The View 9

9 th EDITION | 2019-20

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INTRODUCTION

LÓRÁNT KIBÉDI VARGA MRICS Managing Director

Dear The View Reader,

In 2019 we closed a very successful year and decade, celebrating the 25th Anniversary of CBRE Hungary along the way. As we flip the page to the new decade with this edition, 2020 holds another milestone for us as the 10th edition of The View will follow later this year. Our accomplishments last year did not go unrecognised. I’mpersonally proud of the 2019 results of independent research carried out by Euromoney, who named CBRE Hungary the number 1 real estate firm in the country in all five achievable categories. Also we were named as the Real Estate Advisor of the Year 2019 at the Real Estate Awards Gala. CBRE was recently named the top global brand in commercial real estate by The Lipsey Company, marking the 19th consecutive year in which we achieve this recognition. All this is clearly a reflection of our business successes and our passion towards real estate. Across CEE, our Advisory & Transaction Services Office team transacted ca. 1 million sq m of office space in 2019. In Hungary, we reached a record-breaking 130,000 sq m of annual office leasing, securing the market leading agency position for the second year in a row. Our Capital Markets group once again facilitated the largest investment volume amongst all locally active advisors, our Property Management business line became the dominant player in the outsourcing segment with ca. 750,000 sq m under management, and our Project Management team came out on top in the Best Fit-Out category at the CiJ Awards for their services provided for Jaguar Land Rover. Amongst the properties managed by us, Arena Mall won a Silver Award for Strategic Marketing at the ISCS SOLAL Marketing Awards, while Campona won two PRIZMA PR Awards and one prize at the LOLLIPOP creative activation awards.

In the current edition’s regional outlook section, Kate McMurtrie, Executive Director, Head of CEE Advisory & Transaction Services, Office Occupier, highlights the current office trends and occupier needs across the region.

We always aim to cover all topics in our magazine, but in case you might need tailored analysis or more in-depth data please don’t hesitate to turn to us.

Kind regards,

Managing Director Lóránt Kibédi Varga MRICS

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OFFICE OCCUPIERS IN CEE

INTERVIEW WITH KATE MCMURTRIE, EXECUTIVE DIRECTOR, ADVISORY & TRANSACTION SERVICES CEE

Last year’s forecasts were mostly proven wrong: economic performance in the region was poorer but real estate markets ended up better off than expected. How do you see 2019?What were themain challenges and learning points? Our CEE/SEE office markets performed in the majority exceptionally well in 2019, despite external global headwinds. Overall, it was a record year for our office teams, with over 1,000,000 sq m transacted for our clients. I congratulate both our clients for their success stories and our teams for their hard work throughout the year. As for the main trends we observed: office occupier clients needed more flexibility, more cost effectiveness, and longer lead times in order to define the correct balance for their portfolios and receive approvals for projects. This, in light of shifting market supply and rising competition for large blocks of space, could create clear challenges. In many of our markets, those supply constraints are leading a growing trend in pre-lets in future developments for large occupiers. Office fit-out investment remained a sensitive topic for tenants overall due to corporate constraints. A wave of new flexible office offers flowed across CEE, creating positivemomentumbut also a greater imperative for occupiers to objectively evaluatehow to integrateflex solutions into their CEE/SEEoperating strategy. Creating activity-based, healthy workplaces and placemaking strategies that will be embraced by future generations of talent are key trends that we are passionate about and will continue to explore with our clients in 2020. Most forecasts show consensus around a deteriorating economic outlook for the region, but the service sector is most likely to remain sound. What are the main trends you expect to materialize in 2020? Where are the risks and opportunities at this point in the cycle? We felt that 2019 started up very quickly, with very active demand coming from our occupier clients – but I would say that our first month of 2020 has felt even more energetic. In general, we continue to see very strategic project opportunities in CEE and SEE for our clients and the markets feel positive. Speed tomarket and creating strategic balance in office portfolios will be key topics again this year. Overall, we are tracking economic indicators closely

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– in particular the evolution of unemployment rates in the region – to be able to evaluate and advise on the potential impact for our clients during the course of the year. We see that the region continues to perform well in terms of office occupier take-up, value for money, and appreciation of our skilled and highly skilled workforce. The service sector also remains very strong as a demand driver and we expect that trend to continue in 2020. From these angles, our markets still offer very viable advantages compared to core-EU. The green approach is not new to developers across the region. Do you see sustainability and green thinking climbing up the agenda of occupiers as well? Do certificates matter? What are the main points of consideration for tenants? The certificates do matter indeed. Sustainability has been on the agenda of global occupiers for many years already, but it has not always held deal-breaking status. We see that starting to change, with occupiers requiring stronger attention to environmental and wellness factors from building owners, not only as a matter of corporate social responsibility, but also because these criteria are of significantly rising importance to the talent that our clients wish to attract and retain. LEED, BREEAM, WELL – these are just the first steps in an approach that we see becoming more holistic, with landlords able to better articulate how they provide buildings and services that help reduce carbon footprints and improve the well-being of their communities inside and outside the properties.

ECONOMIC OVERVIEW

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GÁBOR BORBÉLY MRICS Director, Head of Business Development and Research

4.9% GROWTH IN 2019, 3.5% FORECASTED FOR 2020

In 2019 the Hungarian economy continued to surprise in terms of growth. GDP growth in 2019 reached 4.9% - well-above previous expectations. This was the first time in the current cycle when Hungary was able to maintain its dynamic growth despite lower growth in the Eurozone and in the surrounding regional economies. Decoupling from the German economy and the CEE region was mostly due to the solid domestic market which helped to counterbalance the deceleration seen in the export markets. This recipe worked quite well for Poland to avoid a recession in 2009 and 2012 but was never tested in such a small and open economy like Hungary. Looking at the details, economic growthwas robust inmarket-based services andmanufacturing production, while public administration and agriculture exhibited protracted growth. Among the most important sectors, retail, tourism, IT & telecomperformed above the average, while expansion in finance and real estate services was under the GDP growth rate. The construction market also marked a significant slowdown; however, this is understood rather as a normalization following the rampant growth early 2019. December indicators showed a sudden drop in industrial production and construction activities both of which could be explained by the calendar effect due to the unusually long holiday season last year. Q1 figures might be impacted by the recent coronavirus epidemics, but the extent of its economic impact is rather unknown, so its influence is beyond the scope of our analysis.

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HIGH INFLATION, WEAK CURRENCY

Based on Oxford Economics, Hungary will remain the fastest growing economy in the EU in 2020 and 2021 with 3.5% p.a. GDP growth expected for the coming years. Although this is a marked deceleration from 4.9% last year - it is confidently above the 1.1% forecasted for the Eurozone in 2020. This high economic growth is expected to hinge on persistently high investment growth, amoderation in the domestic consumption, and a very disciplined governmental spending - relying on EU funds available until 2022. Although the domestic-driven growth is mostly understood as increasing domestic consumption, the Hungarian economy has also been strongly influenced by expansion in investment activity as manufacturers and service providers expanded their facilities and equipment - reflecting a strong commitment to future business here in Hungary. Investment-to-GDP ratio has been among the highest in Europe (29%), while government spending remained modest at 2% of the GDP. The external leg was relatively weak in 2019 with an export growthof 4%only. Thiswas expected to increase again in line with expected economic improvement in major European countries. Unfortunately, the coronavirus epidemic and its economic implications are likely to hit global economic performance hard in Q1 and mitigate expectations for Q2. This can prolong the recovery of the Hungarian export market.

Consumer price inflation reached a new peak in the cycle with 4.7% reported for January 2020. This is the highest figure currently in the EU and is higher than previously expected. The extent of this improvement; however, is somewhat surprising given the continuing wage dynamics, strong domestic demand and the weaker currency. Many businesses adjust their pricing policies in January - therefore this jump in the inflationary rate can be seen as a natural outcome of higher inflation and weaker currency seen in previous months. That said, MNB expects a clear deceleration in the inflation under 4% as of mid-2020. If this does not happen, MNB by law must intervene in order to moderate CPI. They have clearly articulated their intent do so if figures in coming months continue to disappoint. Interestingly the rental price increase was still above 10% y/y in January, while service prices in general went up by only 3.6% y/y. Besides inflation, many businesses are also concerned about the quick deprecation of the HUF. While Hungary has one of the highest GDP growth in the EU and likely to keep this pace ahead of the rest of

GDP Growth in Selected EU Countries

Source: Oxford Economics

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Purchasing Power Dynamics in CE

Source: GfK

the EU in 2020 and 2021, the Hungarian currency has become the weakest based on the recent FX change and HUF/EUR rate was climbing to new highs every week in January/February. The single biggest reason behind the weak local currency is the extremely loose monetary policy: real interest rates are deeply negative in Hungary and by far the lowest in the region - especially in the light of recent tightening in the Czech Republic.

The current economy is described as a “high pressure economy” which is characterized by dynamic economic growth relying on strong domestic demand. Consumption and investment are fueled by robust wage increase and growth in corporate lending, both double-digit figures in 2018 and 2019. However, rapid increase to the inflation rate can point to an overheating economy which is not desirable and can be prevented only by a stricter monetary policy. This does not necessarily require an increase of the base rate (currently at 0.9%).

Inflation and FX Rate

Source: MNB

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FURTHER INCREASE IN EMPLOYMENT AND WAGES On the back of strong economic growth, the employment rate increased above 70% in 2019, the highest on record. The unemployment rate continues to be one of the lowest in the EU, seeming to have hit the lowest point in the cycle at 3.3% as of Q2 last year. The labor market is likely to soften a bit and unemployment will hover around this level or tick up slightly in 2020. Part of the low-skilled workforce previously engaged in public workfare schemes managed to find jobs in the private sector. Also, the reduction of public administration jobs is releasing workforce to the private sector. Further, immigration had a positive impact on the workforce balance as Hungary has seen the sharpest rise in the number of approved labor visas in the EU - although this is still at a relatively modest level. The unemployment rate in Budapest remains still critically low at 1-1.5%.

Companies are still not seeing a significant moderation in the growth rate of wages and salaries. In fact, the latest figures suggest that due to increased premiums and other benefits, the nominal gross wage surpassed 400,000 HUF in November 2019 for the first time on record. This figure shows an increase of 14% y/y and represents a real wage growth of close to 8% in aggregate. This was the third year when nominal wages increased by a double-digit rate indicating the purchase power of Hungarian households also improved significantly. According to GfK, the per capita purchase power reached 7,400 EUR in 2019, 50% above its level in 2014. Nevertheless, wage and purchase power growth increases are much more moderate in EUR terms given HUF has depreciated by ca. 6% over the year. The average Hungarian gross salary is still under EUR 1,200. Wages remain under pressure not only due to the tense labor market but more increasingly because of the higher inflation rate.

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

The strong prevailing economy helped most of the real estate markets perform above expectations in Hungary over 2019. Investment volumes last year surprised us on the upside. Throughout the first half of the year, market sentiment was negatively impacted by the lack of available assets for trade, the fear from potential interest rate rise and the change in legislation of the domestic open-ended funds. By the end of the year, previous concerns turned out to be unjustified: volume matched the average of the previous years, sentiment around real estate turned positive globally as fears from higher interest rates faded and new domestic funds and fresh foreign capital compensated for the lower transactional activity of the large open-ended funds. The Hungarian investment market is highly domestic-driven, similarly to the Czech and opposite to the Polish market. This exposure to local investors is likely to decrease slowly this year on the back of large transactions currently in the pipeline with foreign investors. Economic fundamentals have been very supportive to most businesses and to consumers in general. Starting from the most remarkable: increasing wages

helped households to spend more. While Hungary recorded 5.7% p.a. retail sales growth in 2019, this was a mere 2.3% in the EU. Nevertheless, not all of this growth materialized in the traditional brick-and- mortar schemes - in fact, based on CBRE Shopping Centre Index, average turnover growth in Budapest was just half of this level. Although the online trade accounts for only 5% of the total sales, this is a channel not to miss for any of the retailers of the future due to the accelerated growth of e-commerce. Plaza-ban continues to limit the growth of the overall modern shopping centre volume, therefore many retail owners opt for a refurbishment of varying scope in their schemes - creating an alternative for retailers compared to the new completions. Mixed-use schemes with considerable retail elements are also on the watchlist for brands deciding to expand their network. It is not only consumers who benefited from the economic growth. The service industry in Budapest has proven to be remarkably resilient to the current global economic slowdown andmost of the companies continue to expand their office footprint here. As another core driver in the economy, industrial production (even including car manufacturing) has outperformed all previous expectations.

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New supply therefore is highly welcome on the industrial market, where Occupiers have no other choice than to renew on the current market as there is essentially zero free warehouse capacity country- wide. While built-to-own market never really endured a crisis, it is promising that the developer-led market has elevated to a new level in 2020 - mostly still confined to the Greater Budapest area. Industrial occupiers have adjusted their expansion plans to the current market reality and are willing to sign leases at significantly higher rates than in the previous cycle. In today’s market, the supply side is the clear bottleneck to further growth. Office occupiers also got used to the landlord- favored market conditions in previous years, and are now more aware of the importance of timing and strategic planning when it comes to any real estate decisions. Although slightly better than the Industrial market in terms of new supply, this plus an increase in office occupier demand, has meant that many office occupiers are left with limited choices on the market, so are pressed into renewing in situ. In fact given that 55% of all companies over 3,000 sq m renewed, it further reinforces the need for them activate their requirements well in advance of their lease expiry or accept that they will stay and renew.

Budapest still proves popular for large International companies and continues to attract more business fromglobal corporates. That being said since February 2020, we have noticed some occupiers applying more cautiousness to their office presence and either delay or postpone their requirements. This could be a temporary effect of the coronavirus epidemic, or a revisal in the demand trend subject to wider global uncertainty, it is simply too early to tell. Pipeline in the office segment increased by 12% since early 2019, partially because of the unfortunate delays of previous projects but also because of developers’ bullish views of the current market situation. In fact, landlords have little to worry about leasing as 80-85% of the 2020 pipeline will already be acquired as we move into Q2 2020. While the development pipeline looks stronger across all asset categories, hotels must be mentioned separately. The Budapest city centre will welcome 24 new hotels in coming years, adding a remarkable 3,000 rooms to the current supply. This will be a gamechanger for some of the current hotel operators, who are used to solid KPIs and steadily increasing demand - as some of these occupiers are little prepared to see fresh competition in a lower growth environment which we are heading into over 2020.

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PROPERTY INVESTMENT MARKET

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INVESTMENT MARKET

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TIM O' SULLIVAN MRICS Senior Director, Head of Capital

Markets, Hungary

SUSTAINED INVESTMENT BOOM IN 2019 Collectively, the core-CEE markets hit a new record annual investment volume of EUR 14.2 billion, notching up by 4% y/y, double the rate across continental Europe. The dominant Polish market reached a new record volume, but Czechia, Hungary and Romania also expanded, while Slovakia was the only market in the region that saw its investment volume decrease on an annual basis. In Hungary, H2 2019 brought another strong rally on the investment market with a total turnover volume of EUR 1.15 billion from32 transactions. Although the volume marked an 11% y/y decrease, it boosted the total 2019 turnover figure to EUR 1.72 billion across 55 deals, which was up by 4% y/y and the second-highest reading of this market cycle. In light of the high annual volume, the resilience of the local market exceeded our earlier expectations and further cemented the current boom period, being the fourth consecutive year with turnover above EUR 1.5 billion.

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Annual CRE Investment Volumes in Hungary

Source: CBRE Research

Looking ahead, loose monetary conditions and seemingly brightening economic sentiment in the Eurozone continue to fuel investor appetite, while record strong local market fundamentals and a considerable amount of new product coming to market present ample investment opportunities. Hence, CBRE expect the 2020 investment volume to largely match or even exceed that of the last few years, with a range between EUR 1.7-1.9 billion looking realistic. The second half of 2019 saw the sectoral breakdown along the usual lines, with offices attracting the highest share (42%) of the investment volume, followed by retail assets (38%), hotels (13%) and industrial properties (7%). However, the full-year 2019 turnover split was more dominantly led by offices (49%) followed by retail (28%), and for the first time in five years hotels (15%) overtook industrial properties (8%). The uptick in hotel investment activity has been expected for some time and is likely to sustain into 2020 as well. The office sector once again enjoyed a busy H2 period with 14 transactions at a combined volume of EUR 485 million, though this reflected a 19% y/y drop from the rally a year earlier. The period’s largest office transaction was OTP REF’s acquisition of the Roosevelt building in the heart of the CBD, which marked the largest deal on record for a single office building in Budapest while setting a new record-low yield level. Another significant office deal involved the recently delivered Corvin Technology & Science Park building, also purchased by OTP REF as a follow- through from the Corvin office portfolio trade a year earlier. Interestingly, the period also saw the forward-sale of a vacant new development in the form of Váci Greens E, which got purchased by a local private fund. Some international buyers were also active, as CBRE Global Investors returned to Budapest with the purchase of Corner6 Business Center and JR AMC acquired the Nordic Light Trio development as the first local investment backed by South-Korean capital. The retail sector bounced back in H2 after the unusually quiet start to the year. The sector saw eight deals that produced a combined volume of EUR 440 million, yet this still fell 31% short of the volume in H2 2018.

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Budapest Prime Yield Levels by Sector

Source: CBRE Research

The drop mainly stems from the Budapest prime shopping centre deal streak coming to a halt, as most of these assets have already traded over the past few years. Secondary assets remain attractive, however, as proven by the transactional activity in 2019. The largest retail deal of the year was for a portfolio of four shopping centres (two in Budapest, one each in Győr and Mikolc) that was acquired by Indotek Group from Klépierre – marking the latter’s exit from the country – while the most notable single asset trade was that of KÖKI, which was purchased by the local fund Adventum. The largest non-shopping centre transaction involved three retail warehouse assets housing Metro wholesale stores in the Budapest agglomeration, which FLE acquired in a sale-and-leaseback structure as part of a regional portfolio. The hotel sector saw continued investment activity in H2 2019, with three transactions totalling EUR 144 million. This raised the sector’s annual volume to EUR 261 million, making it the undoubted relative winner of 2019 in the light of the marginal volume in 2018 and the generally lacklustre investment activity of recent years. The most notable deal of H2 2019 was the trade of the five-star Sofitel Budapest Chain Bridge, which marked the second high-profile hotel acquisitionby IndotekGroup afterHotel Gellért that closed earlier in the year. In addition, three mid-sized hotels traded in the central neighbourhoods of downtown Budapest; Hotel Parlament and Zichy were purchased by Echo Partners while Eurostars Danube Budapest was bought by Hotusa Group. Industrial assets saw improved investment activity in H2, with seven deals totalling EUR 81 million (+81% y/y), raising the annual investment volume in the sector to EUR 144 million (+36% y/y). However, as the increase occurred from a rather low basis the performance continued to lag far behind the other sectors. The largest industrial deal involved M7 Real Estate’s disposal of their countrywide, mostly value-add logistics portfolio, which was acquired by the Chinese CNIC Corporation. Another notable transaction was Infogroup’s purchase of Technik Park HeliPort in Kecskemét, which included stable income and value-add components as well as further development possibilities.

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2019 Acquisition / Disposal Volume by Investor Origin

Source: CBRE Research

CHANGING CAPITAL SOURCES The strong dominance of Hungarian investors in H2 raised their share from the total 2019 investment volume to 74%, which marked the highest domestic share from annual turnover on record. The second half of the year saw Hungarian investors close 24 transactions at an average ticket size of ca. EUR 38 million, which is somewhat lower than during the corresponding period in 2018, but a historically high reading, nevertheless. Seven of the ten largest deals of the period were signed by domestic investors. A continuing trend in H2 was the shift in deal-making from the local open-ended funds – who were the undisputed dominant force on the market over the last years – to closed-ended investment vehicles and private property companies. The recent acquisitions by OTP REF seem to refute this, but those processes were initiated long ahead and the open-ended funds’ new deal sourcing has noticeably waned since the introduction of the MÁP-Plusz state bond that offers supreme returns to domestic individual investors. Although cross-border investment has seen more active days, there were notable moves by foreign investors in H2 as well. Amongst them were two newmarket entrants; JR AMC finally placed South Korea on themap as a new capital sourcing country, while the investment company CNIC is the second Chinese entity to complete an acquisition in Hungary. In addition to these newcomers, the end of the year also brought the re-entry of CBRE Global Investors after their exit nearly three years ago. Overall, foreign investors closed seven deals in the second half of the year, at a modest average ticket size of EUR 28 million.

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PRICING SHARPENED FURTHER Prime yield levels continued to notch in selectively in H2. Based on sectoral fundamentals and transactional activity, CBRE are of the opinion that a further 25 bps prime yield compression has been motivated amongst offices and hotels with a lease, while there has been no recent activity in the industrial or retail sectors to warrant further compression in their prime yield levels. The prime benchmark yield for offices stands at 5.25%, while strong secondary assets in the sector can achieve pricing at ca. 6.25%, following 25 bps compression in Q3. Prime hotels with lease agreements are largely in line at 5.25%, while those with management contracts are priced similarly to the aforementioned secondary office benchmark. Pricing in the retail sector remains unchanged at 5.50% for top quality shopping centres and high street units, and the gap to secondary schemes remains considerable as these cannot seem to break below 7.00%. The prime end of the industrial sector remains idle at 7.00%, although there is still evidence that the right opportunities would place continued pressure on this level – the main obstacle is the shortage of top- grade product coming to market. In the office sector, which is considered the benchmark on the local market based on liquidity, the general price appreciation is ever more apparent. In 2019, more than half of the entire turnover volume in the sector materialized at unit capital values above EUR 3,000 / sq m, which was considered the high- end benchmark only a few years ago. Moving slightly down the capital value spectrum, 75% of the annual office investment volume occurred above EUR 2,500 / sq m. The decrease in the share flowing into lower priced assets reflects the difficulty in sourcing value- add deals at scale.

OUTLOOK Looking ahead, CBRE are of the view that a high investment volume similar to that of the past three years can be reached in 2020 as well. On aggregate, the core-CEE markets are likely to get close to EUR 15 billion for the first time on record based on the current bullish outlook. In Hungary, we expect the annual volume to notch up to the range of EUR 1.8-1.9 billion. The sentiment around Hungarian real estate has remained solid as we stepped into 2020. This is underpinned by several factors including the continuously supportive monetary environment, robust investor sentiment as well as considerable new stock coming to market that is available to trade. The office sector will remain the backbone of the local investment market, while retail is likely to recede for the time being due to most high-end assets already having traded in recent years. Hotels are expected to keep up their recent momentum, while the stalemate in the industrial sector remains largely dependent on the willingness of a few dominant landlords to bring product to the market, such as the newly announced sale of Goodman’s portfolio. Domestic investors are expected to be the main driver on the investment market in 2020 as well, although their relative dominance may have peaked. Foreign investors are increasingly likely to re-appear at the top end of the market, where the competitive pressure from Hungarian open-ended funds has eased. The yield compression seen over the past years is likely to slow, or in some segments bottom out, but a reversal seems further off in time. Exceptional assets can still break below the current benchmark levels in certain sectors, including offices and hotels.

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22 CONSTRUCTION MARKET

BARNA HARANGI Associate Director Head of Project Management & Building Consultancy

CONSTRUCTION MARKET PULLED THE BREAK Based on annualized figures, 2019 construction output grew by 22% as compared to the prior year. This is slightly higher than the 21% growth recorded in 2018. Despite exponential growth within the sector over the past two years, signs of deceleration are evident based on recent industry performance. The slowdown began during the summer months and accelerated over the second half of the year. This progression was most evident in December when construction output was just 3% higher as compared to the same month of the prior year. More importantly, the December figure for the construction of buildings showed a decrease of 11%, marking the first point in

this boom cycle when building construction activity actually declined on an annual basis. Forecasts are suggesting upwards correction following the disappointing figure in December, as the volume of the contracts increased by 39% for the construction of buildings. For civil engineering the trend is exactly the opposite; while the output continued to grow in H2 2019 and was 10% above its level a year ago as of December, forecasts suggest a quick contraction in future volume. Seemingly the joined growth of the building construction and civil engineering works will cease, and their future paths are to diverge as these projects compete for the same capacities on a market with serious supply shortages.

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The slowing growth in construction output is primarily due to the weaker dynamics on the residential development market. On the back of robust demand, developers’ intention to build new residential units was strengthening - reflected in the sharp rise of building permits to around 35-40,000 p.a. since 2016. Nevertheless, the number of actual occupational permits never managed to exceed 15-20,000 units p.a. and even started to show a decline in H2 2019. The wide gap between the planned volume and the actual realization is only partially due to issue of capacity and continuous delays seen on the residential development market. The previous regulation of applicable VAT (whereas the preferential VAT rate was dependent on the date of building permit) heavily motivated developers to accelerate their efforts in obtain building permits. By the end of 2019 we can see that the residential market has passed its local peak in the cycle, and we anticipate a further decline in building permits and in occupational permits - to a smaller extent. Permitting processes will be more centralized as of March 2020 - in the good faith of speeding up the process and relieving the local municipalities. Nevertheless, this change will certainly give more room to the government to decide on individual projects so it remains to be seen how this change will impact the development market.

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COMMERCIAL PIPELINES STILL SWELLING The overall commercial real estate pipeline in Hungary has continued to increase across all categories with the exception of retail. As of February 2020, CBRE monitors ca. 1.34 million sq m of space currently under construction across office, industrial and retail sectors, up by 34% y/y. For hotels, the pipeline moved even more significantly from 2,800 to 3,750 rooms, from mid-summer to the end of 2019. The share of developments outside of Budapest is around 25% for retail and hotel while it is over 60% for industrial - driven by owner occupational manufacturing developments across the main industrial parks countrywide. The Budapest office pipeline under construction increased to 576,000 sq m, up by 24% y/y. The share of regional cities on the office development market remains slightly under 8% with an estimated 44,000 sq m being under active development in the main regional cities. Looking beyond the borders, 2020 is likely to bring elevated supply across other Central-European markets as well - indicating that local construction capacities will remain restricted as global demand persists. Office pipeline in the CE capitals is strong and suggests that 2020 delivery volume may increase by 65% compared to actual 2019 completions. We need to add; however, that actual deliveries in 2019 declined by 25% as compared to 2018 figures due to severe delays with a portion of this expected volume shifted into this year.

Change in Commercial Real Estate Pipeline in Hungary

Source: CBRE Research

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NO RELIEF IN PRICE INCREASE FOR FIT-OUT WORKS CBRE’s estimate for annual construction cost increase remained at around 15-20% y/y, still measurably above the average price index of 9.4% published by Central Statistical Office. As indicated already six months ago, we recorded a divergence between the price evolution for shell & core construction and fit-out works. More robust development pipelines in the industrial, hotel, and office segments directly lead to higher price increases to shell & core construction works while fit-out price inflation slowed clearly compared to mid-year. Industrial construction costs are quoted in the range of 550-650 EUR/sq m, indicating ca. 20% increase over the year. As current vacancy on the industrial market is nominal, the continuous increase of development costs can be directly reflected in the rental increase for new industrial deliveries. In the office segment prices for above ground shell & core space increased the most, now approaching 1,150 EUR/sq m in average, up by 21% y/y. The total fit-out cost (including all soft & additional costs) climbed to 1,025 EUR/sq m on average. The hard fit-out cost elements add up to an average of 720 EUR/sq m, generally split in a 80-20% ratio between the developer and the tenant. On top of this, the remaining cost elements (like furniture, AV etc. and the various soft costs) covered by the tenants comes to ca. 305 EUR/sq m, up by a more modest 14% y/y and almost flat on mid-summer statistics. The cost inflation was smallest here for IT, cabling and furniture.

Evolution of Construction Costs

Source: CBRE Research

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Type of scheme Retail Hotel Office Residential

Size (sq m)

500

20,000

40,000

63,000

Real Estate Developments Under Construction in Budapest

Source: CBRE Research

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BUDAPEST OFFICE MARKET

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OFFICE MARKET

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ANIKÓ P. KOVÁCS

Director, Head of

Advisory & Transaction Services, Offices

UNDERWHELMING NEW SUPPLY DID LITTLE TO ALLEVIATE CRUNCH FOR SPACE In several ways, 2019 was a record year on the Budapest office market. This cannot be said of new supply, however, which ended up below our already toned-down expectations. The H2 period saw a mere 38,900 sq m of new office space come to market, which may have been 23%more than in the first half but equated to just one-quarter of that in the corresponding period in 2018. The new completions during the period were once again spread across the city. They were the second phase of Advance Tower (7,600 sq m) on Váci Corridor and Hungária Center (6,900 sq m) in Non-Central Pest in Q3, followed by Balance Hall (16,100 sq m) in Váci Corridor as well as the first phase of Bartók Udvar 2 (8,200 sq m) in South Buda in Q4. Similar to the projects handed over in H1, these buildings were delivered with a high combined occupancy rate of 87%. Including these completions, the total new supply in 2019 amounted to 70,500 sq m – barely one-third of the volume in 2018 and significantly below the 133,700 sq m that was initially expected over the year, as the wave of delays continues due to construction bottlenecks and commencements dragging out.

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Looking ahead, there is ca. 265,600 sq m of office space that is under construction and expected to be handed over in 2020 – this is 34% higher than our previous forecast, mainly due to some completions having dragged over from last year. The pipeline for this year holds limited remaining availability, however, as 70% of the volume was already pre-let as of January 2020. Delays could occur towards the end of this year as well, but it is still early to accurately judge the likelihood of projects pushing into 2021. The new supply currently scheduled for 2021 amounts to 211,500 sq m, all of which is already under construction, while the new supply expectation for 2022 is ca. 280,000 sq m, though the vast majority of the latter volume is still in the planning phase and is therefore at risk of kick-off delays in addition to the actual construction timeline dragging out. In total, the volume under construction has expanded by 7% over the past six months and there is now ca. 576,400 sq m of office space under construction across Budapest. The geographic spread of the pipeline is becoming more balanced. The Váci Corridor submarket remains the top development destination in the city with 35% of the ongoing volume, albeit by an ever-smaller margin against South Buda that follows with 30% and Non-Central Pest that has scaled up to 22%. Although bottlenecks in the construction sector remain in focus with regards to timely delivery of ongoing projects, an expected settling in new residential development due to the reinstating of the 27% VAT rate could release more labour to the commercial sector and thereby alleviate this to some extent. The increasing pre-lease ratio in the pipeline provides further motivation as it keeps raising the stakes of potential delays.

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Annual Completion and Pipeline Forecast Volumes

Source: BRF, CBRE Research

RECORD DEMAND DRIVEN BY PRE-LEASES AND RENEWALS For every downside surprise in the development pipeline, Budapest office demand seemed to switch up a gear, gradually strengthening and eventually rounding out 2019 with the highest total leasing volume on record at 637,100 sq m (+19% y/y). The H2 period brought particularly strong demand momentum, with 393,700 sq m of total leasing activity (+39% y/y). However, there was a clear rebalancing in the breakdown of this composite demand volume as the second half of the year brought a rally of large renewals, lifting their share of total demand to 54% after a period of steady decline. Excluding renewals, the 2019 net take-up volume actually contracted slightly to 362,000 sq m (-6% y/y), split evenly between the first and second half of the year.

As such, the renewal surge during H2 contributed significantly to last year’s record demand figure.

The deal type breakdown within net take-up also shifted, highlighting the other main contributor to the demand uptick: pre-leases in the pipeline stood for the largest share of take-up in H2 with 83,000 sq m across 27 deals, followed by new leases in the existing stock with 75,500 sq m across 138 deals. Expansions of existing premises added 24,500 sq m from 52 deals, rounding out the H2 net take-up volume to 183,000 sq m (-14% y/y). In terms of geographical distribution of demand the Váci Corridor retained its position as the most sought-after submarket, boosting its share from all net take-up in H2 to 47%. The submarket continued to attract significant pre- leases, which gave two-thirds of the submarket’s total take-up volume during the period.

Average Asking Rents by Asset Categories

Source: BRF, CBRE Research

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Size (sq m)

500

20,000

Type of scheme Retail Hotel Office Residential

40,000

63,000

Real Estate Developments Under Construction in South Budapest

Source: CBRE Research

Four of the five largest pre-leases in H2 were signed along the Váci Corridor, including the largest pre-lease ever recorded in an already commenced project, signed by ExxonMobil for 27,300 sqm in the Pillar development by GTC. Other significant pre-leases in the submarket included a 11,800 sq m deal for a SSC function in Green Court, a 5,200 sq m deal by Intrum in Váci Greens F and ca. 4,000 sq m commitments each by HubHub and Qubes in Agora. The second most targeted submarket was once again South Buda with 23% of all net take-up, also strongly driven by pre-leases. However, the largest deal here was signed in an existing building, as ThyssenKrupp leased 15,900 sq m of vacated space in South Buda Business Park. Pre-leases in South Buda were plentiful but smaller in size, with the three largest being around 3,000 sq m and signed by Roche and Estée Lauder in Budapest One and by Semcon in BudaPart Gate. The third highest take-up volume was registered in Non-Central Pest. Notably, the submarket saw a 6,000 sq m pre-lease signed by TÜV Rheinland in Gizella Loft and a 4,800 sq m lease by Docler Services in the recently completed Hungária Center. The remaining submarkets all lagged behind with single-digit shares within net take-up, as there is limited room for movement in the existing stock and their ongoing pipeline is slim.

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Average Vacancy Rate by Asset Categories

Source: BRF, CBRE Research

In terms of the sectoral background of new demand, H2 2019 brought another stark move away from the balanced split seen in 2018. Notably, Manufacturing, Industrial and Energy (MIE) companies increased their share further, to 39% of net take-up during the period, strongly driven by the large leases of ExxonMobil, ThyssenKrupp and TÜV Rheinland. All other sectors saw their share from net take-up remain stable or decrease. Technology and Telecom companies stood for a 13% share, while other sectors that were amongst the most active in 2018 – including financial companies and public sector entities – fell behind to marginal levels during the period. As such, 2019 became the year of MIE companies, which stood for 32% of the total annual new demand, followed by Technology and Telecoms with 14%, business services accounting for 10%, while the remaining sectors remained in single digits.

As a result of record high occupancy across the new completions combined with continued demand pressure in the existing stock, absorption remained strong in H2. Throughout 2019, net absorption totalled 133,800 sq m, exceeding the new supply volume by 90%. However, it is clear that absorption is increasingly tied to new supply, as the slimand fragmented vacancy in the existing stock holds less room for meaningful demand. Central Buda was the only submarket to register marginally negative absorption (-1,800 sq m), while the remainder all saw their occupied stock expand. The clear winners were Central Pest (+46,500 sqm), SouthBuda (+35,200 sqm) and the Váci Corridor (+28,200 sq m), more distantly followed by Non- Central Pest (+11,400 sq m) and North Buda (+8,600 sq m). The Periphery and the CBD saw marginally positive net absorption.

35

Type of scheme

Retail Hotel Office Residential

Size (sq m) 500 20,000

40,000

63,000

Real Estate Developments Under Construction in North Budapest

Source: CBRE Research

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Total Leasing Activity Split by Deal Type

Source: BRF, CBRE Research

UNRELENTING VACANCY TIGHTENING SUPPORTS RENTAL GROWTH The limited new supply coupled with persistently strong demand resulted in the average vacancy rate across Budapest declining further by Q4 2019, reaching a new record low of 5.6% (-0.7pp in H2, -1.7pp y/y). The vacancy rate is now decidedly lower than what was forecast 12-18 months ago, and although the sustained strong demand wave has been a positive surprise, the main altering factor has rather been the subdued new supply. The ‘A’ category segment still has by far the lowest vacancy rate at 3.7% as of Q4 (-0.8pp y/y), followed by ‘B+’ assets with 7.2% (-3.2pps y/y) and the ‘B’ category segment with 8.6% (-1.2 pp y/y). Six submarkets saw their vacancy rates decrease in a year, led by South Buda (-7.2pps), the Periphery (-3.4pps), North Buda (-2.5pps) as well as Central- and Non-Central Pest (-2.0pps each). The Váci Corridor saw its vacancy rate decrease marginally (-0.2pp), while slight increases were registered in Central Buda (+0.4pp) and the CBD (+0.8pp). These relative dynamics look the same on a shorter time horizon over the past two quarters. Hence, as of Q4 2019, the lowest vacancy rates were found in Non-Central Pest (1.4%) and North Buda (2.6%), while the high outliers were Central Buda (9.4%) and the Periphery (34.5%). The remaining submarkets all registered vacancy rates between 4-6%.

The ever-tighter availability of space in the existing stock as well as the pipeline has underpinned continued rental growth. The average asking rent across all existing available space in Budapest stood at EUR 13.0 / sq m / month as of Q4 2019 (+6% y/y), while the average across ‘A’ category buildings increased to EUR 15.3 / sq m / month (+4% y/y). The mid-quality ‘B+’ category saw its average asking rent level reach EUR 13.3 / sq m / month (+8% y/y), while the weaker ‘B’ category average increased the most both over the past six months and on an annual basis, to EUR 10.8 / sq m / month (+6% in H2, +8% y/y). Geographically, rents remain highest in the CBD and Central Buda, while Non-Central Pest and the Periphery remain the most affordable, although the latter showed ambitious re-pricing moves in H2, narrowing the gap to the rest of the pack. All the other submarkets also registered increasing average rents over H2, led by the CBD, Central Buda, South Buda and Váci Corridor. New developments in the pipeline continued to raise the pricing bar and the typical asking rent for new ‘A’ category space in a semi-central location now ranges between EUR 15-19 / sq m / month. Typical rental incentives include ca. ½ months’ rent free per committed year, counterbalanced by generous Fit-Out allowances stemming from elevated construction costs, with ca. 500 EUR / net sq m being typical for shell-and-core space, for a straight 5-year term.

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Split of Take-up by Occupier Profile

Source: BRF, CBRE Research

OUTLOOK New office supply looks set to spike up again in 2020 after last year’s low volume, although this will not bring much new availability to the market as 70% of the expected volume is already pre-let. Overall, ca. 60% of the total ongoing office pipeline is committed. Risks regarding timely delivery persist as construction sector capacities are still strained. Demand is expected to remain strong this year, though softening somewhat from the record volume seen in 2019 as a renewal wave of similar magnitude is not likely. Take-up will still be driven by pre-leases as availability in the existing stock keeps diminishing. Based on the already high pre-lease ratio across the 2020 pipeline, we expect continued strong net absorption once these commitments convert to physical occupancy upon completion. Hence, the vacancy rate is expected to decline further. While we see continued upward rental pressure ahead, the appreciation will slow. Pipeline projects are ambitiously priced, and meaningful further potential value can be unlocked by exploiting more central or unique locations. Pricing in the existing stock still lags behind by a comfortable margin, which could allow for further appreciation across stock benefitting from sensible quality and size.

Range and Average Asking Rent Level by Office Submarket (excluding pipeline)

Source: BRF, CBRE Research

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BUDAPEST RETAIL MARKET

39

RETAIL MARKET

40

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

STRONG RETAIL ECONOMIC FUNDAMENTALS

Due to positive macroeconomic fundamentals, wages continued to evolve in 2019, which – coupled with record high employment and solid tourism statistics – resulted in a strong domestic consumption growth across the country. The nationwide purchasing power again recorded double-digit (+11.4%, y/y) expansion – of which retail gained an even greater share than last year. Retail spending is not projected to lose any significant proportion of total disposable income, thereby creating space for a sustained rise in countrywide retail trade looking ahead. Although the y/y growth in overall retail sales has decelerated somewhat over 2019, the 6% figure is still the second-highest in the past 15 years. On a regional perspective Hungary stood out again and after several upwardly revisions the country ranked only second to Romania (+6.6%) in terms of retail trade growth across the EU last year, based on Oxford Economics. The domestic retail turnover remained driven by the non- food sector (+9.2% y/y), led by an outstanding increase in demand for manufactured goods (+13.2% y/y). Other, similarly important non-food sector showed quite an improvement from 2018: fashion – even with the persistently unfavourable VAT environment – rose by 4.8% y/y, furniture and electrical goods, health & beauty all showed robust, but below-average increases of around 5% from last year. Our CBRE Shopping Centre Index, however, indicates a turnover growth of only 2-3% in Budapest shopping centres - the gap is partially explained by the growing share of online trade. Based on the Hungarian Central Statistical Office, mail orders and web purchases expanded most rapidly across all retail categories over the past 12 months, by over a third. A big chunk of this increase came in late Q3 during the post-summer sales period. Currently, the sector accounts only for ca. 6% of total retail sales but the projected growth until 2024 has been revised upwards several times. Based on leading retailers’ recent experiences the share of e-commerce could increase steeper than expected; it will though probably not reach the CE-5 average of more than 13% in a five years horizon. Relying on this expectation, Hungary’s retail industry remains the most offline-driven across the EU in the next five years. The most popular product categories that will drive e-trade in the following years are consumer electronics and appliances, apparel and footwear, media products and F&B.