustainable building has a circular rather than a linear life-span, this involves reduced energy-use and carbon footprint,” he says. GOOD EXAMPLES The concept could be seen as the market and sustainability factors impacting building developers at the same time. “There is a need for good examples of circular buildings to persuade developers to construct in this way. With the development of higher quality building, owners are able to receive higher rents. Therefore, more developers are looking at the concept with the use of as many generic rather than specific elements as possible with the creation of a building passport,” Zuidema explains. Barta, of the HuGBC, sees flexibility in the use of buildings as one of the key elements of a circular economy.

Zsombor Barta

DIFFERENT METHODOLOGY He believes things could be moving on that front, however. “This could now change, as the new challenges require a different working methodology and approach. The green building certification schemes provide the systematic methodology, which can significantly support commercial real estate design, development and operation,” Barta says.

the BREEAM accreditation system. The argument is that a sustainable building has to be constructed and managed on a basis that reduces its carbon footprint. This forms part of the wider concept of a circular economy that strives to eliminate waste and enables the continuous use of resources, a closed-loop system that minimizes the use of resource inputs and designs out the creation of waste and carbon-emissions.

Budapest has around 1.5 million sqm of sustainability accredited office space, according to Colliers International; that represents 40% of total space. Further, of the 570,00 sqm of space under construction

The stakeholders in the creation of a circular economy are seen as investors, building-users and authorities by the construction engineer Remko Zuidema, founder of the Dutch BRIQS

“We have heard a lot about new economic models like a sharing economy and if you can integrate these new economic models into the facility operation and maintenance and functions of the building, then you can use refer to it as a circular building,” he says. “One of the economic models is that a building does not have a particular function but the function is also changeable and capable of being modified. For example, you do not have predefined offices for a specific tenant; these spaces can also be utilized for meeting rooms or for completely different types of functions, depending on the needs. In my view, a fully circular building or real estate is not only due to the materials used and a low environmental impact, but also in terms of usage. The concept still has to be developed with regard to the use of space,” he comments.

REAL ESTATE review Tenants have also become more conscious of sustainability issues with regard to workspaces, both in terms of design solutions and the building’s sustainability and wellbeing factors, in the view of Attila Kovács, managing partner at Horizon Development. “Horizon Development works in close cooperation with DVM group, a general contractor with the most comprehensive range of building services in Hungary. This unique, single-contract collaboration enables us to closely monitor the entire planning and construction process, to flexibly integrate our tenants’ requirements into the building design (including aesthetic, technical and sustainable solutions), and to deliver the exact product the client envisioned,” he says.

REGIONAL CONSISTENCY Regional developers are constructing sustainable project across their European portfolios. Agora in Budapest by HB Reavis has been awarded BREEAM “Communities Interim” certification, the first commercial project in Hungary to achieve this, according to HB Reavis. Additionally, the first two buildings in the first phase have received BREEAM “Outstanding” and “Excellent” accreditation. “It provides a framework to support planners, local authorities and developers through the master planning process, before embarking on procurement, detailed building level design and construction,” the company says. “In addition to the more than 7,000 sqm of green areas, solar collectors will be placed on the roof. The energy produced by them will be supplied to the central systems of the buildings. The use of rainwater for irrigation will ensure the sustainable operation and decrease of water consumption. There will also be electronic charging points in the underground garage, for at least 3% of the total parking capacity,” HB Reavis adds. Having become the norm for class “A” office developers, regional industrial developers are now constructing and managing industrial parks in accordance with third-party sustainability accreditation.

Attila Kovács

According to DVM, external and internal parts of the base building are designed as part of an integrated process. Integration of fit-out design depends on the nature of the building (built to suit or core and shell), and the schedule of the different tenants. Some standard elements of the fitouts have to be defined during base building design.

circular economy, for example in energy and water conservation. The company is applying for BREEAM in-use accreditation for its entire CEE industrial portfolio.

“While it was less typical in the past, the number of green industrial properties has increased significantly, with 10 new and 11 existing buildings already certified, representing more than 300,000 sqm of industrial and logistics space,” said Norbert Szircsák, head of green building advisory services at Colliers International Hungary. CTP is in the process of introducing the concept and practice of a

Edina Hornok

The WELL system was developed to focus primarily on people by supporting human health and well-being issues. With regard to the current health emergency, Edina Hornok, head of sustainability consultancy at DVM, argues that although the sustainability standards – especially WELL – already had a strong focus on healthy indoor environment, now this topic is expected to get more emphasis within the certification systems. “These organizations have created new guidance that puts hygiene and the safety of workers at the heart of planning: besides creating flexible layouts and wider spaces for less people, they promote the application of durable materials for heavy cleaning, increased maintenance and cleaning of mechanical systems, creating health screening spots, and applying smart technologies to make contactless offices and to collect space utilization data,” Hornok says.

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SUCCESS STORY CONTINUES

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VÁCI GREENS E & F

Real Estate Review 2020

Articles inside

Sustainability Development More Central to a Successful Project

Development Needs to be Integrated into Wider Environment

Construction Projects Going Ahead Despite Emergency Situation

Investment Climate Faces new Challenges, but Fundamentals are Good

How and When Will Hotel Sector Bounce Back From COVID?

Industrial Seen as a Leading Market Sector

Limited Budapest Shopping Center Pipeline

50 Years of Pioneering Added Value

IMMOFINANZ: myhive Brand Focuses on Increased Security and Flexibility for Tenants

Interior Issues at the Core of a Successful Office Project

INTRODUCTION

Constrained Pipeline Meets Strong Demand

Despite COVID, Budapest Office Fundamentals Remain Strong

New Budapest Business Districts Emerging

Inside View: Legal Approach to Smart Buildings Post-pandemic