The View 9

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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.