Lease renewals dominate the office and industrial leasing markets in Budapest

Jones Lang LaSalle has recently published its Budapest City Report Q4 2012 focusing on the latest real estate trends of the Budapest real estate market, covering office, retail and industrial leasing and Capital Markets as well as the hotel real estate market.

The leasing activity in Budapest was mainly dominated by lease renewals and subdued development activity throughout 2012. Only 22,950 sq m of new office building was completed in 2012 but 2013 is expected to see even lower volume as only one building is planned to be completed with 15,500 sq m. Vacancy rate has somewhat decreased but the annual volume of net absorption became negative, therefore the year end vacancy rate was still 176 bps higher, than in the same period of 2011 (19.2%).

The drop back of occupier activity was clearly reflected in the annual demand figures. In line with our forecast, the annual volume of total leasing activity reached only 344,980 sq m, which was 13% less than the recorded volume of 2011 (395,000 sq m). More than 50% of the annual take-up volume was lease renewals which is significantly higher, than the last year’s ratio of 38%.

Low development activity remains for the immediate future as there are only three office buildings under construction with 58,100 sq m total volume due to be delivered by 2014. No major recovery is expected in terms of occupier activity for 2013 either. Renewals and renegotiations will remain the main drivers of demand and are expected to reach similar levels to those in 2012.

Similarly to the office market, volume of new supply on the industrial market was also extremely low; only 16,450 sq m was delivered. However the majority of the new supply was pre-leased, vacancy rate increased q-o-q to 19.4%.

As the annual volume of net absorption reached a positive figure, this rate was still 155 bps lower than in the same period of 2011 (20.9%). The annual total leasing activity equalled 354,740 sq m, which was 8% higher than in 2011. Renewals represented nearly 63% (222.200 sq m).

The shopping centre stock was increased in 2012 by 2 new schemes in Hungary with 13,800 sq m retail GLA: Sió Plaza – developed by ERSTE – was delivered with 8,500 sq m in June and WING’s Hegyvidék Központ was opened in October. During 2012, several new brands entered the Hungarian market and the presence of the luxurious and high end brands expanded. Notable entries included: The North Face, Monclear, MaxMara Weekend, The Body Shop, Massimo Dutti, La Perla and Superdry. During 2013, only one new shopping centre will open in Hungary. The expansion of ECE’s Árkád is the largest on-going development in Budapest of 20,000 sq m, with expected delivery in the  Spring.

In 2012, the total investment activity reached a level of less than €150 million, the lowest volume of transactions since 2002. The market was characterised by a lack of liquidity. The most important office transaction was the sale of Infopark E in Q4 2012. Several retail assets, including two Family Center’s, and various SPAR, Match and Profi units were also transacted for around €40 million in 2012. The drop in the annual investment volume clearly reflects investors’ cautiousness towards the Hungarian market, partly due to the uncertain macroeconomic situation, but above all, due to the perceived unpredictability of government policy.

Rita Tuza, Head of Research of Jones Lang LaSallecommented: “In 2012 the Hungarian commercial real estate market was moderate in terms of investment, leasing and development activity and no improvement is expected for 2013 either. Neither the country’s macroeconomic environment nor the real estate market fundamentals are favourable for traditional institutional investors but there are  signs of interest for some Hungarian assets by opportunistic investors. Occupiers will remain cautious, while development activity will be subdued due to the financial constraints. Nevertheless, there are a few office developments which may be launched in 2013.”