In the latest Bayfield Training Webinar, David Hourihan MSc RE Programme Leader at UCEM and Mike Edwards Head of Capital Markets at Cushman & Wakefield present: An Introduction to Commercial Office Markets – Budapest.
The Budapest Office Investment Market
David introduces the 8 submarkets of the Budapest office market, mentioning that each of these is unique from the other and attracts different types of occupiers. Mike comments that the CBD is the most undersupplied in Europe, that the Váci út corridor, which benefits from availability of developable “brownfield” land, a high concentration of modern residential build as well as excellent transport links, is the dominant market and is the primary ‘back office’ location for international tenants on which the Budapest office market is driven. Recent years have seen the rapid expansion of the micro-markets south of the CBD, either side of the Danube in South Buda and Central Pest.
Budapest Office Lettings Sub-sectors
As Mike explains, the Budapest office market is the second largest in Central Europe. Recently, the total modern inventory of Budapest office stock exceeded 4M sq. m., reaching a historic milestone. The net take-up and total leasing activity have moved up by 14% and 8% year on year by the end of Q1 2022, respectively, and the vacancy rate has also increased to 9.8%. In the net take-up, only two deals reached 3,000 sq. m: in the absence of larger leases, average deal size recently remained around 500 sq. m, considerably under the pre-pandemic average.
The Hungarian Office Lease Term is typically five years. Rent is denominated in EURO and paid monthly with a 3-month advance deposit in EURO.
Budapest Office Investment Market in 2022
Mike comments that Hungary’s workforce is low cost, well-educated and trained, making it attractive for international occupiers. Hungarian investment turnover in Q1 2022 is boosted by transactions carried over from the year 2021 and amounted to 225M EUR in Q1. Investors are more cautious and slower to make decisions, yet there are still transactions with a value of ca 500M EUR in due diligence as of early May. Based on that, a turnover of 1.1-1.3B EUR is forecasted for this year.
In the CEE region, 2.8B EUR was transacted during Q1 2022, 44% more than the similar period of the previous year. Office and Retail segments represented 80% of the total investment volume, followed by the industrial segment with 13%. The residential, mixed-use, and hotel premises accounted for only 7%. 123 million EUR was transacted in the SEE region during Q1 2022 with 29% less compared to Q1 2021 generated by-products from retail and hotel segments.
The Ukraine crisis will continue to impact upon the European economic growth through the impact on energy and other commodity prices, confidence sentiment, and trade. The new supply estimated in office, retail, and industrial segments will show a slight decrease compared to the annual average due, in part, to rising construction costs – and in so doing underpin and potentially increase headline rents for all real estate segments. Indeed, general inflation will keep annual indexation above levels seen in previous years.
The Budapest Office Investment Market: SWOT, Key Trends, & Forecasts
Beginning with the strengths, Hungary has been ranked number 27 out of 99 countries on the global real estate transparency index (GRETI) report and has been categorised as transparent. Some key features of the Hungarian market are low corporation tax, low stamp duty, attractive location bordering seven other nations, and strong economic links to the German Economy.
Regarding weaknesses, Mike points towards the low population density outside of Budapest and the capital’s dominance in economic, demographic, and administrative terms. The unemployment rate in the Hungarian labour market is about 3.7%, which means staffing has become challenging and costs increasing.
Major threats are the economic impact of the Ukraine war, inflation, whilst investor concerns over the Hungarian relationship with the European Union can be challenging. Nonetheless, there are opportunities, including the shift away from stocks to real estate assets in a defensive move by investors.
Key Trends and Forecasts
To conclude, David and Mike discussed the key trends and forecasts of the Budapest Office Market.
Mike is not overly concerned by increased supply through new deliveries onto the Budapest office market; as we move beyond the pandemic, Mike points out that deferred occupational decisions can now be made and that genuine class A, ESG compliant buildings with expected amenities remain in short supply. Indeed, increased building costs will hold back future deliveries and force rents upwards if they are to be economic. Investors will continue to focus on investing in the Váci út Corridor and CBD as well as the South Danube districts – with opportunities also expected in bringing first-generation buildings up to date. He expects that the prime ‘Grade A’ rents outside the CBD will remain stable at 18 EUR per sq. m. per month and investors will continue their pursuit of ESG-compliant office investments.