King Sturge International presented to the media its prognosis for the Hungarian real estate market. According to the company, the market has reached the bottom of the cycle but the recovery will be a slow process. Improvements will start in 2011, affecting first the industrial sector, then the office market and last, the retail sector. This press conference is a new initiative from King Sturge, which is willing to bring more transparency to the market.
The high vacancy rate (25% in speculative buildings) will decline as of 2011 largely because of a drastic decline of new delivery. This will allow the market to slowly absorb the available space in the next two years, bringing vacancy rate down to 16% by the end of 2012. A more optimistic scenario may see the vacancy drop to 10%, but that assumes a faultless economic reform and bumper global economic growth. Some sub-markets (CBD and Váci út corridor) will recover faster, but the further away from the downtown, the longer it will take to see a significant reduction in vacancy. Rents remain under pressure with a typical Váci út Class A building offering space for 12.5/m²/month headline, with tenants able to obtain a further 15% to 20% reduction through incentives.
The major change created by the 2008-2009 crisis is that new developments will have to be pre-leased from 30% to 50% before construction can start, which historically rarely happened in the Budapest office market.
The industrial real estate market was faster to adjust to the new economic difficulties. Developers stopped all speculative developments and as we speak only one warehouse is under construction on Built-to-Suit (BTS) basis. Vacancy is high at 19.4%. The market is still suffering from the Rynart bankruptcy which saw vacancy jump from 9% to 17% back in 2008. Rents are also under pressure. Headline rents are between 3.5/ m²/month and 4.5/m²/month with incentives representing a 15% to 20% discount. Future developments will be done on a built-to-suit basis.
King Sturge believes that from an occupational perspective, the Industrial sector will be the first to emerge from the crisis. The Western Europe recovery will support Hungarian exports. In addition, the weak Forint and the excellent road network make Hungary an attractive logistics location. This will contribute to recovering demand for warehouse space.
The retail sector entered the crisis on a more solid footing than the other real estate sectors. Shopping centres are practically never built on a speculative basis and vacancy was always low. However, retailers are suffering greatly from declining consumption and high unemployment. King Sturge does not see any immediate improvements in these two factors. The government reform package will take time to generate jobs and increase Hungarian purchasing power (civil servants will likely have their pay cut by 15%).
Rents in most shopping venues are declining. The remaining retailers in the market have a strong negotiating position. The changes are most visible in the High Street sector where on Andrássy út, retail space can be leased between 35/m²/month to 60/m²/month. This is a 15-20 decline versus last year. It is important to clarify that luxury brands are not leaving Andrássy út. It is the older local shops which are leaving or closing, thus creating a surge in supply.
The investment market remains illiquid. 2009 saw less than 300m worth of institutional grade transaction. At this stage, Poland and the Czech Republic are the main focus of investors' attention. King Sturge perceived some renewed interest in Hungary in Q2 2010 but it is still not sure whether the investors will think of Hungary as a potential next Greece or a country on the path of sound structural reforms. King Sturge believes in the latter.
Many of last years transactions were not "arms length" as the buyers had a strong vested interest in the property (mostly as tenant). These transactions were reputedly con