The View 7th edition

1

2

3

TABLE OF CONTENTS

INTRODUCTION

2

EUROPEAN OUTLOOK

4

ECONOMY OVERVIEW

6

PROPERTY INVESTMENT MARKET

10

CONSTRUCTION MARKET

16

BUDAPEST OFFICE MARKET

22

BUDAPEST RETAIL MARKET

32

HUNGARIAN HOTEL MARKET

38

HUNGARIAN INDUSTRIAL & LOGISTICS MARKET

44

CBRE MALL SURVEY

50

NEW COLLEAGUES

54

4

INTRODUCTION

LÓRÁNT KIBÉDI VARGA MRICS Managing Director

Dear Reader,

The start of 2019 proved to be intensive, we have been working diligently to summarize the findings of 2018 and prepare the 7th edition of The View, CBRE Hungary’s biannual real estate magazine. The objective was and continues to be providing you with fact based, fresh market insights to support your business decisions. The magazine is dynamic in its nature, as we have been shaping it based on your feedback. We have revised our design to be more compact and facilitate understanding of the insights but remain comprehensive in our content. The booming Technological Revolution is transforming our civilization and the way we work and live. Innovation across all sectors is looping into commercial real estate as well. As a result, we had an exceptional year in terms of our Capital Markets, Advisory & Transaction Services, and Office business lines. Our Property Management team has nearly doubled the managed space. Thanks to the growing confidence of our clients and the favourable environment we managed to grow our business over 30% and our staff to 135 experts. We are proud that CBRE was the top-ranked real estate company on Fortune’s World’s Most Admired Company roster.We have been rising steadily on Fortune’smeasure of corporate reputation andfinally reached the number one position for the first time in 2019. Drawing from a base of some 1,500 companies, Fortune evaluated 680 companies from 30 countries in determining the Most Admired Companies. Fortune surveys board directors, executives and financial analysts to determine the rankings.

In our regional overview, Jos Tromp Head of Research Continental Europe puts the effects of political and macroeconomic events into perspective.

While innovation, digital transformation and disruption drive our business, we also find it imperative to stay true to our core values. I assume personal responsibility in building long-term relationships and attempt to help those in need. I am proud to continue our decade long co-operation with Szent Miklós Children’s Home & Elementary School to improve the conditions of both the staff and the children.

I am confident that you will enjoy reading the 7th edition of The View and don’t hesitate to contact the CBRE experts with any questions you may have.

With kind regards,

Managing Director Lóránt Kibédi Varga MRICS

5

REVENUE GROWTH 2017vs.2018

STAFF 135 2018

+30%

6

JOS TROMP Head of Research Continental Europe – European Outlook

In H2 2018 we have seen a rally unfold on the property investment markets across several countries in the region, bringing the CE-5 volume to EUR 13.3 bn. This is not only the highest turnover on record but indicates a stunning 20% increase on 2017. How did other markets across EMEA perform last year? Europe had a tremendous year in terms of investment volume last year. Many of the key markets reached all-time highs – including France and the Netherlands. Germany had it’s second strongest performance ever recorded. This is all due a combination of low interest levels, large amounts of equity available and sound underlying fundamentals in the occupational markets. Despite increased completion volume in 2018, office vacancy rates in general decreased across most European office markets on the back of growing service sector employment and increasing demand for office space. In the future, pipeline may be curbed somewhat by increasing construction costs and lack of available labour – this has emerged as an issue not only in CEE but most Western European markets as well.

7 Current economic sentiment is somewhat downbeat and seems to indicate a deceleration of economic growth throughout the EU in 2019-20 Looking beyond the property investment markets, what is the sentiment for 2019? Are there particular risks we are likely to face this year? There was a change inmomentum in the second half of the year, in particular Germany surprised the analysts with weaker than expected GDP figures seen in Q3 and also in Q4. It is still to be seen if this slowdown was just a temporary dip due to one-off impacts, or this indicates a turn in the cycle. On the one hand, there are arguments that the ongoing trade war, the generally slower Chinese economy will have a general drag on the European economy, on the other hand fiscal stimulus in particularly China and low energy prices can help to keep economic growth at a healthy level. Q1 2019 will provide evidence to judge if this slowdown is more a structural trend, but – for now economic growth is strong enough to support occupational markets and real estate in general. Definitely there is more political risk in the world than a year ago. We can name the ongoing conflict between Russia andUkraine, the sensitivities around Italy’s fiscal policy and Brexit of course. While uncertainties remain, liquidity has fallen in the UK investment market. Despite this, London has remained a healthy office market with strong local demand fundamentals. The high-end demand in the financial sector (like hedge funds) are less active and we certainly have seen some spinoffs to the continent (Paris, Dublin, Frankfurt, Amsterdam), the true impact thus far has been rather limited. Real economy has a clear impact on interest rate cycles. Last year many warned of increasing interest rates. How has this changed and what is the impact expected on the property investment markets? Do you think there are any fundamental changes we need to watch out for in the coming years? The outlook for an interest rate increase in the short terms has somewhat moderated – interest rate increase in the US is likely to come to an end sooner than previously anticipated as sentiment has come under pressure recently, and US economy faces risks on the downside, due to the trade war mentioned and as well as the lockdown of the government. In Europe the ECB is keen to take any measure in order to help confidence and support economic growth as some European economies are simply not strong enough to support interest rates increasing. In the long run, economists expect lower growth rates globally and this combined with the so- called “pension-glut” may mean we will remain in an environment of lower interest rates for a number of years. Generally, the expectation is that yields will remain mostly stable for now. Across property sectors, only retail has a weaker outlook and we expect here more consolidation to come for fundamental reasons: major cities are benefiting more than other locations, consumers are spending on services and F&B, instead of on consumer goods and online is taking a higher share of retail sales. The share of online in China or South Korea is around 30% of sales. As a comparison, in the UK – Europe’s most penetrated online market by far -is seeing the impact ecommerce is having already based on roughly 20% of overall sales. Based on this we may expect the increasing importance of online sales to impact the markets across Europe in the years to come. On the other side, logistics strongly benefits from this change and global markets await finally some rental growth.

0,25

0,2

0,15

0,1

Investment Volume in EUR mln.

0,05

0

0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Czech Republic

Hungary

Poland

Romania

Slovakia

Hungary's Share in Total

CEE Investment Volumes by Country

Source: CBRE Research

ECONOMIC OVERVIEW

8

DAVID M. JOHNSTON MRICS Senior Director, Head of Advisory & Transaction Services

ECONOMIC GROWTH AT HIGHEST LEVEL IN 15 YEARS Despite mounting risks surrounding the global economic ecosystem and concerns about a looming cyclical downturn, most European economies performed above expectations in 2018. Economic growth in Central Europe (4.3%) strongly outperformed the Eurozone average (1.8%) based on the latest full year expectations, with Poland (5.3%) and Hungary (4.9%) being the front runners in the region. GDP growth has not been this strong for 15 years. The three major sectors of the economy (agriculture, manufacturing & industry and services) performed similarly well, with all subsectors increasing output on an annual basis. The service sector remained the biggest contributor to GDP growth, but the performance across subsectors widely varied. As the strongest drivers amongst services, wholesale and retail trade as well as accommodation and food service activities all expanded by ca. 7% y-o-y. Meanwhile, construction output rose by 28% y-o-y, by far the highest pace among all industrial activities. Looking at GDP with the expenditure approach, the economy looks to be in a balanced state. Output growth relied on domestic drivers as household consumption went up by 5.3%. Governmental spending, however, remained flat on last year – keeping the budget deficit around 2% of GDP, below the target rate of 2.4%. As a rather positive sign for future economic growth, fixed capital investment bounced up by 20% y-o-y. Driven by strong domestic demand, imports have grown faster than exports over the last two years, yet the gap in their dynamics seems to narrow as we turn into 2019. Based on GKI’s business sentiment index, a survey based forward-looking indicator, the economy is still in a strong momentum as of Q1 2019. Business sentiment has been consistently improving for the past three years, reaching

Major Economic KPIs

GDP Growth

2018 actuals

8%

2019 forecast

6%

Import Growth

Inflation

4%

2%

0%

Export Growth

Private Consumption

Industrial Production

Source: KSH, Oxford Economics

9

all-time high levels in recent months. On the other hand, all macroeconomic forecasts point to decelerating growth across the globe and Europe in particular. With that said, recent forecasts have been revised upwards and a severe slowdown is not anticipated: GDP growth for Hungary is expected to slow to 3.4% in 2019 – still comfortably above the Eurozone average of 1.6%. CONSTRUCTION AND RETAIL & TOURISM PULLING THE ECONOMY The share of the construction sector in the economy has markedly increased in the last two years – while it was a drag on growth in 2016, it has become the second biggest contributor to GDP growth by the end of 2018 following two years of double-digit expansion. Fueled by available EU funding, the increase in infrastructure-driven civil engineering (+40%) was still way ahead of the construction of buildings (+18%), despite the visible development boom in the real estate industry. Looking at real estate construction figures, 28% more dwellings were built across the country in Q1-Q3 2018 compared to the same period of the previous year. While the increase in occupancy permits was stunning, the number of building permits ceased to increase – in fact, it fell back by 25% in Budapest. The service sector remined driven by wholesale and retail sales growth; the overall retail trade volume finally surpassed the pre-crisis peak by 2018, following 30% cumulative growth since 2013, the bottom of the cycle. Purchasing power continued to grow in Budapest and across the country and

Source: CBRE Research, Oxford Economics

GDP Growth and Forecast - Selected Countries

10

2018 2019-23 (forecast)

0

1

2

3

4

5

6

7

%

Ireland Hungary Central Europe USA Netherlands Spain

Eurozone Germany Russia France UK Italy

is one third above its level in 2014. However, Hungary is still ranked among the countries with the lowest actual individual consumption figures in the whole EU. Accommodation and food services continued to expand by a rate over the average, as tourism revenues rose by ca. 10% y-o-y, boosting demand for hotel- and retail real estate. ABSENCE OF INFLATIONARY PRESSURE DESPITE STRONG WAGE INCREASE The strong economic growth has coupled with a significant increase of employment. Roughly 4.5 million people are currently working in the economy, up from 3.7 million since 2010, the bottom of the cycle. The average unemployment rate has reached a new all-time low of 3.6%, although the downward trend flattened in 2018.

Unemployment in Budapest hit 1.3% as of January 2019, while the same rate is above 4%only inDebrecen and Miskolc across the key regional cities. The lack of available labour remains the most critical issue across practically every business segment and region in the country. Thus, it is hardly surprising that wages kept rising throughout 2018; the monthly average gross salary reached ca. HUF 350,000 (ca. EUR 1,100) by year end, up by 11% in a year and by ca. 45% since 2014. After a hike of 25% in two years, minimal wages are set to increase by a more moderate 8% per annum in 2019 and 2020. However, it is still to be seen whether wage growth will subdue in sectors with serious labour shortage. Despite the strong wage dynamics and robust economic growth, inflation has not spun out of control. The consumer prices index sunk back to 2.7% by the end of 2018 and is forecast to hover around 3% in 2019 – in line with the MNB’s target rate.

Source: KSH, Oxford Economics

Real Earning Growth and Inflation Rate in Hungary

11

10 12 14 % year

0 2 4 6 8

real earning growth inflation rate

Forecast

2006 2008 2010 2012 2014 2016 2018 2020 -8 -6 -4 -2

Forecast

In the absence of inflationary pressure, the monetary council has kept the benchmark interest rate at 0.9% as of January 2019, although recent communication cautiously suggested an upcoming rate hike. Based on market sentiment, the HUF seems undervalued based on economic fundamentals and is likely to strengthen or stabilize against the EUR at a rate around 320 or below. As the global economic outlook is turning increasingly bearish and the likelihood of an exaggerated tightening of global interest rates is fading, the MNB faces less pressure to end its lax monetary policy intended to support further economic growth and credit expansion. Hence, there is still significant room for debt-driven real estate activity, as Hungarian households are among the least indebted in the EU, with an aggregate mortgage-to-GDP ratio below 8%. In summary, there are no obvious warning signs suggesting a sudden slowdown from the outstanding GDP growth seen in Hungary in 2018. Although there are various headwinds which can restrain economic activity, foreign analysts have gradually revised their forecasts upwards over the last 12months, as themain drivers of economic growth remain intact: continued wage increases fuel consumption while EU funds boost investment, all supported by a relatively lax monetary environment.

12 PROPERTY INVESTMENT MARKET

13

INVESTMENT MARKET

14

TIM O' SULLIVAN MRICS Senior Director, Head of Capital

Markets, Hungary

DEAL VOLUMES AND SECTORAL SPLIT

investment volumes, the former maintained its top position. Offices attracted 49% of the annual investment turnover, closely followed by retail assets with 44%, while the still under represented industrial sector fell to 6% and hotels to a mere one percent. The office sector saw 17 transactions in H2, with a combined value of EUR 668 million. This boosted the number of office deals throughout 2018 to 25 and the sector’s annual turnover volume to EUR 818 million, up by a slight 2.5% y-o-y. The largest office transaction of the year involved Corvin Offices, a portfolio of six standing buildings and one ongoing development to transfer upon completion, which form a significant part of the Corvin Quarter area in Pest. The portfolio was purchased by OTP RE Fund, marking the largest property acquisition ever closed by a Hungarian investor. The second largest office deal was for Skanska’s newly completed and largely pre-let Mill Park project, purchased by another leading domestic investor, Erste RE Fund. To complete the picture, the third largest office acquisition was Diófa RE Fund’s deal for Alkotás Point in central Buda, and another similarly sized deal took place in the same submarket in the form of Goldman Sachs’ purchase of Science Park.

After the initial low investment volume in the first half of the year, H2 2018 compensated with a rally that produced a record high biannual investment turnover in terms of volume. The strong upswing was driven by a handful of large-ticket transactions, yet activity in the small-cap segment was also buoyant. This raised the total 2018 investment volume to EUR 1.68 billion, marking it the third highest on record – down by 6% y-o-y but considerably higher than expected early in the year. The year saw more than 50 transactions close at an average size of EUR 31 million, down from the EUR 38 million average in 2017. Looking ahead, occupational market fundamentals and investor appetite remain solid for 2019, supported by lax monetary conditions. The increased development pipeline for offices and hotels is set to ease the short tradeable product supply and help boost volumes. CBRE expect a somewhat more conservative 2019 investment volume in the range of EUR 1.3-1.5 billion based on current outlook. While 2018 saw the gap between the office and retail sector narrow in terms of total

Office

Retail Industrial

Other

EUR million

Forecast Period Average

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019 F

Annual CRE Investment Volumes in Hungary

Source: CBRE Research

15

The retail sector saw 11 transactions close in H2, with a combined value of EUR 585 million. Seven deals were for single assets while the rest involved concentrated portfolios. This brought the sector’s annual number of transactions to 17 and its annual turnover volume to EUR 732 million, 59% of which came from two prime shopping centre sales in Budapest during H2. The two largest retail deals of the year involved Mammut Shopping Centre, purchased by NEPI Rockcastle following their acquisition of Arena Mall a year earlier. The other prime shopping centre deal was for MOM Park, purchased by OTP RE Fund and thereby marking the first prime shopping centre acquisition by a Hungarian investor.

Meanwhile, local property company Indotek expanded its portfolio of retail centres in regional cities, notably Győr, Nyíregyháza and Székesfehérvár, and Diófa RE Fund made a bet on retail parks around the periphery of Budapest by purchasing a portfolio of three such assets from Portico. Early in the year, Premier Outlet Center was acquired by a leading German fund and local WING picked up a portfolio including the secondary asset Euro Center in north Buda as well as a Family Center and Praktiker property in Szombathely. Investment in the industrial sector remained marginal in H2, with only two registered deals. Prologis divested two more logistics properties, in Százhalombatta and Üllő, this time as part of a global

16

10,00%

9,00%

8,00%

Office Industrial Shopping Centre High Street

7,00%

6,00%

5,00%

2007 Q4

2008 Q4

2009 Q4

2010 Q4

2011 Q4

2012 Q4

2013 Q4

2014 Q4

2015 Q4

2016 Q4

2017 Q4

2018 Q4

Evolution of Prime Yields in Hungary

Source: CBRE Research

portfolio sale to Singapore-basedMapletree, following their park in Hegyeshalom that sold earlier in the year to an end user. A small city logistics building in north Pest also was sold to an end user. Along with IPD’s sale of South Base 1 & 2 in Dunakeszi to IAD Investment and a handful of smaller single asset deals in the countryside, the industrial investment volume in 2018 totalled EUR 106 million, less than half of the preceding year’s figure. Two countryside hotel deals were registered as closed in 2018, involving Greenfield Golf & Spa Resort in Bük as well as Novotel Szeged, adding an estimated EUR 24 million to the 2018 investment volume. SOURCES OF CAPITAL The dominance of Hungarian investors continued to increase in H2 2018, reaching a share of 84% of the total volume in the latter half of the year. On an annual basis, domestic investors stood for 65% of the 2018 investment volume, up from 37% in 2017, and hence this marked the first year on record when local investors provided more than half of the total invested capital. Although a continued gain in market share was anticipated, the magnitude of the increase surpassed expectations. In terms of cross-border investment, the second half of the year added capital sourcing countries to the list for 2018. Mapletree’s arrival on the market marks the second logistics deal closed by an Asian institutional investor, albeit once again as part of an international portfolio as in the case of CIC’s Logicor acquisition in 2017. US based investors also showed activity after a prolonged idle period, with AEW purchasing three classical buildings in the CBD and Goldman Sachs acquiring Science Park. Earlier in the

year, the acquisition of Premier Outlet Center marked the long-awaited return of a German open-ended fund to the local market after not having closed a deal since the crisis. PRICING AND YIELDS Prime yield levels remained stable throughout most of the year, as there was no new product on the market that could clearly break below the prevailing benchmark figures at the time. However, based on recently closed and ongoing transactions benefitting from resilient investor sentiment, CBRE are of the opinion that a prime yield benchmark compression of 25 bps, q-o-q, is motivated across all sectors as of Q4. Despite concerns related to trade conflicts, overly stringent monetary tightening and a looming economic slowdown, the outlook for the local market remains positive and yields could still see potential compression for true Core/Core Plus assets in the office, industrial and hotel sectors. The prime yield for offices stands at 5.75%, while high-quality secondary assets in the sector can achieve around 6.75%. Retail assets retain their somewhat more ambitious pricing profile with a prime yield benchmark of 5.50%, which is valid for the best quality shopping centres and high street units alike. However, the gap between prime and secondary shopping centres is wider, as the latter would face difficulties breaking below 7.50%. The industrial sector still lags behind with a prime yield level of 7.50%. This obstinate gap remains partly due to the continued shortage of top-grade product coming tomarket – the right opportunities would place strong pressure on the current figure.

17

In the office sector, which can be considered the benchmark sector on the local market, the capital value profile showed interesting diverging trends in 2018. In 2016 the vast majority of investment turnover was priced between EUR 2,000-3,000 / sq m based on the Gross Lettable Area (GLA) of the building, and in 2017 this range narrowed to the higher end above EUR 2,500 / sq m GLA. In 2018, however, the trend showed a clear split into distinct segments. The previous appreciating

continued and resulted in most of the volume trading above EUR 3,000 / sq meter GLA, although this was largely driven by the Corvin transaction. However, the most liquid segment which produced the second highest turnover volume was between EUR 1,500- 2,000 / sq m GLA – clearly lower than in recent years. The figures suggest continued willingness to pay premium prices for high-quality assets, while a more value-add segment gained wider attention as investors seek further opportunities.

France Greece Other Singapore Austria Germany USA South Africa Hungary

Acquisition

Disposal

Sweden Israel

-800

-400

0

400

800

1200

EUR million

Acquisition vs. Disposal Volumes by Investor Nationality

Source: CBRE Research

CONSTRUCTION MARKET

18

HARANGI BARNA Associate Director Head of Project Management & Building Consul- tancy

COST INCREASE REMAINS TRIGGERED BY STRONG ACTIVITY The growth rate in construction output volumes accelerated over 2018. While KSH reported an annualized increase of 19% until June 2018, the same indicator climbed to over 27% by the end of November. The output volume increased in both main construction segments: the construction of buildings (+17.8% y-o-y) was driven by increases across residential and all commercial property categories, while growth in civil engineering projects remained high due to continuing road, railway and utility constructions, mostly backed by EU-funded subsidies. The volume growth has been accompanied by a further surge in prices; while Hungarian consumers perceive moderate inflation (under 3%), manufacturers face price increases of over 5%, and the rate can be as high as 12% in the building construction industry. According to CBRE, the annual cost inflation for office and industrial constructions reached 18% – a notable acceleration from 13% a year ago. The Hungarian construction market is experiencing a critical shortage of available labour – perhaps most severely amongst all sectors in the economy. An estimated 40,000 skilled workers are missing from the sector, out of which ca. 25,000 are working abroad. This shortage has been driving up labour costs, yet so far the wage increase has failed to attract back skilled workers from Western Europe, where construction is also fuelled by the increased pipelines across major economies. Experts in the field agree that a drastic wage hike of up to 25- 30% would be necessary to retain the needed skilled workforce in Hungary. The trend of increasing costs is anticipated to continue this year as well. The law sets the mandatory minimal wage in the construction sector at ca.

1000

1000

900

900

800

800

700

700

2018

600

600

2019

500

500

Developer's Contribution

400

400

300

300

200

200

100

100

0

0

Office Shell&Core Cost

Hard Fit-Out Cost

Tenant Fit-Out Cost

Industrial Construction Cost

Evolution of Construction Costs

Source: CBRE Research

19

20

10.3 EUR/hour, indicating an annual increase of 15%, well above the average minimal wage increase of 8% at a national level. Although development pipelines have been growing across various building categories, the supply side is far from overheated. The annual reproduction rate of the Hungarian housing stock stands at 0.4%, well under that of other CE countries (0.7%-1.2%) or Austria (1.4%). Moreover, the uptick in development seems to be temporary and does not signal long- term acceleration in the growth of intended completion volumes. Issued residential building permits have already started to decrease – by 6% y-o-y on a national level and by a striking 25%inBudapest. This reversal can be attributed to the prolonged VAT reduction for new-built housing until end of 2023, which helps developments with existing building permit only but does not facilitate further projects on the housing market. On the other hand, besides the increasing cost, the most serious challenge the market faces is the continuous delay in deliveries.

Keeping schedules and timelines is rarely feasible due to the lack of available capacity of constructors. CBRE calculates with an average delivery time prolongation of 10-15%. According to MNB, only 38% of all residential developments are expected to be completed on time, while 29% of the projects face a delay of more than six months. With the prolongation of the reduced VAT rate for new residential development until the end of 2023, the elevated residential development activity is expected to continue for the next four years, yet in a more reasonable and sustainable manner than before the extension was announced. Hence, the potential benefit from a slowing residential market for commercial developments remains to be seen later in the cycle, as labour will remain locked in on residential projects for the coming years and the competition for materials and equipment is unlikely to ease. Nevertheless, commercial development markets are active across CEE. The two-year office pipeline in Budapest amounts to 413,000 sq m, albeit with a risk of delays. This

21

figure is in line with the forecast for Prague, but far below the levels expected in Warsaw or Bucharest. Industrial development activity is still outstandingly high in Poland with 2.1M sq m of space under construction, compared to 580,000 sq m in the Czech Republic and only 475,000 sq m across Hungary. Retail development volumes have largely remained in level across the region and are expected to be less of a driver of construction activities in the coming years, once again with the notable exception of Poland. Based on recent projects, CBRE estimate the annual construction cost increase to have reached 18% towards the end of 2018. Industrial construction costs rose to the range of 450-550 EUR/sq m by year end, up from 400-450 EUR/ sq m 12 months ago. Above ground shell & core office space can be constructed at an average of 950 EUR/sq m, up by a more moderate 9% on last year. Price increases have been more transparent in fitout works, with the total fitout cost (including all soft & additional costs) reaching 910 EUR/sq m on average, up from 770 EUR/sq m a year ago. The cost inflation was most significant for works involving intense blue-

collar efforts (mostly mechanical and electric installations), followed by the material-heavy project elements, while it remained modest for soft cost elements involving mostly white-collar labour. The hard fit-out cost elements add up to an average of 640 EUR/sq m, generally split in a 75-25% ratio between the developer and tenant. In our experience, fit-out costs have not only increased in absolute terms but also in terms of the share covered by landlords (as a compensation for the reduction in other forms of tenants’ incentives). On top of this, the other cost elements (like furniture, AV etc. and all the soft costs) covered by the tenants sum up to 270 EUR/sq m. Residential developers are experiencing similar cost increases, but they are more likely to transfer the vast majority of the increased fit-out costs to the buyer, therefore the cost inflation weighs less on their profit margin. Furthermore, last year saw final capital values for offices increase only by ca. 10% (yield and rent driven), while the price increase amongst newly built residential schemes was well in the double digits.

22

VÁCI CORRIDOR

23

OFFICE COMPLETION PIPELINE

U/C (OCCUPIED)

U/C (AVAILABLE)

PLANNED

5,000 sqm - 70,000 sqm

RING ROAD

SOUTH BUDA

24 BUDAPEST OFFICE MARKET

25

OFFICE MARKET

26

JUDIT VARGA

MRICS Director , Head of Advisory & Transaction Services, Offices

UNDRAMATIC WAVE OF NEW COMPLETIONS

The second half of 2018 brought a further uptick in new completion volumes around Budapest, with 155,200 sq m of new office space handed over across eight buildings. This marked the highest semi-annual new supply volume in a decade, largely underpinning previous expectations of 2018 being a turning point in the development cycle. The new completions in H2 were the new Telekom HQ (58,800 sq m – the largest standalone office building ever in the local market), Mill Park (36,000 sq m), HillSide Offices (21,900 sq m), Tópark Offices (15,400 sq m), the first phase of Advance Tower (11,300 sq m), Pasaréti Irodaház (5,900 sq m), Ecodome (4,800 sq m) and a classical building redevelopment by the name of Société (1,100 sq m). Overall, these new buildings came to market with an average 83% occupancy rate, and

27

even discounting the BTS Telekom HQ the rate was 73%. Along with the five new completions during H1, the total new supply in 2018 amounted to 230,600 sq m – nearly tripling y-o-y while also marking the highest annual new supply volume since 2009. Although the past year saw emerging challenges in the construction sector stemming from labour shortage and material cost inflation, there were few significant delays in office completions. The majority of projects committing to handover during the year did indeed open their gates, and ca. 90% of the total new supply volume that we expected a year ago successfully came online. Lookingahead, thedevelopmentpipelinecomprises 130,900 sq m of new office supply due for completion in 2019. The forecast for the year has showed great uncertainty over time, as construction bottlenecks as

well as timing reconsiderations for planned projects have delayed certainty of the final number. A year ago, the anticipated supply volume for 2019 totalled 251,000 sq m – this has halved by now as several developments have lagged compared to their initial timelines. The general delay trend has also affected the pipeline for 2020, yet newly emerged smaller developments with shorter planned timelines have kept the yearly anticipated volume in balance at ca. 250,000 sq m. In total, there is ca. 484,000 sq m of office space under construction across Budapest. The Váci Corridor submarket retains its position as the top development destination in the city with 41% of the total ongoing project volume, followed by South Buda with 30%. Although the challenges stemming from bottlenecks in the construction sector remain in focus for the foreseeable future, an expected settling

28

Forecast

Delivered Forecast Jan. 2018 Forecast Jan. 2019

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Annual New Supply and Pipeline Forecasts

Source: CBRE Research

in residential development following the reinstating of the 27% VAT rate for newly obtained permits could release more labour to the commercial sector and thereby alleviate this to some extent. RECORD STRONG APPETITE FOR OFFICE SPACE While the second half of the year saw somewhat weaker demand than the corresponding period in 2017, the consistently robust volume throughout 2018 produced higher annual results. In H2 2018, total leasing activity amounted to 283,000 sq m (-9% y-o-y), while take-up clocked in at 217,300 sq m (-2% y-o-y). Take-up was largely driven by the 180 new leases registered across the existing office stock, totalling 116,300 sq m (+29% y-o-y), which was further boosted by 20 pre-leases in ongoing

developments, totalling 63,200 sq m (+36% y-o-y). On an annual basis, 2018 saw ca. 680 lease transactions producing total leasing activity of 535,700 sq m (+13% y-o-y), which was effectively in line with the previous record level from 2015. Annual take-up comprised of 506 transactions totalling 391,200 sq m (+16% y-o-y), marking a record level for new demand in Budapest. Throughout the year, new leases in the existing stock showed the most dynamic upswing to 230,900 sq m (+46% y-o-y), while pre-leases in ongoing developments amounted to 74,500 sq m (+4% y-o-y). There were 58 take-up transactions sized above 1,500 sq m throughout the year, up from 41 in 2017, and the average size of all take-up transactions in 2018 increased to 775 sq m (+18% y-o-y).

Six of the year’s ten largest leases in the existing stock were signed by public sector tenants, while

sq m

60%

50%

BTS

New lease + expansion

40%

Owner occupied

Pre-leases Renewals

30%

Share of renewals (rhs) Share of pre-leases from take-up (rhs)

20%

10%

0

0%

2012

2013

2014

2015

2016

2017

2018

Structure of Total Leasing Activity by Deal Type

Source: CBRE Research

29

30

the majority of large pre-leases were signed by international corporations such as IWG, NN, Raiffeisen Bank, Sykes and Thermo Fisher. Discounting the owner occupation pre-commitment for the new MOL HQ in 2017, the volume of pre-leases increased by 32% last year to 94,900 sq m. In terms of the geographical distribution of demand, the Váci Corridor submarket widened its lead as the number one choice for relocating or expanding companies, as it amassed 39% (+14pps y-o-y) of the citywide annual take-up volume. Nearly 30% of the submarket’s total take-up came frompre-leases. The most significant deals along Váci Corridor were secured by blue-chip international companies such as BlackRock, NN and Raiffeisen Bank in new or still under construction buildings, as well as relocations to older buildings by public sector entities. The next largest shares within take-up were registered in South Buda with 15% (-7pps y-o-y) and the CBD with 14% (+6pps y-o-y). The former saw a similar mix to Váci Corridor, although here 57% of new demand came in the form of pre-leases. The CBD registered several large relocation deals in its existing stock, complemented by a single pre-lease in the ongoing Szervita Square project, which is set to host the city’s largest and most high-end co-working hub operated by SPACES (IWG). The remaining submarkets all registered single-digit shares of the total take-up volume in 2018. With regards to tenant profiling, the second half of 2018 evened out the sectoral split of annual take-up. During the period, the share of financial services companies strengthened while that of ICT companies weakened. Thus, 2018 saw the most diversified breakdown of new demand during this cycle, as the business and professional services, financial services,

30%

25%

MARKET AVERAGE

20%

Grade A

15%

10%

Grade B+

5%

Grade B-

0%

2011 Q4

2012 Q2

2012 Q4

2013 Q2

2013 Q4

2014 Q2

2014 Q4

2015 Q2

2015 Q4

2016 Q2

2016 Q4

2017 Q2

2017 Q4

2018 Q2

2018 Q4

Average Vacancy Rate by Asset Categories

Source: CBRE Research

31

RENTS STILL INCREASING DESPITE PLATEAUING VACANCY The average vacancy rate across Budapest remained largely stable throughout 2018, hovering between 7.3-7.6% and finishing 2018 at the bottom of that range. At year end, the ‘A’ category segment had an average vacancy rate of 4.5% (-0.9pp y-o-y), ‘B’ category assets averaged 9.8% (-1.6pp y-o-y), while mid-range ‘B+’ assets saw their average vacancy increase to 10.4% (+2.2pps y-o-y). Five of the eight office submarkets saw their average vacancy rates lower than a year earlier. The Váci Corridor showed the greatest decrease by halving its vacancy rate to 4.3%, while the CBD (4.0%), Central Pest (6.7%), North Buda (5.1%) and Non-Central Pest (3.4%) submarkets all decreased by 1.0-3.3pps y-o-y. The remaining three submarkets showed considerable increases in their vacancy levels. The Periphery’s longstanding vacancy rose further to 38.0% after a vacant new completion, Central Buda roughly doubled its rate to 9.0% via the inclusion of a vacated Telekom

ICT, manufacturing/industrial, and public sectors all stood for effectively equal shares of take-up with 16-17%, each. The B2C sector was the only laggard with 7% of take-up, while the source behind 10% of the volume remained undisclosed. Thus, the only notable changes from 2017 were the moderate declines registered in the manufacturing/industrial as well as B2C sectors, counterweighed by an increase in demand from the public sector. In H2 2018, net absorption increased by 60% from the preceding semi-annual period and by 27% y-o-y, to 127,800 sq m, producing the strongest absorption on record during the latter half of a year since 2007. This was driven by the highest completion volume in ten years with a solid pre-lease ratio, as well as the uptick in relocation deals within the existing stock. Geographically, Váci Corridor and Non- Central Pest saw the greatest absorption during the year due to their successful new handovers, while South Buda registered strongly negative absorption following the departures of eg. Telekom and IT Services Hungary.

16,00

15,00

14,00

13,00

MARKET AVERAGE

12,00

Grade A

11,00

Grade B+

10,00 EUR / sq m / month

Grade B-

9,00

8,00

2014 Q1

2014 Q2

2014 Q3

2014 Q4

2015 Q1

2015 Q2

2015 Q3

2015 Q4

2016 Q1

2016 Q2

2016 Q3

2016 Q4

2017 Q1

2017 Q2

2017 Q3

2017 Q4

2018 Q1

2018 Q2

2018 Q3

2018 Q4

Average Asking Rents by Asset Categories

Source: CBRE Research

32

33

30

25

20

Rental Range

15

Average Rent

10

Budapest Pipeline Rent

EUR / sq m / month

5

0

CB CBD CP

NB NCP

P

SB VC

Range and Average Level of Asking Rents by Office Submarket

Source: CBRE Research

HQ building in the speculative stock, while South Buda was hit the hardest by relocations that nearly quadrupled its average vacancy from the lowest in the city to 12.6%. At a more granular level, the city’s most saturated micromarkets at year end were Lipótváros, Ring Road North, Újlipótváros and Víziváros, all with average vacancy rates below 3%. Persistently tight availability of space combined with shortages of skilled construction labour and building materials paved the way for continued rental growth in H2 2018. The average asking rent across Budapest stood at 12.2 EUR / sq m / month at year end, up by 7% y-o-y. The average amongst ‘A’ category buildings reached 14.8 EUR / sq m / month (+5.4% y-o-y), whereas mid- category ‘B+’ assets advanced to 12.4 EUR / sq m /

month (+6.2% y-o-y). Rents are the highest in the CBD and Central Buda submarkets with average headline rents at EUR 15.8 / sq m / month and EUR 13.3 / sq m / month, respectively. While Central Pest was on a rapidly converging trajectory until mid-2018, the second half of the year saw its rent levels stagnate – still, the submarket appreciated by 7%y-o-y by year end. The lowest average rent of 8.4 EUR / sq m / month can still be found in the Periphery submarket and evidence remains to be seen how high the newly delivered Tópark Offices can achieve. Average rental incentives have not changed considerably, as landlords tend to offer between half to one rent free month per committed year, counterbalanced by generous fitout allowances due to construction cost inflation, with ca. 500 EUR / net sq m typical for shell-and-core space.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

6%

6%

8%

16% 17%

9% 13%

15%

8%

10%

10%

16%

Financial Services

Public Sector

12%

9%

16%

16%

7%

14%

Other, Unknown

Manufacturing Industrial & Energy ICT

13%

12% 7%

16%

7%

13%

10% 16%

B2B

15%

19%

B2C

24% 17%

39%

30%

23%

16% 17%

2014 2015 2016 2017 2018

Split of Take-up by Occupier Profile

Source: CBRE Research

34 BUDAPEST RETAIL MARKET

35

RETAIL MARKET

36

ANITA CSÖRGŐ Director , Head of Advisory & Transaction Services, Retail

CONSISTENT INCREASE STRONGLY CONTRIBUTE TO GDP GROWTH Throughout 2018, there has been an overall upward trend in Hungarian retail sales across most of the commodity groups. Sales volumes registered an annual growth of 6.3% (seasonally unadjusted) up to end of November. Based on the recent expansionary cycle, December is also projected to trend around the same level. Strong retail sales growth was primarily supported by the continuous improvement in the F&B and automotive fuel sectors, along with the substantially increasing customer appetite for furniture and electronic goods. Sales in these categories expanded by ca. 4.5%, 6.5% and 8.4% y-o-y, respectively. Like in previous years, the steep increase in e-commerce also proved to be sustainable during the past 11 months, showing an extreme 26% growth y-o-y, however, the sector’s proportion still has not reached the EU average. Looking ahead, domestic and tourism fundamentals remain solid and retail sales continue to grow in 2019 – although at a somewhat more moderate pace than in 2018. Nevertheless, a “hard Brexit” could negatively affect the domestic retail market as several important omnichannel retailers were originally founded in the United Kingdom. A measurable downturn in China also puts luxury fashion retailers under serious pressure all around the world, which could also be considered a potential drag on growth.

sq m

Forecast

Budapest

Other cities

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Retail Completion and Pipeline

Source: CBRE Research

37

Seating Area of new Vörösmarty Vapiano Regional Flagship Store

New Regional Vapiano Flagship store on Vörösmarty Square SECONDARY SCHEMES CAME TO LIGHT 2018 was a relatively uneventful period on the Hungarian retail market, there hasn’t been any new delivery except for a minor retail park on 4,100 sqm in Budapest IX. The ground-breaking for Futureal’s 54,200 sq m GLA Etele Plaza occurred in Summer 2018 with handover projected for Q3 2020. Other new development projects were announced in tertiary regional cities last year including Immofinanz’ new Stop-Shop retail parks in Gyöngyös and in Salgótarján (ca. 6,000 sq m per each) and an Interspar retail park in Tata (ca. 5,200 sq m). This last one is the only expected

delivery for 2019. The overall monitored pipeline, however, adds up to ca. 150,200 sqm, including previously announced but currently still pending projects. This figure excludes planned extensions of several landmark shopping centres in Budapest. All refurbishments and new projects are delayed due to changes in the so called ‘Plaza Stop’ law put into effect this past November that necessitates further permitting for all modifications and refurbishment for not just retail premises with larger than 400 sq m individually, but also for smaller units that are located in retail centres with GLA over 400 sq m.

Frequented high-street arteries in downtown Budapest are also seeing some numerous

38

INCREASING RETAILERS’ ACTIVITY, DECELERATING RENTAL GROWTH In the case of new retailer entries, CBRE registered 15 brands which entered the Hungarian retail market during 2018, falling short to the historic record measured four years ago, but up on 2017 figure. Primarily targeted destinations were landmark shopping centres over high-street downtown locations, 10 out of 15 new entrants opened their first stores either inTier-1 or Tier-2 shopping centres across the capital city. Despite the somewhat unfavourable VAT and global political environment, luxury fashion retailers proved to be the most active players on the domestic market, with six new openings on prime locations, offering a wide range of high-end apparel. Calvin Klein, Karl Lagerfeld, Philipp Plein or even Liu Jo can be found amongst the noteworthy newcomers representing the premium category, opening stores in Arena Plaza, on Fashion Street and along Andrássy út, respectively. Bentley (currently via franchise partner) as the first luxury car brand for a long time expanded into Hungary in 2018. This is likely to be followed by other premium car brands in the upcoming years. Demand for retail space in strip-mall schemes across the country also increased in 2018 driving vacancy down and leading to quality change in the tenancy in many centres as the purchase power profile of large regional cities continued to improve. While the footprint of cheap local and Chinese discounters shrank further, international chains across various product and price categories continued to expand in the aforementioned schemes.

mixed-use projects under construction with smaller retail components that will add significant retail GLA and expand the footprint of the downtown commercial zone. Some twenty new retail units on ca. 3,500 sq m will be added to the high-street supply (including Párizsi Udvar in 2019, and two projects on Szervita Square in 2020/21). These projects are already acting as catalysts in a retail resurgence of the street between Ferenciek and Szervita squares. Many new cafés and showrooms opened in 2018 and with increased footfall, more retail venues will follow. The market also awaits some large-scale mixed-use developments outside of the core city centre area (incl. Agora and Central Park in District XIII. and BudaPart in District XI.), which will include considerable retail components to serve office workers and residents in the developments and surrounding areas. While large, new projects still await to be handed over or even to commence, the market of secondary shopping centres have become more lively. Following purchase by add-value investors, several Tier-2 schemes with historically higher vacancy rates and weaker tenant mixes have recently undergone significant refurbishment and repositioning. Csillag Centre (formerly Csillagvár) and Shopmark (formerly Europark) both opened their gates in H2 2018 with stronger, widely-recognized retailers. This trend is likely to continue as Alba Pláza (in Székesfehérvár), Nyír Pláza (in Nyíregyháza) or Duna Center (in Budapest XIII.) have also been sold to add- value investors who are likely to undertake notable refurbishment and/or expansion in the coming years.

BUDAPEST

Regional Cities

Tier-2 SC

Tier-1 SC

High-street (prime)

100 110 120 130 140 150

0 10 20 30 40 50 60 70 80 90

EUR/sq m/month

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

Rental Rates by Retail Format

Source: CBRE Research