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Commercial Real Estate Market Report - April 2019

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The Magyar Nemzeti Bank deems the regular monitoring of the real estate market to be an important task, and accordingly, it has been gradually updating its real estate market analysis framework since 2016. The first published results were the MNB housing price index family and the Housing Market Report. The current publication focusing on the commercial real estate market marks another milestone in the development of the MNB’s real estate market analysis activities.

In 2018, broad-based growth of 4.9 per cent was seen in the Hungarian economy, which exceeded market expectations. This growth was primarily supported by the expansion of market-based services, but the performance of the construction and manufacturing industries also increased GDP considerably. The favourable developments in 2018 sustained the six-year upturn on the CRE market, moreover along with labour resources, the lack of physical infrastructure also appeared as a constraint to performance among companies operating in the services sector. The performance of the manufacturing and services sectors was a key factor for the CRE market on the demand side. Stable retail sales growth generates favourable demand conditions for the retail segment of the CRE market, while favourable developments in tourism lead to rising demand for hotels.

By the end of 2018, the average vacancy rate of modern offices in Budapest dropped to a historically low 7.3 per cent following a six-year decline. Similar to previous years, the office market was characterised by strong demand for rentals in 2018, which resulted in declining vacancy rates regardless of the outstanding volume of new completions. The composition of office market take-up by tenant activity was more balanced in terms of sectors in 2018 than in previous years. It must be added that – in contrast to previous experience – the public sector accounted for a larger portion of demand.

The vacancy rate of industrial-logistics properties in Budapest and its agglomeration reached its lowest recorded rate at the end of 2018. With the low vacancy rate, lease extensions remained dominant in demand. Due to high demand, the rental rates of industrial-logistics properties in Budapest increased by more than 15 per cent in 2018.

Partly due to domestic sector regulations, new supply in the retail real estate segment was relatively restricted in previous years and no large increase is expected in the foreseeable future. The lack of new supply and growing demand resulted in higher rental rates. However, due to the expansion of e-commerce, the future viability of shopping malls may be called into question. Based on market research data, consumers’ need to try products will probably remain, and therefore real estate owners and retailers will have to find the optimal tenant mix and the new consumer experiences, often supported by modern technologies, that can attract consumers.

In 2018, domestic hotel performance increased in all categories compared to last year’s results. In contrast to the previous period, hotel openings in 2018 primarily occurred in Budapest, and this will continue in projects currently under construction or in the preparatory phase. Due to the strong hotel building activity, twice as many hotel room openings are planned for the next three years than were opened in the previous four years combined.

In 2018, investment flows in the domestic commercial real estate market reached EUR 1.8 billion. Within this, office buildings remained the most popular investment product. The lack of available properties suitable for investment led to a low investment volume in the first half of the year, but as a result of several major transactions, investment flows reached the 2017 levels in the second half. The yield premium of office investments in relation to long-term government securities remains significant. Based on transaction sums, 65 per cent of investment purchases were linked to Hungarian agents, which is significant even in a historical comparison. In 2018, the net asset value of public domestic real estate investment funds increased by 41 per cent. The ratio of real estate investments to the net asset value of these funds was 53 per cent at the end of 2018, which may be considered a safe level.

In parallel with the upswing on the CRE market, project loan stocks collateralised by CRE rose in 2018, primarily as a result of higher outstanding HUF loans. In an annual comparison, the loan stock for industrial real estate developments and hotel purchases increased the most, but office and retail real estate loans still represent the majority of the loans outstanding. Among new disbursements, loans for purchasing CREs were increasingly popular. Looking ahead to H1 2019, banks plan to tighten conditions on commercial real estate loans; the main reasons include a prudent approach to the excessive increase in real estate prices and the bank’s capital position.

According to the results of the CRE market survey conducted by the Magyar Nemzeti Bank (MNB) and the Royal Institution of Chartered Surveyors (RICS), market experts expect investment demand for most kinds of real estate to increase or stagnate in H1 2019. According to the respondents, tenancy demand for office buildings and for the best performing shopping centres is expected to rise in the first half of the year, while prime non-central office buildings and prime logistics centres may be the most prominent in terms of property development.

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