The Property Advisors

Eston International Property Advisors 2007/2 The Property Advisors Economic overview 2007 was the year of unavoidable reforms, but without social support, a year characterised by an improvement in the balance indicators, and a temporary deterioration in the economic performance indicators. Under the impact of low-key government expenditure, of steps increasing the revenues of the social security funds and strengthening taxation discipline, budget deficit in terms of GDP, just below a shocking level of 10% in 2006 was 5.5% in 2007. The deficit target for 2008 4% requires that budget expenditure shall be kept in check and it also forecasts that the Maastricht level of 3% shall be coming closer. For the first time, influenced by the already implemented elements of the social security reform, the system s balance remained in the positive range, but steps aimed at a structural transformation required in the long term are still ahead. With a moderate public spending, there was a slowdown in the expansion of household consumption as well. Retail trade volume dropped by 4.2% in comparison with previous year s figure, while real wages decreased by almost 4% year-on-year and the unemployment rate went up to 8.1. The annual GDP growth dwindled to a level not seen since the 1990s: in the fourth quarter of 2007, it was merely 0.7%, and so, the increase for the whole of the year was 1.3%. This indicator is particularly unfavourable in a regional comparison, but the slowdown is expected to be only temporary. According to the standpoint of the Finance Ministry, clearly, low-key government investments bear the responsibility for this check, while the performance of the business sector increased by about 4%. Annual growth rate in 2008 may come close to 3% again, even in an international environment which is expected to deteriorate, and the sustainable medium-term growth rate of the Hungarian economy is expected to remain in the neighbourhood of 4%. Despite a slower economic growth, the consumer price index jumped up, to a smaller extent because of the reform steps, to a larger extent because of the increase in the prices of food and materials, with an annual average inflation of 8%, against 3.9% in 2006. A major portion of analysts and economic players consider this unfavourable change to be of a temporary character, therefore, the impact of higher index generating further price increases due to the expectations shall be of little importance. Nevertheless, the 3% inflation target set by NBH for 2009 looks less and less achievable. GDP (%), Consumer price index 10 9 8 7 6 5 4 3 2 1 0 2004 Variation GDP, of inflation GDP, inflation and and HUF/EUR HUF/EUR exchange exchange rate rate Jun. 2005 Quarterly GDP growth 2005 Jun. 2006 Consumer price index 2006 Jun. 2007 HUF/EUR exchange rate 220 2007 HUF/EUR exchange rate During 2007, the exchange rate of the forint remained in a relatively narrow band around 250 HUF/EUR, with no signs of high volatility, as experienced in previous years. The annual average exchange rate was 4.8% lower than in 2006. All signs indicate that after a not very nice year of 2007, it is feasible to return to the path of meeting the Maastricht criteria, even though some analysts do not expect the introduction of the euro before 2018. Here, a certain role may be played by the example of Slovenia, showing that in the case of a small, open economy, it is basically insufficient to meet the criteria, but in terms of structure as well, the economy shall come closer to the development level of the EU economy in order to let the introduction of the EUR give a favourable stimulus to the economy. Until September 2007, the NBH reduced its benchmark rate in 2 steps, to 7.5%, from 8% at the end of the year 2006. Due to the slower-than-expected curbing of inflation, the rate cut development may also be inferior to previous expectations and, in response to a speculative attack against the forint, generated eventually by indicators of a weak 2007, the Hungarian central bank might be even forced to carry out a rate hike. By the end of 2008, the market expects a base rate of 6.5-7%. The ECB interest rate stands, since June 2007, at its 6-years high, 4%. In early 2008, the FED decided to make a rate cut of 125 basis points, in two steps, within one week, in order to avoid recession, and so, the US base rate now is 3.25%. 290 280 270 260 250 240 230

Modern offices In spite of the drop of economic growth to an eleven-years low, the series of records continued on the Budapest modern office market. The largest-ever (23,000 square meters) pre-lease contract was concluded in the summer of 2007. According to that, the Hungarian Post shall move to the Gateway office building, completed by Ablon in December, next to the Árpád Bridge. Another element in a series of contracts for large areas was an agreement of the CEU with Trigránit, about 11,000 square meters in Millenium Tower, to be completed in 2008, as well as a rental of 14,000 square meters by Siemens Nokia Network with a new name but in the old place (City Gate). Still above the usual levels was the size of an 8,000 square meter contract of AXA as well, in the BSR office house, delivered at the end of the year, and both T-Online and Nokia rented 7,500 square meters (the first one in Infopark D at Lágymányos, while the latter in Studium Office Building, next to Corvinus University); both of them were assisted by Eston advisors. Pannon extended its contract in the Terrapark of Budaörs, for 9,000 square meters, for the period until its own development of a pioneer character, at Törökbálint shall be ready. With the record number of contracts for large areas, a total of about 320,000 square meters were con- Office deliveries in Budapest & typical vacancy rate tracted, that is, demand exceeded the level of the year 2006 by 28%. According to estimates, about two thirds thereof were new deals concluded. The total volume of completions, with 193,000 square meters, even if lagging behind the expansion in demand, exceeded the 2006 record by 6%. In the category of large office complexes meeting the highest quality requirements, seven were built by 2007. Most of them added to the offer on Váci út, but some buildings were completed in the Lágymányos area, on the emerging Hungária körút and in the city centre as well. In Inner Buda, Millenáris Office Building was finished, an office building accommodating, among others, the new office of Eston. By the end of 2007, according to our calculations, the stock of A-category rented offices in Budapest reached 2.2 million square meters, and the vacancy rate dropped from 12.8% at the end of the year 2006 to 12.6%. Meanwhile, there were no major shifts in respect of rentals, with a monthly average amount of 13-16 euros Gateway Office Park Millenium Tower sqm 400,000 25.0% 350,000 20.0% 300,000 250,000 15.0% 200,000 150,000 10.0% 100,000 5.0% 50,000 0 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009* *Eston forecast Offices handed over Typical vacancy rate per square meter for new A-category areas, and 9-12 for older A and for B categories. The above data confirm that in the short run, the office market is not sensitive to the drop in the GDP growth rate, which is considered to be of a temporary character. The impact of the American subprime crisis could not be felt either, but it may slow down the development projects planned for launch in 2008. For 2008, we continue to foresee the completion of 200-250,000 square meters, while the drop in the motivation of developers may set back rather the quantity of completions in 2009-2010. Another setback for development motivation may be the property tax to be introduced. According to the present concepts, local municipalities would be allowed to apply this tax, representing not more than 1.5% of the calculated value, from 2009 onwards. The introduction of the property tax, at the same time, may lead to a significant increase in rental expenses, due to the forwarding of the costs represented by this tax onto the tenants. 2

Eston International Property Advisors 2007/2 Offices above 10 000sqm handed over in 2007 Name gross area (sqm) Arena Corner 28 000 Gateway Office Building 23 000 Infopark D 18 000 Váci 33 17 400 Átrium Park 1 st phase 16 200 Studium Office Building 13 000 BSR Center 12 614 A new development is the extension of multi-function projects, such as the Corvin project, Tópark ( Lake Park ), Károlyi István in the capital city, whilst in the Czech Republic, on the second largest market (Brno), its volume in terms of square meters already reached one-tenth of the level in Prague and significant interest is present for call centers, shared business services, with larger areas, but cheaper solutions. In Hungary, university cities in the country, primarily Szeged, Miskolc and Debrecen may become locations for similar development projects. By early 2008, it became evident that the large-scale government district planned for the territory behind the Nyugati Railway Station shall not be built, at least not in the present government cycle. At the same time, mini-districts for the government may be created if, instead of the former free use of office space, marketised rental fees become applicable in the case of public administration offices. When, in this field an actual rationalisation of the state-owned property stocks takes places, market-based renting by public administration organisations may grow further. BSR Center Millenáris Office Building Project, Solaris City or Öböl ( the Gulf ), where office development is implemented arm-in-arm with residential development, because this way, a wider scope of services accessible from the office building can be ensured. Also, more and more players, earlier active only in residential development, appear on the market with office products; and some companies, such as Pannon and the insurer Uniqa, started to build headquarter offices of their own. Significant development projects already announced include AIG Lincoln s 22,000 sqm project next to Ferihegy airport, Quadrum. It is considered to be able to fill a gap, taking into consideration the emergence of much-favoured office centres in the proximity of airports in Western Europe. In addition to these, developers tend to compete for tenants more and more by creating green offices, environment-friendly, energy-saving solutions and higher quality. As to Hungary, we can speak about a modern office market only Industrial properties Whilst in the other segments of the market records keep falling, the market of industrial-logistics properties for rent had another silent year. During 2007, a total area of 85,000 sqm were completed, well behind the 150,000 square meters planned for the year and the 140,000 square meters of one year earlier. The total stock by the end of 2007 was close to 1 million square meters. Both completions and total capacity are quite modest, in a regional comparison and, in addition to that, as opposed to other countries in the region, modern facilities for rent are almost exclusively concentrated in the capital city and its surroundings. This concentration appears to be melting a bit, as in 2007, the initial phase of the first major development project in the country was completed, next to Hegyeshalom and, with the expansion of the Schengen borders in December, cities near to the country borders, such as Nyíregyháza 3

or Szeged, as well as Záhony, with its special situation, may come into the focus for potential tenants, and so, for the developers. In 2007, however, the most important increase was observed not in the countryside, but rather on the market of the so-called city logistics properties, within the boundaries of Budapest: the development of Dél-Pesti Üzleti Park (South Pest Business Park) was accomplished and, also in District IX, in the first phase of InNove Business Park, 8,000 square meters, in Mester Park and in CityPoint9, 6,000 square meters each and in Újpest, the first 20,000 square meters of Europa Center were completed. On the market of city logistics, we expect active movements in 2008 as well. The developer of CityPoint9, Convergence Capital, for instance, starts such a development project of a total 25,000 sqm in District XV. In the logistics parks in the neighbourhood of the capital city, the level of completions in 2007 was low, 32,000 square meters. In covered a total of about 170,000 square meters, while in 2006, a total of 140,000 square meters. The largest transaction was the extension of a 26,000 square meter rental by a German freight forwarder, Fiege, in the Harbor Park of ProLogis. And the most significant new transactions were: Tesco rented 15,000 square meters in Agrogate, at Zsámbék, Behrtrans almost 9000 square meters in the Szigetszentmiklós area of ProLogis, while Philip Morris and Filtrona rented 7000 square meters each the first one in the East Gate Business Park of Wallis, the latter also in Szigetszentmiklós. In the Tulipán Park of Biatorbágy, a logistics service provider, Eurogate, rented 6000 square meters, Puma: 2300 sqm and Gefco: 2000 sqm. This means that in the second half of the year, one of the most popular locations in the western portion of the conurbation became the facility of Segro. On the East, in EGBP, another 9000 square meters were taken up by tenants like GE Hungary Tópark Quadrum innove Business Park the meantime, in the parks of ProLogis in the neighbourhood of Budapest, warehouses with an area of 60,000 sqm are under construction, in Vendel Park, 16,000 square meters are being built. With the construction of the eastern sector of M0, slowly becoming a reality within reach, we expect a rocketing increase in interest towards the eastern portion of the conurbation, both from tenants and developers. After a successful début of East Gate Business Park, the first development project here, new investments start in the southern portion of the sector, close to the airport, for instance, the Ablon Airport City project between Vecsés and District XVIII, where after full completion, 47,500 square meters will be offered for rent. Together with that, areas suitable for development might be appreciated, in particular, the ones next to motorway M31, connecting M0 with M3. As opposed to the silence on the offer side, demand was somewhat more active than a year earlier. In 2007, contracts concluded Energetika (2400 sqm), TP Logistic (1600 sqm), Central Drinks (4750 sqm) and an automotive industry supplier. And city logistics parks attracted tenants like Chio-Wolf Hungary, Color Life Benetton or Obi (CityPoint9), Johnson Controls (Mester Park). The rentals in city logistics parks became somewhat lower than in previous years: within the city, the typical level was 5.5-6 euros/ sqm/month, in the neighbourhood of the capital city, 3.8-4.5 euros/sqm/month in 2007. On the demand side, the needs for larger areas also cause a downward change in rentals. In the case of rented space for logistics purposes, it was already observed in other countries of the region that instead of the companies providing logistics services, their clients are looking for warehouses, directly. The emergence of this trend in Hungary coincided with the bankruptcy of Rynart. With the fallout of this logistics service provider, tenants of its warehouse capacity of 130,000 square meters appeared on the marketplace again. 4

Eston International Property Advisors 2007/2 Retail The year 2007 was rich in records on the market of retail properties and, within that, in the segment of shopping malls, in particular. For the Christmas season, the largest shopping mall of the country and, at the same time, that of the region, Arena Plaza was completed, with gross rentable area of 65,000 square meters, on the territory occupied earlier by the Trotting Field. This huge shopping mall accommodates the first Budapest outlets of several brands (for instance, Pull&Bear, belonging to the Inditex Group, Behrska, Stradivarius, or Peek & Cloppenburg) and the whole of the area was rented, months before the opening. Presence in the newest and largest player of the market is an attractive opportunity, even if its location and the date of its opening were not the luckiest choices. The huge shopping mall is difficult to access by public transport, it lies halfway between two underground stations, and its completion took place in a year when retail trade turnover fell. built on the site of the ORI headquarters and including both office space and luxury homes, there are still some vacant retail outlets in the side streets of Váci utca. Like on Andrássy út as well, where rentals soared due to fee increases by owners, on the basis of the long-awaited coming of luxury brands. After Louis Vuitton, Gucci is expected to come within short, and an opening of Burberry is also increasingly probable. In 2007, important completions were made in the outskirts of the city as well. Next to the airport, Market Central Ferihegy was built by AIG, with 44,000 square meters fully rented out already several months prior to its opening. At the western gate of Budapest, the last phase of Premier Outlets Center (6000 sqm) was accomplished and it became similarly popular to the first two phases. In its immediate neighbourhood, M1 Outlet Center (16,500 sqm) can be opened within month. This is intended to be a mix of a traditional factory outlet center and of a classic shopping centre. In the framework of the Tópark development project at Törökszentmiklós, a 100,000 square meters shopping centre shall be ready by 2010 according to the plans, and Solaris at Budaörs shall also enter the market with a significant size of retail premises. As to rental fees, the most marked change could be observed in the case of retail properties on Andrássy út. Their monthly rental fees came up from the previous levels of 25-35 euros, one year ago, to the level of 40-60 euros, already earlier usual in the area of Váci utca. The prices in the other market segments did not change that much. In the most favoured shopping centres the average monthly fee per square meter is 100 euros, in shopping centres on the outskirts of the city, an average of 20 euros is required. Investment properties Parkway Offices After a relative silence in the last couple of years, the construction of further shopping malls with about 150,000 square meters is planned or already started by the developers e.g. Köki and Neo in Kispest, an ING project on the place where Buda Skála stood. The completions are expected in 2009-2010. Meanwhile, on the market of shopping malls in the countryside, the aggregate volume of development projects in process is of a similar order of magnitude, but there, some of these will be completed in the coming months: the shopping centre of Wallis Real Estate: Agria Park in Eger has been handed over and further completions follow in Nyíregyháza, Miskolc and Debrecen (Árkád). Árkád in Szeged shall open in 2009, according to the plans. In the upcoming five years, a total of 25 shopping centres shall be built countrywide. Simultaneously with the completion of the giant shopping centre, there was a revival on the market of retail outlets in the inner city of Budapest as well. In addition to a total of almost 20,000 square meters of new shops in Fashion Street in Deák Ferenc utca and V1, Due to the overheating of the American mortgage market in previous years, more exactly, due to the granting of mortgage loans to customers without proper credit standing, in an environment of increasing interest rates, the housing market bubble was burst, loans defaulted in large quantities and banks suffered huge losses. As a consequence of mutual financing relations between banks, almost each of the credit institutions were seriously hit. The subprime crisis projected a threatening economic recession in the USA and FED, in order to prevent that, reduced its benchmark rate drastically, by 125 basis points. In Europe, the impact of the crisis could be felt primarily on the money markets, with some decrease in the amount of monies waiting for being invested and financing became much more expensive. Parallel to the unfolding of the subprime crisis, the ECB benchmark rate and the general reference in financing: inter-bank rate (EURIBOR) diverged. The latter rose with 0.7-0.8 percentile, which means, the mutual financing of banks also became more expensive. And this makes more expensive the access to funding for other market players, including developers, reducing by the same the achievable returns and, together with that, their willingness to develop, to invest into properties. On the market of the Hungarian commercial properties, there was 5

2007/2 only little impact from the subprime crisis in 2007 in terms of development projects, and even less in terms of investments. The amount of the year s investment transactions was close to 1.9 billion euros according to the estimates, that is, it was more than doubled in a comparison with the activity experienced in past years, partially, because of certain deals with large amounts. The main attraction of the emerging markets of Eastern Europe, and within that, Hungary was a higher yield achievable, in a comparison with the primary markets of Western Europe. The capital cities of the emerging nations of Eastern Europe offered an excellent opportunity for convergence play. While yields in London, Dublin dropped below 4% in the first half of the year, the most popular products exchanged hands at levels of about 5.5% in Prague and Warsaw, and just below 6% in Budapest (with 5.8-6% on the office market, 6-6.5% in the market segment of retail properties, 7-7.5% on the market of logistic properties). This also meant that the aggressive reduction in yields experienced in previous years came to a slowdown, even though it did not come to a standstill. However, in addition to the correction observed on the primary markets with London yields recovering to the range of 5-5.5% by the 4 th quarter of the year a further decrease in yields is quite questionable on the convergence markets as well. Hungarian commercial property yields & ECB base rate 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jun. 2003 2003 Jun. 2004 2004 Jun. 2005 2005 Jun. 2006 2006 Jun. 2007 2007 A-category offices Industrial properties Shopping centers ECB base rate In Hungary, the largest investment transaction of the year was the sale of Arena Plaza, where the British AIM paid 381 million euros to the developer, Plaza Centers for the largest shopping mall of the country, four months prior to its completion, but at an occupancy level of 100% already. In addition, several important transactions were made in the market segment of retail properties: Corvin Átrium, a shopping centre under construction was bought by Kleppiere; Campona shopping centre, built in 1999 and operating at an occupancy level of 97% also exchanged hands when one of ING s partially open-end funds purchased it from Compagnie Immobilière de Belgique for a consideration of 110 million euros. The portfolio of Park Center, consisting of retail properties in 10 cities in the countryside was sold for 70 million euros. Among the most significant transactions on the office market, the sale of Átrium Park, developed by Wallis Ingatlan shall be mentioned, where Immoeast paid 100 million euros for the property. The office building Aréna Corner was bought by Orco, from the developer, Raiffeisen Property, while the Parkway development project of Biggeorge s NV, to be accomplished in 2009, was bought by Raiffeisen Property Fund, in the framework of a forward purchase transaction, with the contribution of Eston. Skanska sold Népliget Center to GLL, a few weeks before the completion of the first phase, against a consideration of 72.2 million euros. The first Hungarian project of Hochtief, Capital Square, to be completed in 2009, was bought by CA Immo International, for 71 million euros. Margit Palace was transferred from the ownership of Terrafinanz to the portfolio of JP Morgan, IVG Institutional Funds bought, from a group of international and Hungarian investors, the Herzog Palace, accommodating the Budapest Stock Exchange and an office building on Károly körút, vacant at present. A new trend is an increased interest in hotels for instance, Art otel, on the Buda side of the Danube, exchanged hands and in properties suitable for hotel development, but offer remains scarce in this respect. Development motivation does not leave intact the countryside either, where the SCD Group, committed to development projects on Lake Balaton attracted the attention of the Irish Quinlain Group, wishing to participate in the projects of the coming 5-7 years. At the same time, attention continues to be focused on areas suitable for office development in Budapest, in particular, the section from Váci út to Hungária körút, as well as the outer ring, but Kerepesi út also became included into the maps of the developers. After a very strong year of 2006, there were almost no changes in 2007 in the stocks of the Hungarian property funds. The most important players remained the property funds of ERSTE (HUF 151 364 billion), OTP (HUF 141 625 billion) and Raiffeisen (HUF 91 553 billion), being increasingly active on the market. 1024 Budapest, Lövôház u. 39. Tel.: (+36 1) 877 1000 Fax: (+36 1) 877 1001 e-mail: info@eston.hu www.eston.hu