Budapest  Pauses from Real Estate Frenzy

Copyright: David Lawson – Autumn 2001

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 Budapest struggles hard to be the most western of  central European cities. Hungary was the first Iron Curtain nation to adopt a free economy and much of that is run from the capital, which holds a fifth of the population and almost all its offices. This, like most commercial property, is priced in a western currency, Deutschemarks. Even the reviews are tied to German inflation rates.  But the urge to merge has a downside. The country has certainly benefited from  the prospects for amalgamation with the EU by 2005. Foreign investment has poured in, reaching US$1.7bn last year. But the slowdown in major markets like Germany, which takes almost 40% of the country’s exports, is taking a toll as it spreads eastwards.

    This has made many developers pause for thought after several years of frenetic activity. Rapid growth in office construction since 1999 appears to be peaking, says DTZ central Europe research co-ordinator Peter Murphy – the first time since the mid-Nineties that supply has fallen year-on-year.  Completions will rise again in 2002 but a fall heavily in the following 12 months developers postpone schemes in the face of oversupply created during the rush to become a European office centre.  Takeup has soaked up the output in the past and is expected to break 150,000 sq metres this year, pushing  prime rents to DM36/sq metre but occupiers are beginning to draw into their shells. The terrorist attacks on New York and Washington, combined with economic slowdown and upcoming elections next spring have replaced buoyancy with caution for next year, and letting decisions are being put off.

   The elections will come at a crucial time. Faced with a slowdown of GDP growth from almost 4.5% at the beginning of the year to less than 3% in 2001, the government has been trying to fill the gap by boosting public spending. Interest rates have also come down.

  The trick will be to keep control of inflation. This remains one of the more positive factors, according to Jones Lang LaSalle, which expects a reduction to 6% by the end of next year.  Another bright note is the prospective erosion of supply.  The overall vacancy rate remains high but has fallen to 17.8%, says JLL, predicting that this will continue as developers hold back. The changing balance  has already slowed decline in prime office rents from minus 5% in the first quarter to minus 2.6% in the three months to June, settling at DM 38/sq metre.

   Budapest is by no means awash with the amounts of space seen in many western cities. ‘But you have to remember that these are relatively small markets,’ says Darren Battle, JLL central Europe research manager. Another 40,000 sq metres predicted by DTZ for completion this year plus next year’s commitments  will still take total stock of modern offices to only 1.152m sq metres. Beyond that, increases will be closely tied to revival of occupier confidence, as funders are unwilling to back schemes unless they are at least one-third pre-let.

   That might be expected to please investors wary of oversupply but, ironically,  slower growth in stock could be just as frustrating  A snap poll of more than 100 international fund managers at a JLL conference in Budapest last month revealed that 70%  were keen to taste the relatively high yields of 8.75-9.25% but few have managed it. Even this, the most mature of central European office centres, has yet to develop a secondary market because developers either build and hold or ask too high a price.

  .  While more than US$21.5bn of foreign capital has flowed into Hungary in the last decade, only a handful of property deals have taken place since the investment market was born in 1999. Prominent among those, DGI bought the 11,500 sq metre Raiffeisen office development at a reported yield of less than 9.5% and HypoVereinsbank took the Ericsson’s 8931 sq metre building at a reported 10%. JLL says a new benchmark could be set when DGI completes purchase of MOM Park, a mixed-use development of 28,000 sq metres of offices and 18,000 sq metres of retail this year.

   Despite the enthusiasm shown by investors at the JLL conference, Budapest offices could remain low on their list of priorities. One manager putting together a European fund admitted the sector was off his scale. ‘Even though yields appear to be stabilising, the blight of oversupply could be emphasised by the economic slowdown, and there are other cities – and sectors – which show more promise,’ he said


The fact that Marks & Spencer continues to flourish in Budapest while withdrawing elsewhere speaks volumes for the potential that international retailers see in this historic capital city, which has made astonishing progress in restoring its prestige in the last five years. Tesco has invested HUF 100 billion in  Hungary, while Dixons and a Debenhams franchise are just being launched. Most of the fashionable high street names like Mango, Benetton and Esprit have staked a claim as consumer spending continues to rise at around 4% a year.  The only ones missing are Zara and Hennes, says Charles Taylor at Healey & Baker’s Budapest office, who obviously believes it won’t be long before the list will be complete.

  The irony is that Budapest’s weakness is its high streets. The downtown area is restricted by older buildings, limited supply and lease structure. That has thrown the emphasis on fringe shopping centres, where development has been nothing short of frenetic. Eight centres have opened since 1996, doubling space to more than 400,000 sq metres as local and foreign investors piled in. Add to that a slew of individual hypermarket developments and over-supply begins to loom for a city which only boasts around 2m people.

  ‘We are close to saturation,’ admits Taylor.  But there is still room for one more centre, he adds – providing it is in the right location.  A 22,000 sq metre extension to the Mammut centre, 3km west of the centre,  has just opened fully let because it is close to relatively prosperous customers and linked to public transport. Others which are less well designed, managed or located could fare less well as the novelty value wears off. ‘Some centres have been trading poorly in the last 18 months,’ says Taylor.

  Introduction of department stores or large lifestyle operators like Hermes could help. Existing centres don’t have these UK-style anchors: the Mamut extension is centred on a sports retailer. Bolting on hypermarkets are another possibility. Development began earlier than other central European capitals like Prague and Warsaw, so foodstores found their own sites. Habits are changing, as consumers adjust to the Western idea of  multiple-choice shopping, so combined centres may suit suite operators. The other alternative is expansion on retail warehouse parks as food stores sell or develop surrounding land. This is still a fledgling market, dominated by hypermarkets, DIY and furniture. But electrical and sports retailers are now eying these locations around the city fringes. Several developers are competing to create the first factory outlet in Hungary.

   The investment market is moribund, according to Jones Lang LaSalle, and while funds are increasingly keen on central European shopping centres, Budapest raises concerns over potential oversupply. ‘There remains concern that many of the rents agreed in shopping centres over the last three years are not sustainable in the long term,’ says Peter Chatfield, national director in Budapest.

  One bright point is that further development is restricted. Investors will now need to sort existing wheat from chaff. The strong will survive but some will fail in the medium term, he says.  Retail warehousing could be a more productive sector. While nothing of significance has yet emerged, retailers could soon begin searching for ways to offload freeholds. Lack of deals in this new market makes evidence scarce but Healey & Baker cites prime yields of 10.75% off rents of DM 18/sq metre compared with 10.5% at rents of DM 80/sq metre in Duna Plaza Shopping Centre, the only real benchmark since disposal to the Plaza Centres..

  TrizecHahn’s decision to sell its shopping centres will provide further evidence  for other international investors. The North American group spent more than US350m with local partners Granit Polus and TriGranit creating two centres in an early enthusiasm for central European investment but is now retreating back to its home market.  Budapest’s  WestEnd centre, which boasts rents of DM 110/ sq metre,  is rumoured to be under offer to French investors for HUF130 billion [US$458m] but H&B insists that the field is still open and nothing will be completed this year. Meanwhile, the high street will also claim attention. The main Vaci utca, where rents are already hitting DM160/ sq metre – three times anywhere else in the city – is set for dramatic improvement over the next six months, as big names open new stores.


  Speculative development reached significant levels for the first time this year as investors responded to an influx of international operators layered onto an expanding local market. The bad news is that this has pushed down rents for older space and this could spread to newer stock. Some 64,500 sq metres was completed in the six months to June of which around half is speculative, says Jones Lang LaSalle. Prime rents remain stable at around DM12/sq metre but are expected to show a small decline as choice of premises widens. Vacancy rates have already increased slightly to 5.2%.

   The city is rich in international tenants such as P&O and Rynart, Holland’s biggest logistics firm, however, which have been extremely active in the last 18 months. ProLogis has recently taken a site close to the airport to develop a 100,000 sq metre park.   But purpose-built schemes remain dominant. No significant institutional investments have been made in the sector up to the middle of this year, says JLL.