Improving Outlooks behind the Deteriorating Figures - Q3 2009

The recession in both the Hungarian and world economies is clear in the latest figures of the property market. However, besides the data reflecting the present unattractive state, the market is beginning to consider positive outlooks for the future – it was announced at the press conference of CB Richard Ellis (CBRE) Hungary today.

Difficulties in Real Economy after Restricted Financing

“As one could predict, the property market is hit by the current crisis in two phases. Financing has become more restricted since last year, either for completed or planned projects. The second wave came due to the weakness of the real economy” – said Tim O’Sullivan, Head of Capital Markets at CB Richard Ellis. This narrowed the possibilities for developers and investors to a great extent, last year 410 million Euro was invested in property, this year approx. 90 million in H1, compared to the almost two billion Euro in 2007. The financial crisis also caused a set-back in the volume of the developments, planned and under construction. The total size of the projects under construction fell from 550,000 square metres below 250,000 square metres in twelve months.

The recession affecting the whole of the real economy evolved this year, after shock waves created by the financial crisis late in 2008, weakening the demand side of the property sector as well. There are less tenants coming to the market, the existing ones generally staying in their existing buildings, but negotiating subleases or downsizing instead of expanding. As their spending power is also limited, the rise of rents witnessed in 2007 take a U-turn and nowadays rents are more likely to fall.

Turn of Trends in the CEE Occupier Market

Most of the Central and Eastern European countries closed 2008 with a record level of occupier demand, due to which regional take-up came close to 1.6 million square metres last year. In the first half of this year demand fell by 19% in the whole CEE region, but the differences are significant on the level of the individual regional capitals. The greatest fall was registered in the office demand of Bucharest and Warsaw, while the lease renewals kept demand almost flat in the Hungarian and Czech capitals.

Net demand, however, fell everywhere in the region, causing vacancy levels to rise. In cities such as Prague, where the development boom reached its peak last year, availability increased only slightly. In markets like Bucharest, where a considerable volume of office space is due to complete this year, vacancy is rising sharply. In Budapest, the relatively stable demand compared with a large number of completions pushed vacancy further up, but the scope of the change was behind that in Moscow, Bucharest or Warsaw.

Rental levels also became under pressure. The largest change in percentage terms – unsurprisingly – was registered in those cities where the property bubble was blown bigger in recent years. The most noticeable correction was made in Warsaw and Moscow. Rents moved downwards everywhere in the region; there has already been a cca. 10-20% decrease in Budapest, dependent on location within the city.

Brighter Outlooks - Example Set by Logistics

Although all the figures reflecting the present state indicate deterioration in the last six months, the outlooks are much more positive than half a year ago. The best example for this is the shape of the logistics property market: the office market reacts to the economic shock with a greater delay than logistics, where recession was more severe at the beginning of the year, but activity is already showing signs of recovery. Developers gave a drastic answer to the collapsed demand at the beginning of this year: they reacted with a full project stop until the current oversupply is absorbed. This already has some promising signs, with the presently high vacancy rate (24%) is anticipated to decrease. The recovery is expected to be seen first in the industry and logistics sector, with the growing demand for warehouses helping to stabilise the market in 2010.

The office market is facing a similar procedure, which is in an earlier stage at the moment. The office stock coming to the market in the next two quarters, coupled with weakening office demand could make vacancy to increase in the short term, but in the second half of 2010 vacancy may start to decrease – partly due to the lack of new stock, partly due to the demand caused by the recovering economy.

Hungarian Economy – Property Market Fundamentals are Getting Better

„We can trust that economic perspectives are getting better.” – concluded Gábor Borbély, Senior Analyst of CBRE. „ Although all business sectors have suffered huge losses during the recession, due to the restrictive policy of last year the economy is much more balanced than it was before the crisis. This is highly appreciated by the financial markets: base rate can be cut further, forint is less volatile, and there is a growing appetite for all kind of Hungarian assets – including not only T-bills but stocks and real estate as well. The Hungarian economy has a chance to get a good starting position for the next global boom – nevertheless, economic policy must remain strict and consistent until then.”

Press Release: Property Market CEE & Hungary, 2009 Q3
Press Release: Property Market CEE & Hungary, 2009 Q3