The deterioration in the macroeconomic environment due to COVID-19 also affects the commercial real estate market, which is strongly linked to economic cycles: market developments at the end of 2020 H1 pointed to a growing risk of overvaluation. Looking ahead, economic performance may remain subdued for the rest of the year as the real economic recovery may take longer than expected, due to the second wave of coronavirus.

The spread of COVID-19 has a major impact on the sectors primarily responsible for CRE demand. In 2020 H1, demand declined in every CRE segment except for industrial-logistics, and occupancy/vacancy figures also deteriorated, with falling rental rates in the retail segment. Based on the opinion of the Housing and Real Estate Advisory Board (LITT), the sector’s position will be further aggravated by the second wave of the pandemic: the hotel and the retail segments are attempting to reach a turnover level sufficient to cover overhead expenses. Home office regimes and online retail sales will increase yet again, with a growing risk of becoming permanent features, thus pointing to restrained demand conditions for the sector.

The downtrend in investment yields seen in recent years came to an end, with prime yields increasing by 25-75 basis points in every segment compared to the end of 2019. The biggest uncertainty factors for investors at the end of 2020 H1 included slower economic growth, tenant insolvency and tightening financing conditions, as opposed to the previously typical shortage of supply. Investment demand did not disappear completely, and two substantial transactions took place in H1, but according to LITT a ‘wait-and-see’ approach, the postponement of investment decisions has become typical and the pre-pandemic level of activity is likely to return at a later stage of the recovery. In the case of a protracted recovery, the value of commercial real estate could fall, potentially affecting the stability of the financial system via multiple channels. However, the capital adequacy of the banking system is adequate to deal with potential risks arising from the commercial real estate market.

The liquidity of Hungarian public real estate funds is stable. Although the redemption of investment fund shares increased at the outbreak of the pandemic, there was a net capital inflow again into the sector from the end of the second quarter. With regard to these funds, rising investment yields could pose a threat going forward, due to the higher uncertainty in rental cash flows, among other things, which could lead to a revaluation of real estate assets. The liquidity of open-ended public real estate funds is also supported by the MNB, which has allowed them to participate in the central bank's long-term collateralised loan tenders since April 2020.

Banks significantly tightened business-purpose property loan conditions in 2020 H1, due to the economic impacts of COVID-19, as demand for property loans fell. Loan conditions were tightened as banks’ risk tolerance waned and industry-specific risks emerged. CRE loan risks are temporarily mitigated by the payment moratorium introduced in March 2020. 55 per cent of credit institutions’ project loan portfolio secured by commercial real estate was affected by the moratorium at the end of June 2020. Within property types, at 77 per cent, hotel financing was responsible for the highest share of loans covered by the moratorium. The targeted extension of the moratorium with effect from January 2021 is expected to significantly help real estate project owners as many projects will be able to meet the established criterion of a 25-per cent decrease in revenue.