A guide to real estate investment in Hungary - 2014/2015 The time is now!
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A guide to real estate investment in Hungary 2014/2015 The time is now!
Contents
3 Introduction
5 Why Hungary now?
8 Office Market
11 Industrial Market
14 Retail Market
16 Submarket focus: Váci Corridor
19 Submarket focus: CBD
22 Understanding capital markets in Hungary
25 Trends and projects to keep an eye on
27 About Hungary
30 Leading industries
31 Subsidies for investment projects in Hungary
32 Legal environment of real estate investments
36 Tax environment of real estate investments
40 About JLL Hungary
42 Contacts
Introduction
The time is now!
Hungary is experiencing a revival of its economic
performance and real estate investment activity which
follows several years of poor performance amid the
wider European and global financial climate.
Since 2013, all major macro-economic indicators
have improved and this has started to translate into
real estate investment activity. We have registered as
much volume in the first half of 2014 as we recorded
for the entire 2013. The substantial pipeline of deals
set to close in Q4 and early 2015 is a testament to
the changing landscape. We are experiencing larger
investments by local real estate funds associated to
an inflow of foreign capital which should help the
volumes to reach €600m in 2014.
So far the CBD and the Váci Corridor submarkets
account for the bulk of the investment volume. While
we are not witnessing large development activity
similar in size to the development of the Millennium
City Centre or, the booming Váci Corridor from the
pre-financial crisis times, we should however mention
Benjamin Perez-Ellischewitz some high profile projects related to listed historical
properties in the city centre and the expected
Director, Head of Capital Markets Hungary
development of the mixed-use retail and office project
in Buda South.
JLL has been a leader on the CEE and Hungarian
market since the region gained momentum in the
early 2000’s and our Capital Markets team has
an unbeatable track record and access to the best
opportunities, both on and off-market, for real
estate transactions, JV structuring, debt issuance or
trading. Moreover, our team offers a complete service
from advisory for market entry, valuation, asset
and property management, to leasing and project
management services.
We hope that this paper will help investors gain a
better understanding of our real estate market and its
recent development, including a general tax and legal
overview prepared by DLA Piper.
3
Why Hungary now?
1 3
The economy has recovered
and Hungary shows some
of the best macro-economic
indicators in the region
Local demand is
GDP growth peaked at 3.7% in Q2 2014 (strongest among
the EU 28) and is forecast to finish at 3% for full year 2014.
complemented by
Inflation is around 0-0.5% and the central bank sharply
reduced the main interest rate to 2.1%. After several
recovering exports
years of adjustment of state finances, by 2013 the fiscal
deficit became one of the lowest in Europe at 2.7% and Hungary is one of the most open economies in Europe
the general government gross debt came back under the with an average of total exports and imports representing
80% level of GDP. In the meantime unemployment rate 75% of GDP (only Ireland scores higher in the OECD with
fell to 8% in Q2 2014. Hungary has one of the highest 80%). As such, the country is highly dependent on the
Economic Sentiment Indicator of the EU 28 and remains economic performance of its export markets. The positive
2
on a positive trend. economic signs in Germany, the main export market for
Hungary with a share of 24% of total exports, come at a
good time to amplify the recovery of the local demand.
Retail consumption is
showing a positive trend
Retails sales are growing with the strongest pace of the
past few years. The positive trend echoes the reduction
in unemployment and the increase of real wages. Such
evolution comes at a good time for retailers, who,
after several years of negative trends see a recovery of
turnovers.
5
Budapest is a competitive
near-shoring centre
4 7
Budapest has asserted itself as a major location for Business
Process Outsourcing (BPO) companies and multinationals
to set up Shared Service Centres (SSC). BPO/SSC occupiers,
along with the Information and Communication Technology
(ICT) sector are driving demand for office space in
the capital city. Similarly to Paris, Budapest
is the capital city of a very centralized
country. The city represented 35% of
the national GDP in 2007 and its share
will reach 40% by 2020. The economic
power of the city is reinforced
Hungary offers investors attractive
tax structuring
Efficient tax structuring can allow investors to avoid capital
gains and limit the tax impact on income derived from
real estate assets. A 10% corporate income tax rate applies
for net taxable income up to HUF 500m (approximately
TAX
€1.6m). The excess is taxed at 19% but,
taking into account tax deductions
available in respect of interest payments
on debt and shareholder loans and
tax relief for depreciation of the
asset, the effective tax rate can be
very low.
by its role as the centre
for administration,
8
university education Market standards and ease of business
and culture.
5
The real estate market in Hungary is standardized and
supported by a robust and reliable land registry system.
Lease agreements are of an international standard, €
based with annual rent uplifts in line with inflation. In
Development pipeline retail, lease contracts with turnover rent provisions and
remains limited turnover reporting are the norm. In the 2014 JLL Global
Transparency Index, Hungary ranked 25th among the
The development pipeline in Budapest came “Transparent” group (between the Czech Republic and
under significant downward pressure since 2010 Japan).
due to the restrictive financing situation and the
increase of the vacancy rate in both office and logistic
schemes. There has been a very limited supply of new
developments to the market and, in the CBD, significant
office developments are few and far between. 2014 saw
the delivery of the 14,500 m2 Eiffel Palace in the CBD and
the 21,070 m2 Váci Corner Offices in the Váci Corridor.
The two wings of Vision Towers on the Váci Corridor and
6 9
the third phase of Corvin Offices in the Pest Central South
submarket, are due to be delivered in the second half of
this year.
Foreign investors remain the dominant force
Despite the increasing share of national investors in the
past years, the real estate investment market in Hungary Hotel performance improving
remains highly international with foreign investors
typically representing more than 80% of investment Hotel performance figures for the last 3 years have
volumes. For assets above a €30m value, demand is been improving, showing significant growth in both
almost exclusively international. Some of the largest occupancy and room rates. In 2013, occupancy was up
tickets in the past few years have been related to the by 1 percentage point and the ARR by 2.5%, contributing
acquisition of 5-star hotels by Middle Eastern investors to a 3.9% rise in RevPAR. International demand, which
(Intercontinental, Le Méridien, The Four Seasons). represents almost 85% of bed nights is strong, particularly
the tourism component of it. The general occupancy
among Budapest hotels has returned above the 65% level
for 4* and 5* hotels.
1 It’s all
0 9 7
8
about
timing!
Contrary to markets such as London, Paris and even Warsaw where there is very high
competition among investors on prime assets and therefore bidding frustration and
fatigue, today Budapest offers a window of opportunity as the market depth remains
limited. Even for the best assets, proactive investors can conclude deals which would
be difficult to secure in a more competitive environment. With the increasingly positive
outlook for the country, the easing of financing and the increasing interest of foreign
and national investors in the real estate segment, we expect the market to show a sharp
recovery of activity in the coming months. As recently witnessed in Spain and Italy, the
repricing materialised in a 6 to 9 month time frame and the current Hungarian market
configuration therefore offers a rare acquisition window.
7
Office market
Bullish occupier market - record take-up The quality of the Budapest office stock is in line with
in H1 2014 with almost 250,000 m2 of Western-European standards and the modern Class
office space leased A office buildings meet the technical requirements of
large, international tenants. The latest handovers of new
Decreasing vacancy rate – standing at its developments are certified under the LEED or BREEAM
lowest level in the past 5 years rating systems in the planning and construction phase,
while older buildings have started to apply for the
Stabilised rents - with reduced tenant operations and maintenance certifications.
incentives in some successful buildings
and submarkets MATURE SUBMARKETS WITH EXCELLENT INFRASTRUCTURE
Weak development pipeline – shortage The city of Budapest is divided into two easily identifiable
of prime category office space could parts by the Danube river, namely: Buda and Pest.
push rents up While Buda is the wealthier residential area, Pest is
the administrative and cultural centre of the city with
governmental buildings, ministries and headquarters.
Budapest has a well developed, efficient and dense public
transportation network. It has 4 metro lines and numerous
High quality standards bus, tram and suburban railway lines, which provide
excellent access to every part of the city.
The development of Budapest’s modern office market
began at the beginning of the 1990’s. Both international The infrastructure network of Budapest has been
and local real estate developers have progressively continuously developed. Most recently, a new metro
developed a modern stock of Class A and Class B line was completed (M4) connecting Buda and Pest and
buildings, which currently totals 2.57m m2 of speculatively several busy and strategically important tram lines are
built office space and a further 640,000 m2 of owner also being upgraded and extended (tram line 1, 3, the
occupied premises. With this volume, Budapest has the merging tram network of Buda including line 17, 19, 47
second largest office market in CEE behind Warsaw. and the reconstruction of Széll Kálmán Square). No doubt
that once these developments are realized, they will add
a significant boost to the commercial property market of
Buda.
MODERN OFFICE STOCK IN CEE AND SEE CAPITALS
The Budapest office market is divided into 9 submarkets,
Belgrade which all have different characteristics in terms of stock
Zagreb quality, availability, rental levels and development
pipelines. The majority of the office stock (63%) is located
Bratislava
on the Pest side, owing to Pest’s administrative role and
Bucharest
favourable public transport network.
Prague
Budapest
Warsaw
Record breaking occupier activity
The largest occupiers of the Budapest office market are
0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000
well-known, international tenants, who entered the
Office stock (m2)
Source: JLL Research, September 2014
Photo: Millennium City Center
Hungarian market in the early 2000’s. Almost all of them Although the composition of demand changed after the
have expanded in the past 10 years and their crisis, occupier activity hasn’t collapsed as gross take-up
long-term plans in the country are reflected by the amounted to approximately 370,000 m2 on average over
recurrent renegotiations and extensions of leases. the past 5 years.
Leading occupier groups include: What is even more noteworthy is the record breaking
take-up in H1 2014 with almost 250,000 m2 of gross and
• Banking, financial services, insurance 130,000 m2 of net take-up.
• FMCGs
• SSCs/BPOs Most significant transactions in 2014 included:
• ICT
• Media and telecommunication • The pre-lease and expansion of various GE
• Business services subsidiaries totalling more than 9,000 m2
• Public sector • Vodafone’s expansion of more than 5,000 m2
• The opening of Emirates’ new SSC of more than
There is a significant requirement from small and micro 3,000 m2
enterprises as well, mainly from local companies who
make up almost 20-25% of the total leasing activity. Most
recently, we have seen a rise of successful Hungarian ICT
firms (Prezi, LogmeIn, Ustream) occupying prime office
space.
9
Lowest vacancy rate of the past 5 years Due to the
After the global economic downturn, the volume of financial crisis
and recession
vacant office space increased rapidly in Budapest due to
the backlog of the development pipeline. Nevertheless,
following,
strategically located, modern, properly managed office
buildings did not suffer as much as could have been
expected. Several buildings, delivered after the crisis,
succeeded in securing 90-100% occupancy within a there has been stagnation in the past 5-6
reasonable period of time. The likes of Eiffel Square, Green years on the real estate market in Hungary,
House, Office Garden II, Infopark E and Corvin Offices are with low take up figures, high vacancy
good examples of successful projects. and limited number of transactions on
unattractive yield levels for developers and
By mid-2014, availability shrank to 17.6%, the lowest sellers. However, in comparison to Western-
rate of the past 5 years. In other words, vacancy is back Europe, the office space per capita still
to its pre-crisis level and based on our forecasts the shows significant room for improvement in
decline will continue. Considering the bullish occupier Hungary. As for the future, I am optimistic,
activity paralleled with a very limited, partially pre-let in H1 2014 there has been increased interest
development pipeline, it’s easy to see that the only way is for capital investment by international
down for the vacancy rate. real estate funds in addition to growing
interest from local investors. Capital
The biggest winners in the present market conditions will investments are starting to flow into the
be the high quality, Class A buildings, which will continue region, and hopefully, Hungary will be one
to attract tenants from older, lower category buildings. of the target countries. The environment is
positive for the investments, as the prices
are down and the perspectives on returns
Promising prospects – the only way is up seem promising as well. Increased activity
in all fields underlines my expectations,
A limited number of properties are scheduled for delivery since the net take up in office leasing shows
by the end of 2016, totalling some 80,000 m2. As these a 28% increase in the first half of 2014
are already 40% pre-let, there should be a shortage of in comparison to H1 2013. Furthermore,
high quality office supply in the near future. investment volume is expected to be
around €600m with an increasing share
While development activity should recover, we foresee of institutional products in comparison to
market conditions to be more favourable to landlords and the 2013 annual volume of €320m. The
a progressive easening of the rental pressure which has spirit of investments can be raised, since the
been characteristic of Budapest in the last few years. In recent Eurostat data forecasts an increase
addition, the fierce price competition, which was observed in the Hungarian economy, according to the
during the past few years, will slowly diminish and tenant numbers the Q2 2014 domestic GDP has
incentives and rental levels should return closer to the grown by 3.7%.
pre-crisis levels.
Árpád Török
Chief Executive Officer
TriGranit Development CorporationIndustrial market
Occupier market showing strong
momentum: 3PLs are back
Vacancy is falling
Rental pressure is over
A market where 6 highways meet
The centre of the Hungarian highway system is centred Similar to the office market, the development of
in Budapest where 6 highways meet, connected by the Budapest’s modern industrial stock started in the late
city ring road (M0). This provides quick and easy access 1990’s. At that time most of the assets were owner
to any part of the city, meaning that there is almost no occupied, but as Hungary’s accession to the European
substantial difference in terms of the accessibility of the Union became certain, the need for leasable modern
submarkets. warehouses boomed.
Photo: ProLogis Park Budapest Sziget
11In terms of quality, the majority of warehouses are in line actively monitoring the market for better options in
with Western-European standards and can be fitted out for terms of lease conditions and have pushed landlords into
logistics or, light industrial purposes. achieving better terms. Although demand has relapsed in
recent years, the setback was not that large. The average
Typical technical standards of warehouses include: demand for the period 2009-2013 was at 150,000 m2/
year, only 17% below the typical average for the period
2005-2008.
Warehouse Office
Concrete/steel building Flexible layout with The volume of renewals increased significantly in recent
structure sufficient social areas years, which was simply the result of the major leases
Internal clear height 10 m Mezzanine above loading signed in early and mid-2000 rolling over, along with
dock area at Clients’ request early renegotiations by occupiers to secure preferable
terms from landlords that were keen to secure them in the
ESFR sprinkler system Heating maintenance
system to 20ºC with outside context of increasing vacancy. Looking ahead, we expect
temp. of -15ºC occupiers to be especially active in 2014. Nearly 180,000
m2 industrial space was let during the first half of the
Skylights and smoke vents Average lighting level of year giving grounds for optimism. Demand from 3PLs is
400 lux
picking up sharply, with the largest transactions of the first
Interior fire hydrants / Parapet cable trunks for half of 2014 being signed by DB Schenker, DHL and UTT.
hoses cable systems
Gas fired dark radiators
heating system to 5°C with What will happen with vacancy
outside temp. of -15°C and rents?
Floor loading capacity of
5,000 kg/m² First of all, given the Budapest industrial market’s small
size, we need to bear in mind that even a relatively
With an average one rack small occupier exit or entry can cause a wide swing in
point load of ~6,000 kg
the vacancy. Until mid-2008, the vacancy rate used to
Average lighting level of fluctuate between 8-10%, considered as a healthy level,
200 lux providing a sufficient number of options for occupiers to
Electrical loading docks choose from while guaranteeing a stable level of rental
with levellers and drive-in rates for landlords. In mid-2008, the largest occupier
doors in Budapest, Rynart, went bankrupt, releasing some
100,000 m2 of space to the market at once; suddenly
Source: JLL Research
adding 8% of vacancy.
Occupiers are back
MODERN INDUSTRIAL STOCK IN CEE AND SEE CAPITALS
In general, most of the industrial space (built
for letting purposes) is leased by logistics
service providers or, companies dealing with
Belgrade
light industrial and manufacturing activities. Zagreb
Bratislava
The most important clients of 3PLs are Bucharest
the automotive, food and pharmaceutical
industries. Besides them, food retailers
Prague
(hypermarket chains, discount food retailer Budapest
chains) and drugstore chains also operate large Warsaw
distribution centres across the country. 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000
Industrial stock (m2)
During the past few years, tenants were
Source: JLL Research, September 2014The industrial
property market
is clearly on an
upward cycle.
Since then, the vacancy rate has fluctuated between 20
and 22% in almost every quarter.
Since mid-2014, the rate fell back due to absorption in Occupancy is increasing as a result of
both older, lower quality parks and in prime modern expansions and new business, however
parks. The current robust leasing and expansion activity of yield compression is just starting, so
major occupiers, points in the direction of further vacancy Hungary provides attractive investment
decrease by year end. Taking into account that there are opportunities. After the difficult past few
no on-going speculative developments in Budapest, we years, occupier activity is firmly gaining
foresee a shortage of high quality industrial supply in the momentum in our parks and we see an
mid-term. increasing interest from 3PLs again, as
well as from manufacturers. We will close
Rents have reached a level where any further decline 2014 with positive results.
would simply make the maintenance and operation of
parks unfeasible for landlords. Adding to the signs of a
pick-up in leasing activity, we foresee a positive trend
ahead for landlords with the reduction of rental incentives
and the stabilisation of rents at around €3.0-3.5/ m2/
month.
László Kemenes
VP Country Manager Hungary & Romania
ProLogis
Photo: ProLogis Park Budapest Harbor Park
13Retail market
Retail sales are shooting up, average Hungarian customer. Unlike secondary cities in
consumption is increasing the Hungarian regions, Budapest offers more than just
giant shopping centres. The last few years have seen a
Shopping centres are being upgraded: revival of the high street scene with luxury and premium
tenant mixes and layouts are improving brands: the beautiful historic scenery of Andrássy Avenue,
part of the World Heritage, the recently refurbished and
High street market is developing further: branded Váci Street and the premium corridor of Fashion
uniform “Váci Street” brand, flush of Street, offer a retail experience for locals and tourists in
luxury retailers in Il Bacio di Stile at the heart of the city centre.
Andrássy Avenue
New shopping centre in the pipeline Evolving tenant mixes and exciting new
projects
Although there are no on-going shopping centre
developments in Budapest at the moment, existing
Budapest, the retail hotspot centres are constantly upgrading their tenant mixes and
layouts to attract more customers. This way, the best are
Budapest is the centre of the Hungarian retail market. The getting even better. The tenant mix of Westend, Aréna
Hungarian capital has approximately 1.8m inhabitants, Plaza and MOM Park has improved notably during the
the largest concentration of population in the country. past 2 years and the footfalls of Allee, Mammut and MOM
Moreover, it has the wealthiest residents. Based of GfK’s Park have shown significant increases. When a new brand
latest purchasing power study, the average Budapest enters the Hungarian market, they tend to look for a unit
purchasing power per capita was more than 30% higher in one of the top 6 shopping centres. This was the case for
than the Hungarian average. Marc Cain, Michael Kors, Napapijiri, Gap, Superdry and
Budapest’s retail market has a long
history. While Western-style shopping
centres were almost unknown in
the regions until the late 1990’s,
Budapest was an exception. In line with
international trends, the first rudimentary
shopping mall developments in the
capital were handed over in the 1970’s
(Flórián Üzletház, Skála Nagyáruház), but
their GLA barely reached 20,000 m2 at
that time. The first wave of truly Western-
style shopping centres was realised
in the late 1990’s and early 2000’s, to
the delight of Hungarians, and quickly
overtook outdated high street retailing.
The popularity of shopping centres hasn’t
toned down ever since and they remain
the retail destination of choice for the
Photo: MOM ParkSports Direct to mention a few, unless their luxury
There are positioning dictates an Andrássy address. In order
to keep up with shopping centres, high streets are
definitely tangible also transforming and developing. Units along
Váci Street now have a uniformed branding and
improvements in the pavement was refurbished. A new multibrand
luxury department store, Il Bacio di Stile, opened
the retail market in on Andrássy Avenue, with a poignant mix of luxury
retailers from Saint Laurent to Bottega Venetta.
Hungary What’s next?
suggesting the worst years of the crisis are now over.
Turnover performance is improving generally giving From 2007 to mid-2013, retail sales volumes
retailers’ confidence to enter new markets and open suffered tremendously. Since July 2013, this
in new locations. Certain retailers like Spar, Inditex negative trend was reversed and year-on-year
and H&M who have been present in Hungary for a monthly retail sales volumes have shown a positive
number of years expanded extensively even during the trend. We foresee a slowdown of the growth during
crisis, increasing market share. More exclusive brands the second half of the year, nevertheless annual
like Michael Kors, La Martina and Furla entered in retail sales are likely to reach approximately 1.9% in
the past 12 months, opening 1 or maximum 2 stores 2014. Growing household consumption supports the
in selective Budapest locations. Retailers now have a expansion of retailers and also encourages potential
better understanding of the complexities of the market, new brands to enter the Hungarian market.
meaning they are more selective about the locations
they choose and the conditions they are willing There is however still room for improvement for the
to accept. This is leading to a polarisation within Hungarian retail market. While retail units on Váci
the sector, with the better shopping centres seeing Street are almost 100% occupied, there are still
improvements in retailer demand and performance, several vacant units available on Andrássy Avenue,
while less clearly defined schemes are falling further where the fluctuation of tenants was especially
behind. As the market becomes more sophisticated striking in recent years. We are now seeing a
landlords must ensure their retail assets stay relevant stabilisation of the mix with additional retailers due
to the changing demands of targeted tenants and to enter some of the existing vacant units, following
customers, as well as meeting investor criteria. Along a full redevelopment / refurbishment. Once
with maintaining a strong awareness of local and delivered, Andrássy Avenue’s flash will become even
international retail market trends it is becoming more more evident.
important to ensure the asset meets institutional
standards from every aspect. And just as retailers As for shopping centres, the upgrade of existing
are adopting more sophisticated and often regional schemes will continue further but, the market will
expansion strategies, investors need to formulate also receive stimulus from the potential launch
clear asset management strategies for their assets of a new shopping centre development by local
implemented by experienced teams on the ground. developer Futureal. The construction of Etele
Shopping Centre, a 43,000 m2 shopping centre near
Kelenföldi Railway Station, is expected to kick off
in late 2015. Taking into account that the shopping
centre density of Budapest is one of the lowest in
CEE at 445 m2/’000 inhabitants, that there is still
room for development in the Hungarian capital.
Jane Petrie
Director, Head of Retail Central Europe
AEW Europe
15Submarket focus:
Váci Corridor
Densely built-up area with high quality No.1 option for occupiers
offices and relatively well maintained
residential buildings As Váci Corridor is the largest office submarket, it is
no surprise that it attracts the most demand. During
Close to city centre the first half of 2014, 28% of the total Budapest take-
up was recorded here, amounting to almost 9% of the
Largest office submarket with 25% submarket’s stock. The largest transaction of the first half
of the total stock, the fourth biggest was also concluded there (29,000 m2 renewal), along with
district in terms of population (~118,000 the most significant pre-lease of the year so far (8,400 m2).
inhabitants)
Due to its central location, large stock and excellent
Includes the whole area of District 13, accessibility (both by car and public transportation) this
divided into two sections by Árpád Bridge submarket is usually never eliminated when an occupier
and Róbert Károly Avenue (Northern and starts to monitor the Budapest office market. The
Southern sections) composition of Class A and B buildings is approximately
60% and 40% respectively, meaning that regardless of the
Excellent public transportation network: budget of the tenant, Váci Corridor can meet all kinds of
M3 metro line connecting the Northern requirements, including the additional benefit of its easy
and Southern sections, numerous bus, accessibility.
tram and trolley lines, quick access from
Buda through Árpád Bridge There is no surprise that Váci Corridor is popular among
all types of occupiers from banks to FMCGs, consultancies
or SSCs.
Pulse of the office market LARGEST OCCUPIERS:
Váci Corridor is by far the largest office submarket of • Hungarian State (post office, tax office,
Budapest with 25% of the total office stock. Due to its national healthcare desk)
excellent location (right next to the city centre), easy • Exxon Mobile
accessibility and high supply of affordable plots, it became • Budapest Bank (GE Money)
the hot spot for landbanking and office developments by • Citibank
the mid-2000’s and has since been going through a rapid • AXA Bank
evolution. • Unilever
The progress of the submarket has continued during the • Diageo
past five years (2009-2014) as 23% of the new supply was • KPMG
delivered there. Growth is not over: between H1 2014-
2016 90% of the future supply, totalling nearly 80,000 m2,
will be delivered in the Váci Corridor, which clearly reflects
that it will remain the darling of developers in the future.M3
1 Eiffel Square
2 West End Business Center
3 West End City Center
4 V17
5 Green House
6 Capital Square
M3
7 Vision Towers
8 Átrium Park
9 Center Point
10 Váci Corner
11 Váci Greens
12
12 BSR Center
11
10
M3
9
M3
8
6
7
M3
5
M3
4
2
3
M3 1
17Photo: Váci Corridor
Investors’ appetite building up prime office yield at approximately 7.3% is a transaction
concluded in this submarket, highlighting that prime is no
Váci Corridor has always been on the radar of opened-eyed longer exclusive to the CBD.
investors, especially as it is the best alternative to CBD
properties. It is a central submarket but, unlike the CBD, it
offers a wide selection of suitable ticket sizes for funds and Towards a brighter future
institutions. There are numerous modern, recently built,
large office buildings with stable and high occupancy The resounding success of Váci Corridor is about to
rates and well-known international clients or, secure continue further. Almost 50% of its pipeline is already
entities of the Hungarian State. The list of these buildings pre-let and, due to the lack of adjacent large floorplates,
is expanding as the pipeline is delivered. it is presumable that most of the remaining areas will
be absorbed by the time of their delivery. However, the
Having a look at recent transactions, we see that growth of the submarket will not stop soon as there
two recently completed, successfully let offices were are numerous development options within it (some
transacted in 2014 and further deals are in the pipeline. with building permits, others just in planning phases)
Furthermore, the benchmark for the recently compressed comprising more than 500,000 m2 of GLA.Submarket focus:
CBD
The heart of the city with 5* hotels, LARGEST OCCUPIERS:
prime office buildings, three high streets
(out of which Andrássy Avenue is part of • Hungarian State (ministries and other bodies)
the World Heritage) • Raiffeisen Bank
• Citibank
Commercial centre of the city • PWC
• BNP Paribas
Includes the whole territory of District • LogMeIn
5, the first section of Andrássy Avenue • Aegon
(between Bajcsy-Zsilinszky Street and • Volksbank
Oktogon) and Kálvin Square
Although the submarket comprises only a small territory,
Fourth largest office submarket it has a high concentration of 5* hotels with approximately
comprising 11% of the total stock 55% of the 5* accommodation located there. All of the
large hotel chain operators are active in the market
Various means of public transportation: 4 including: Four Seasons, Sofitel, Kempinski, Marriott and
metro lines, trams, buses, trolleys Le Meridien for example.
Continuously improving area due to When it comes to shopping, the CBD does not disappoint
numerous municipality developments either. Andrássy Avenue, Váci Street and Fashion Street are
well known high street retail destinations, offering a wide
selection of luxury, premium and mass market brands.
Due to its compact size, shopping centres are absent in the
CBD and although there are only a handful of shopping
galleries, Il Bacio di Stile and Paris Department Store
The No.1 spot to go to are worth mentioning due to their amazing architectural
designs and sortiments.
One can find everything one is looking for in the CBD.
Highly prestigious residential properties, 5* hotels, a wide
selection of luxury brands, spectacular tourist attractions,
countless restaurants and theatres and of course: offices.
The CBD is Budapest’s administrative and entertainment
centre, hence the favourite spot of tourists, local residents
and officials. On top of the various ministries and bank
headquarters, Budapest’s prime office segment is also
concentrated in the CBD, including Bank Centre, Roosevelt
7/8 and the recently completed Eiffel Palace, where the
prime office rent reaches € 20-22/ m2/month for the best
units.
197 M3
M2 6 M1
M3
5 M1
r.
St
sy
ás
9
dr
An
1 8
M1
1 Roosevelt 7/8 Office building
2
2 Four Seasons Hotel 5* hotel
Gresham Palace
3 Sofitel Budapest Chain 5* hotel
M1 Bridge
3
tr. 4 InterContinental Budapest 5* hotel
M1 ionS M2
sh
Vö S
4 Fa 10 5 Bank Center Office building
rö qr
M3
sm .
11 6 Szabadság tér 14. Office building
ar
ty
7 Eiffel Palace Office building
Vá
8 Andrássy Palace Office building
ci
St
9 Il Bacio di Stile Retail gallery
r.
M2
10 Le Méridien Budapest 5* hotel
11 Kempinski Hotel Corvinus 5* hotel
12 M3 Budapest
12 Buddha-Bar Hotel 5* hotel
Budapest / Klotild Palace
13 Kálvin Center Office building
M3
13
M4
M4Photo: Szabadság tér 14
And the beat goes on
Based on the aforementioned, one might think that there As there are several vacant buildings to acquire from
is no room for further development in the CBD and that locals or the municipality and suitable for all sorts of
the evolution of the submarket is out of the picture. The commercial activities, we foresee that the CBD will
assumption could not be further from the truth! continue to transform at a rapid pace. Currently, there are
two ongoing 4* hotel developments (in Apáczai Street by
At the beginning of 2014, the office stock was expanded Zara Hotels and Hercegprímás Street by Aria) both being
by 14,500 m2 after Eiffel Palace, a new, prime office refurbishments of vacant buildings. The 5* hotel stock is
building, was delivered - 65% pre-let to PWC. The prime also about to be expanded in the upcoming 5 years after
property caught the attention of several investors and by 3 landmark buildings, Dreschler Palace (former Ballet
August 2014, it was already transacted. This reflects that Institute), Parisi Udvar and the South wing of Klotild
CBD properties are always on the radar of investors, who Palace were sold to Qatari, Saudi and Turkish investors.
are aware, that high quality downtown offices will never go The local municipality of District 5 is keen on transforming
out of fashion. The largest commercial development in the the central areas further into even more appealing
pipeline is the 30,000 m2 large former Hungarian Stock destinations. To do so, they have founded the Heart of
Exchange at Szabadság Square. The property is owned Budapest program. During the past few years, they have
by the Canadian Tippin Corporation, who is planning to successfully upgraded numerous streets and squares,
create office and retail components, as well as residential creating pedestrian friendly areas. As a result, a new and
flats in the building. colourful tourist hub has appeared around St. Stephen’s
Basilica. The transformation of Október 6 Street, Szent
István Square and Arany János Street is especially
spectacular, which became tourist hot spots due to their
never ending offer of clubs and restaurants.
21Understanding capital
markets in Hungary
Q:
How do stamp duties, income
and capital gain taxes impact
the investment?
Q: A:
Our investment group is Stamp duties are levied on real estate
active in the Czech Republic asset deals and SPV transactions
and Slovakia and we are now (4% on the first HUF 1bn /€ 3.3m
considering entering the Hungarian approximately and 2% above with a total tax
market. We want to get comfortable capped at HUF 200m /€ 645,000 approximately).
with the land registry, title and
contracting practices. Capital gain taxes are amalgamated in the
taxable income base and taxed at the general
A:
Real estate property ownership is corporate rate (10% on the first HUF 500m /€1.6m
registered in the land registry system approximately and 19% above). Tax planning and
controlled by territorial land registry proper structuring can ensure the optimisation
offices nationwide. Location, size, usage type, of the effective tax rate as Hungarian tax laws are
ownership and third party rights on the property relatively friendly towards overseas investors.
(usufruct, easements, call options, mortgages, etc.)
are all registered.
The commercial buildings and the land on which
they are built are mostly owned in freehold by
one single owner. Nevertheless, some multiple
ownerships (condominiums) as well as cases when
Q:
different owners possess the land and the building Why invest now?
do exist. Have we passed the bottom
yet?
In all cases, the records are accurate and can be
A:
accessed online (Takarnet). The market went from a peak at €2bn
of commercial real estate transactions
Sale and purchase agreement, prepared in in 2007 to a bottom of €200-300m
accordance with Hungarian Law, and countersigned annually during the 2012-2013 periods. This year,
by a Hungarian attorney at law (or incorporated in we expect some €600m of transactions.
a public deed made by a Hungarian notary public)
is submitted to the relevant land registry office for In the meantime, the prime office yield went from
registration. 5.90% up to 8% and back to the current level of
7.30%. Rental levels have been under strong
pressure since 2008 and we estimate the peak-to-
trough repricing of net effective rents at 20-25%.Q:
As a family office we are
concerned about value
preservation and regular
returns. Which product is the best
Q:
choice for us in this context?
Which location and asset
A:
class should I invest in? Private Wealth Investors tend to focus
on established CBD location and prime
A:
There is no easy answer to this assets let to international covenants.
question. The market offers Leases are relatively short in Hungary compared
opportunities across all of the main to other markets in Europe as the standard is
asset classes of office, retail and logistics, along 5-year leases in offices (up to 10 years for built
with hotels, residential and since recently, student to suit properties) and 5-year leases for retail,
accommodation. Depending on the background of with up to 15 years for anchor tenants in large
investors, their experience and appetite on the risk shopping centres. As such, the market does not
/ return curve, all asset classes can offer interesting offer the same income streams than the 20-year
investment opportunities. occupational leases of London, but prime central
locations and buildings offer now a long-term value
What is more important, is to get the right preservation as development potential is very
professional advice as similar investment proposals limited and rents are at the bottom. Moreover as
can have very different outcomes. current lease contracts were negotiated during the
challenging 2008-2012 years, there is clear rental
growth potential.
Q: Q:
Is the market liquid and Are environmental standards
transparent enough for applied in the construction
overseas investors to industry in Hungary?
succeed?
A:
In the last few years, obtaining green
A:
Hungary is classified as a transparent accreditation for new commercial
market, according to JLL’s Global construction has become a
Real Estate Transparency Index 2014. market standard. In practice, LEED or BREEAM
Hungary was among the top improving countries accreditations are the most commonly used and
on a global scale during the 2012-2014 period and based on the database of those 2 organisations,
has now a benchmark similar to Japan or Spain there are currently ca. 30 buildings accredited
(along with the Czech Republic and Poland). While in Hungary (full buildings) with an additional 30
there are a number of off-market transactions, large accreditations for operations and maintenance.
institutional prime assets are usually marketed
through leading international advisors like JLL. In the case of asset deals (as opposed to SPV
transactions), an energy performance certificate,
valid for 10 years, is to be obtained by the seller.
While there are no tax incentives for the
implementation of green solutions, investors are
becoming increasingly sensitive to the subject
and any new construction is incorporating such
requirements today.
23The real
estate market
fundamentals
in Budapest are
better than they
have been at any
time since 2008
Tenants are actively seeking space and
they are prepared to make long term
BTS commitments. Retail sales and hotel
occupancy are both rising. Economic
growth is predicted for the coming years.
Vacancy is falling across all sectors
and all submarkets. Financing is
available at competitive rates. The
low volume of investment activity over
recent years means that investment
grade product is available at higher
yields than in comparable CEE markets.
The Hungarian government is actively
encouraging and supporting international
investment in services, back office
functions and manufacturing, all of which
are major drivers for further property
development opportunities. In 2014 Wing
is developing major office and industrial
properties for multinational tenants on
a BTS basis, as well as a hotel project.
Wing has investment grade properties for
sale to international investors.
Noah M. Steinberg
Chairman & CEO
WING Zrt.Trends and projects to
keep an eye on
The city of Budapest is alive with various on-going Kelenföld and Keleti Railway stations. Futureal, a leading
regeneration projects and infrastructural developments. Hungarian developer acquired a plot just above the head
The followings highlight a few interesting projects that will station of Kelenföld and now that the metro line has been
have an impact on the city landscape. delivered, the project for a mixed-use development at this
multi-modal transportation hub is ready for kick-off.
The project is composed of Budapest One, a cca 70,000
Regeneration project at the new metro terminal m2 office complex and Etele Shopping Centre, a 43,000
m2 shopping centre. Futureal have teamed up with ECE
In early 2014, a new metro line, M4, was completed to work on the leasing of the shopping centre, due in year
in Budapest connecting Buda and Pest through the end 2017.
Photo: Budapest One
25from the District Municipality.
The District Municipality also sold
another building at Ferenciek Square
in 2014, the Parisi Udvar, a secession
style landmark, built in 1912, to host
offices and a retail gallery. The building
of 12,400 m2 was acquired by Middle
Eastern investors in 2014, with the
intention to convert it into a hotel.
A new chance for Széll Kálmán
Square and its vicinity
Széll Kálmán Square is the main
multimodal transportation hub of Buda,
with several tram lines (including the
busiest lines 4,6) buses and the metro
M2 line connecting. The long awaited
refurbishment of the square and the
transport infrastructure is due to start in
Photo: Buda Palota late 2014. This public work, coupled with
the 12,000 m2 Buda Palota office project,
will transform the appearance of this
major square of the city. Built in 1925,
The revival of landmarks the building used to function as the headquarters of the
Hungarian Post until 2008 when it was acquired by WING,
The city centre of Budapest is a constellation of heritage a leading Hungarian developer. The building is intended
buildings, mainly erected between 1880 and 1914 and a to be refurbished into a Class A office building.
show case for the evolution of architecture from the neo-
renaissance to the secession. Several landmark buildings,
some of them disused and in desperate condition, are in Museum Quarter
need of a full refurbishment and restructuring to put them
back in to use. It seems that 2014 is bringing the long One of the most ambitious plans of the Hungarian
awaited winds of change for those assets. government is the Liget Budapest project. The project is
the largest cultural investment of the last one hundred
Dreschler Palace, the former Ballet Institute, located on years in Hungary and aims to relocate six operating
Andrássy Avenue across from the Opera House, is one of institutions (scattered around various locations in the city)
the most prominent spots of the avenue. The property’s into 5 buildings to be built next to Heroes’ Square and the
struggle started in 1997 after the sale by the municipality City Park to create a museum quarter.
to private investors and the Ballet Institute had to move
out. The building was transacted again at the peak of the According to the plans, this will include the Museum of
market while standing idle and rapidly deteriorating. Ethnography, the Hungarian Museum of Photography, the
During the summer of 2014, the property of 17,000 m2 new National Gallery, the Ludwig Museum – Museum of
was acquired by a private Qatari investor committed to Contemporary Art, the Hungarian House of Music and the
transforming it into a 5* hotel in the coming 5 years. Hungarian Museum of Architecture. An open, two-staged
design competition was announced for the design of
The two wings of Klotild Palace, on Ferenciek Square, the new buildings and the State is targeting an opening
frame the way towards Erzsébet Bridge. While the between 2018 and 2020.
Northern wing, in private ownership, was fully refurbished
and transformed into a Buddha-Bar Hotel in 2012, it
is only this year that the South wing of 11,000 m2 was
acquired by the Ozyer Group, a Turkish conglomerate,About Hungary
An open economy closely tied to external
markets
Facts & Figures
Hungarian has a medium-sized and open economy, largely
exposed to the international economic and financial Area: 93,030 km2
environment of the Eurozone. Hungary’s main exports are Population: ~9.9m
machinery and transport equipment, consumer goods, Government: Parliamentary democracy
agricultural products, chemicals, apparel, textiles, wine, Capital City: Budapest
iron and steel. Trade with EU countries and the OECD now Neighbouring countries: Slovakia, Ukraine,
represents over 70% and 80% of the total recpectively, Romania, Serbia, Croatia, Slovenia, Austria
with Germany being the single most important trading GDP/capita: € 9,000 (2013)
partner. GDP growth: 3.7% (Q2 2014)
Unemployment rate: 8% (Q2 2014)
The engine of the Hungarian economic performance is
the service sector followed by manufacturing. Within
these, the processing industry, retail and wholesale and
real estate activities represent the highest distribution
of gross value added by industries. The industrial
sector (automotive, telecommunications and computer THE MOST IMPORTANT GOALS
sciences) account for around one quarter of the country’s OF THE GOVERNMENT INCLUDE:
GDP, but the service sector (especially trade, finance,
communication and tourism) represents the largest share • Boost domestic consumption and lending
of GDP. • Job creation
• Reduction of bureaucracy, shadow economy and
public debt
Issues to sort out and their solutions • Keep the general government deficit below the
3% EU Maastricht threshold and enhance the
Although the country joined the European Union in 2004, country’s competitiveness
it has always been financially vulnerable due to its FDI • Respond to demographic challenges
requirements to ensure economic growth and to the fact
that nearly half of its household and corporate debt has
been foreign exchange denominated. Successful achievements of the past 4 years
Hungary became highly leveraged and piled on high Although some of the government’s new measures were
levels of current account deficit by the middle of the criticised, the significant improvements of the economy
decade. The country’s public debt and fiscal deficit started cannot be denied.
to accrue at a barely sustainable pace and the situation
worsened after the global financial downturn. The Out of the 28 European Union member states, Hungary
economy needed quick and firm changes, which arrived in had the highest ESI (European Sentiment Index) during
the form of “unorthodox” measures after the centre-right the first 5 months of 2014 and the second highest in June-
FIDESZ-KDNP (Christian Democrats) coalition won the July. ESI reflects the level of confidence and optimism in
elections in 2010 with a two-thirds majority. Since then, each sector of the economy and shows that Hungarians are
the coalition repeated its victory during the 2014 election upbeat about future economic prospects. And what are the
and is determined to continue their strategy. reasons for this optimism?
27Bullish GDP growth
The Hungarian economic performance has regained
Q2 2014 GDP GROWTH
momentum.On the back of the increasing performance of
agriculture, manufacturing and construction, the seasonal
adjusted year-on-year GDP growth peaked at 3.7% in Q2
4.0
3.5
2014, which means that the country’s economy expanded 3.0
at its fastest pace in the last 8 years. The growth rate 2.5
was significantly above the European Union’s average 2.0
(1.2%) and it was the strongest among the 28 EU member 1.5
countries.
1.0
0.5
0.0
According to the latest forecasts, Hungary is going to ga
ry tv
ia
la
nd ni
a
do
m
ub
lic
ak
ia
an
ia
ni
on
La ua
remain one of the leading pulling forces of the European un Po ng ov om
ep U
H Li
th Ki R Sl R n
d ch p ea
te
economy with around 3% growth in 2014. U
ni
C
ze
Eu
ro
Quarterly GDP growth (%, y-o-y)
Source: Eurostat, August 2014
Improving labour market
Unemployment in Hungary has been constantly declining
since the first quarter of 2013. By mid 2014, the rate
decreased to 8% which is the lowest level since the end of
2008.
In parallel, employment is increasing
QUARTERLY UNEMPLOYMENT RATE
and peaked at 54.2% in Q2 2014, which
is the highest ratio of recent years. This
13,0
is especially positive as not only public
12,0
works schemes support the improving
11,0
indicators, but employment in the private
sector is also picking up.
10,0
The spectacular growth of the economy,
9,0
the strengthening business confidence
8,0
and the continuous expansion of the
7,0
automotive industry all assist labour
6,0
01
02
03
04
01
02
03
04
01
02
03
04
01
02
03
04
01
02
03
04
01
02
market indicators, which are forecast to
2009. 2010. 2011. 2012. 2013. 2014. improve further as, based on the latest
Quarterly unemployment rate (%, y-o-y) sentiment surveys, companies and
enterprises plan to hire new employees.
Source: HCSO, September 2014Galloping retail sales and private consumption Future expectations
Boosting consumption and increasing household The on-going recovery of the Hungarian economy is
disposable income are some of the main targets of projected to continue in the upcoming years on the back
the government. The positive effects of the improved of improving national indicators and the European macro-
macroeconomic environment were quickly reflected in the economic environment. The country’s main trade partners
retail sales indices, which started to increase y-o-y in the are forecast to experience significant improvements
second half of 2013, and their improvement has continued in terms of GDP growth, which will speed up external
ever since. In March 2014, retail sales growth peaked at demand and strengthen Hungarian exports, especially
6.1% and reached 3.5% between January and July (based in the machinery sector. This should help the Hungarian
on the sample data source). economy to expand by 2% to 2.5% annually in the
upcoming years.
The spectacular growth was the result of a combination of
factors: the improving consumer confidence and labour Increased disposable household income and improving
market conditions, the close to 0% CPI and the growth of employment rates will help domestic demand to pick
real wages. As retail sales are in strong correlation with up, while investments will build up with the help of
economic performance, it is believed that growth will the “Funding for Growth” program, EU fundings and
continue through the second half of the year, although at a the improved, positive sentiment about the country in
slowest pace. general.
Helping retail borrowers and SMEs
Private sector debt had almost tripled between 2000 and
2009 in Hungary. The large share of FX denominated
loans, especially in household mortgages, caused serious
problems for residents, who were struggling with their
increased monthly repayment obligations after the
Forint started to weaken rapidly in late 2008. To solve
this issue, the government introduced several measures
including the early repayment of household loans at a
fixed exchange rate (below the market rate), an FX-rate
cap and most recently it ordered banks to refund clients
for general conditions deemed unfair. Hence repayments
on forex loans are expected to drop by 25-30%, making
borrowers’ lives easier.
To stimulate growth, the National Bank decided to provide
money with 0%-interest refinancing to banks to grant
loans carrying at 2.5% interest and charges to SMEs. The
loan is available for commercial real estate developments.
The scheme creates liquidity on the market, mainly used
by local investors and boosts investments.
29Leading industries
The two most dominant sectors and employs more than 17,000 people. Pfizer, Astra
in Hungary are the service and Zeneca and Mylan set up regional centres while
industrial sectors contributing to the Sanofi Group, EGIS, TEVA and Richter Gedeon
~50% and ~20% of the country’s conduct manufacturing.
output respectively. Below, we
describe the most significant and
rapidly expanding industries. Information & Communication Technology (ICT)
The ICT industry comprises some 20,000 companies and
contributes to cca 10% of the country’s GDP. The sector has
displayed rapid growth in the past few years and employs
Automotive sector nearly 100,000 people. Most of the major software and
hardware developers are present and the country has become a
The automotive sector is one of regional incubator for software development, including game
Hungary’s thriving industrial sectors programs and geographical information technology systems.
which contributes massively to the country’s Moreover, Hungarian developer firms contribute significantly
exports. As at February 2014, there were to the global ICT sector and achieved international success and
712 active enterprises in the sector (including both acknowledgement (much of the damaged global IT data after
manufacturers and suppliers) employing nearly 140,000 09/11 were recovered by KÜRT, a Hungarian firm).
people and exporting ca. 90% of their products. Four large
automotive manufacturers have production in the country:
Suzuki (Esztergom), Audi (Győr), Daimler (Kecskemét) and Opel Internationally renowned Hungarian ICT firms
(Szentgotthárd). They continuously expand their production
capacities and hire employees. On the top of this, they attract Company Business
numerous equipment manufacturers and suppliers and have
Balabit IT security systems
established strong cooperation with local universities to focus
on R&D and provide an uninterrupted flow of highly-qualified, Evoline Power and data systems
young labour. Graphisoft Architectural design software
IND Banking solutions
KÜRT IT security systems
Electronics
LogMeIN Remote desktop software
Due to the high availability of skilled labour, NNG Navigation and GPS systems
the electronics industry developed rapidly over Prezi Cloud-based presentation software
the past few years and the country became one of Xapt Enterprise resource planning solutions
the largest electronics producers in the CEE region.
Source: HIPA
Similar to the automotive industry, it contributes greatly
to the Hungarian manufacturing production and several
large, leading electronics producers are active in the country,
employing some 80,000 people. According to the American Shared Service Centres and Business Process
Manufacturing Market Insider (MMI) magazine, out of the top Outsourcing
10 global electronics manufacturing services (EMS) providers
in 2013 four have a presence in Hungary (Jabil, Flextronics, Since the late 90’s, Hungary has been a popular European
Foxconn, Sanmina) providing contract design, manufacturing destination of BPOs and SSCs. The first centres opened before
and related product support. Moreover, Videoton, the largest 2000 and after the country’s European Union accession, their
Hungarian industrial company group in private ownership, is the number increased rapidly. To date, more than 70 operations are
27th largest EMS provider globally and the 4th in Europe. present, employing a total of 30,000 – 35,000 people. Their
activity is centred in Budapest. However, about 20-25% of SSCs
are situated in the regions, mostly in county capitals such as Győr,
Pharmaceuticals Debrecen and Miskolc. Typically outsourced activities include:
finance operations & cost accounting, IT desktop support, and HR
The Hungarian pharmaceutical industry is one of the largest administration. Besides traditionally outsourced activities, some
and most-developed in the CEE region due to its century-long companies perform complex, high value-add activities such as
tradition. It attracts a substantial amount of foreign investment marketing, procurement and financial modelling.You can also read
