In 2004, the European real estate sector outperformed equity and bond markets.
Total volume invested in prime CEE property since 1998 reached EUR 11.6 billion by end-Q3 2005. The annual volume by year-end 2005 is expected to surpass EUR 4 billion. The pace of activity has increased substantially each year. 2005 is set to break further records, with several large deals pending for Q4. Poland, the Czech Republic and Hungary continue to be the major destinations for capital, although investor interest in emerging destinations elsewhere in CEE is huge.
Following the record successes of 2004 with an investment volume of €900 million, the Hungarian investment market has continued its development. While 2005’s volume is not expected to exceed this record, investor appetite remains very strong. Fuelled by the prospects of rental growth within the office market and the further compression of yields across all sectors, owners have been encouraged to bring stock to the market.
The industrial investment sector is traditionally considered the least liquid in Hungary. It continues to be both small and balanced.
Continuing a trend established over the past several years, the market for modern speculative and build-to-suite (BTS) space grew by 33% in 2004, however the total stock of 637,200 sqm remains below comparable markets in Central Europe such as Prague and Warsaw. For a variety of reasons, Hungarian firms have been slow to fully embrace modern logistics practices and this has limited demand. However in August, Prologis closed the largest industrial transaction in the region with the acquisition of Harbor Park an established logistics park in southern Buda comprising around 150,000 m² of existing and future build area.
2004 was an exceptionally good year for the Budapest office market, with the highest absorption ever recorded. The market expanded by 84,600 sqm in 2004 and absorption reached 138,300 sqm, forcing the vacancy rate down from 24.7% a year ago to 16.4% by December 31, 2004. The total stock of Class A office space in Budapest at the end of 2004 was 1,060,700 sqm.
In 2005 continued demand has resulted in further yield compression, with two major transactions near closing which will take the prime benchmark below 7.5%. For some investors this signals a need to move further east, but for others it represents a sign of a maturing market, especially for the more risk-averse investors.
With office transactions dominating 2004’s investment volume, the appetite for portfolio diversification through retail investment has increased.
2004 and 2005 showed increased momentum on the retail property market throughout Hungary. EU accession has encouraged new retail brands to enter the market and thereby increased competition, especially in the food, home and fashion sectors. While retail sales continued on an upward trend in 2004, with growth more than double the EU average at almost under 5%, total retail spending in Hungary remains about half of that in the rest of Europe.
In the office market segment headline rents remained stable in the range of €12 – €15/sqm/month. Effective rents in new buildings declined slightly to €11,5 – €12,5/ sqm/month in 2004, Given the dramatic decline in vacancy rates during 2004, rents finally rebounded during 2005, moving back up to €12,5 – €13,5/sqm/month.
In the retail market segment rents vary quite significantly even within districts and prime rents are available only in specific sections of particular streets and in selected shopping centres. One corner distance in the wrong direction may result in 30-40% difference in achievable rents therefore an average for an area may be misleading. As a trend, shop owners quote specific rent for their units regardless of the exact size in m2, and that also can result in 5-10% deviation from the mean average. It is also important to mention, that the function of a retail area and its tenant history might also be reflected in the price; a long-time resident tenant with a good reputation is definitely a price factor.
The highest achievable rent in 2005 was EUR 115/m2, which is a 4.5% increase year on year. Areas like the inner section of Király street have shown higher growth rate but starting from a very low basis. There the handover of Gozsdu udvar is expected to give a serious push to rates achievable into the prime high street range. Achievable annual yield is in the range of 7,5%-9%.
In shopping centres the highest rents were EUR 100/m2 but taking into account the very low vacancy rate (3,1%) and that no completions were reported for 2005, the rates are expected to rise. Currently the highest yield is 7%.