Eston International Property Advisors 2007/1 The Property Advisors Economic overview The balance-improving effect of the stabilisation package introduced in several steps since the summer of 2006 began to show itself; at the same time, the short-term bitter flavour of the pills to swallow was somewhat attenuated by the favourable international economic environment. The steps of the equilibrium program implemented to date have been recognised to be efficient not only by the market, but by the European Commission as well. Even though the popularity index of the government is record lows, political stability does not look like threatened. In recent months, we witnessed a slackening in economic growth. GDP expansion, usually above 4% p.a. in previous years plummeted to 1.4% in the second quarter of 2007, worst data in eleven years, putting the GDP growth of 1H 2007 to 2.1%. In the first six months of the year, industrial output was about 8.7% above the value observed in the previous year, however the economic tightening consumed the growth of investments and of household consumption. There was a 6.8% reduction in net real wages in 1H 2007, while unemployment rate remained flat at 7.5%. % 10 9 8 7 6 5 4 3 2 1 0 2004 Variation of GDP, inflation and HUF/EUR exchange rate Dec 2004 Qarterly GDP growth 2005 Source: MNB, KSH, market consensus Dec 2005 2006 HUF/EUR exchange rate Dec 2006 Exchange rate 220 2007 Consumer price index The market expects a GDP growth of 2.5% for 2007, to exceed 3% in 2008, again. Already in the first half of the year, the government managed to reduce the budget deficit target for 2007 from 6.8% of the GDP to 6.4%, due to processes having a favourable effect on the balance of the general government, with measures connected primarily with the healthcare reform that generated substantial discussions and discontent in the society. Part of these, exactly due to their 290 280 270 260 250 240 230 much-disputed character, may not be sustainable in the long term, and there is also an immense uncertainty about a future introduction of property taxation, aimed at increasing revenues. In view of the ongoing processes, however, the deficit target of 3% in terms of GDP looks achievable by the year 2010. The improving deficit numbers are expected to contribute to a gradual reduction from 2007 in the ratio of government debt to GDP, having increased from the value of about 50% in 2001 to more than 67% by 2006. A jump in the consumer price index is one of the most perceptible unfavourable effects of the stabilisation package. Annual inflation peaked, after 2.3% in the spring of 2006, at 9% in March 2007, and it still stood at 8.6% by the end of e. Even if the one-off, inflation-boosting effect of the VAT rate increase in September 2006 will soon drop off from the index, the higher rate, through its implications in the pricing of services, as well as the development of food prices represent serious factors of uncertainty. According to presently available information, the market expects an annual inflation of 6% by the end of the year, with an average annual consumer price index of 7.7% for the year 2007. According to NBH, a 3% inflation, understood to mean price stability shall be achievable by the end of 2008 early 2009. The prime rate, kept at 8% since October 2006, was reduced to 7.75% by NBH Monetary Council, operating with the new central bank governor since April, who has the support of the market as well. By the end of the year, the market expects further rate cuts of a total of 75-125 basis points, in line with a decrease in inflation, the more so, because this rate is far the highest in the region. In the meantime, the European Central Bank, with its rate hikes in April and e, 25 basis points each, increased its prevailing interest rate to 4%, a height unseen since August 2001, and further rate hikes cannot be excluded either. In recent months, the exchange rate of the forint stayed stable, apart from a couple of fluctuations under the influence of international market shocks, close to the strong side of the band, at levels of 245-255 HUF/EUR. The average exchange rate in the first half of the year was 250 HUF/EUR, almost 4% stronger than in the same period of the previous year.
Modern offices In Budapest, on the market of Category A offices, only 38,800 square meters of office space were delivered in the first half of 2007, or barely one-third of the office space completed in the same period of last year. This low-key delivery, however, indicates merely a stillness before the storm, as for the whole of the year, a record level of completions is foreseen. The stock of highest quality offices for rent in the capital city may reach 2.25 million square meters by the end of the year. During the first six months, four major deliveries took place: in the central portion of Váci út, Ablon s BC30 office building, with 13,000 square meters and the first phase of Átrium Park, with 16,100 square meters, rented to the extent of 72% already upon completion. Another delivery in the Váci út corridor (in a wider sense) is River Loft, with 5,500 square meters, and in the inner city, after years of waiting for completion, Kálvin Center Offices handed over in Budapest and typical vacancy rate m 2 300,000 25 0 250,000 20 0 200,000 15 0 150,000 10 0 100,000 50,000 5 0 0 0 0 2000 2001 2002 2003 2004 2005 200 2007 2008 ston forecast Offices anded over ypical vacancy rate opinion, the completion of a portion of the projects might slip through to early 2008, but even so, the expansion in the offer may reach 250,000 square meters this year. In the first half of 2007, according to our calculations, office rental transactions covered more than 125,000 square meters, and that is 13% more than in the same period of 2006. BSR Center BC30 Studium Office Building Átrium Park shall accommodate the first tenants from April. Several smaller, upgraded office buildings have also come to the market, including BJ48 (2,150 sqm) in Pest, while on the other side of the Danube, Buda City Tower (2,850 sqm) and the luxury category Lánchíd Palace (2,800 sqm), with respectively high rentals. At the end of e, projects with a total area of 75,000 square meters were in the stage of being given the last touch. These include, on the Váci út corridor, Váci 33 (17,400 sqm), in Lágymányos, Infopark D (17,500 sqm) or the building of Aréna Corner, located at the crossing of Hungária körút Kerepesi út (28,000 sqm). Studium Irodaház, accommodating the educational premises of the Corvinus University, with its 13,000 square meters of lettable space shall be also completed within short. By December, developers promise the delivery of further 150,000 square meters, as they brought forward the implementation of certain projects, with reference to the strong demand. In our The largest announced transaction was a pre-lease contract for 11,000 square meters, signed by CEU in May 2007. In accordance with that, the university shall start the year 2008/2009 already on the Danube side in Ferencváros, in the Trigránit building called Millenium Tower IV. T-Online, relying on Eston International s exclusive representation services, rents a total of 7,500 square meters in the Infopark D building, to be completed by IVG in the third quarter of 2007. Meanwhile, Microsoft, operating in the other Budapest technology park, with its expansion requirement of 4000 square meters, opted for the Graphisoft M building, in the neighbourhood of its existing offices, to be completed also in the third quarter of the year. Major transactions included a rental contract of the European Social Fund in Átrium Park, with 3,744 square meters, a contract of British Telecom, for 3,500 square meters in IP West, or 3,000 square meters to be rented by Citibank in Aréna Corner. 2
Eston International Property Advisors 2007/1 Out of the largest transactions, only the renting by ESF (ESZA) concerns the area of the Váci út corridor, and so, the dominance of the previously far most popular location seems to start weakening. Still, for the whole of the year 2007, Váci út is likely to remain the office location most in demand, this is still the area where more than one-third of the new office projects will be completed in the second half of the year. In the first half of 2007, under the impact of the huge renting transaction by CEU, the T-axis became the location of highest vendibility. At the same time, the Lágymányos portion of the city lagged only narrowly behind, primarily because of the Infopark D building, occupied to more than 60% already weeks before its completion, or IP West I-II office building, completed by the end of last year, with a 100% occupancy by the end of the first half of 2007. In view of the completions announced for the next one year and a half, the emphasis is expected to shift to the T-axis, Office buildings above 10,000 sqm to be handed over by end 2007 Office building Gross area (sqm) Gateway Office Building 35,000 BSR Center 29,500 Arena Corner 28,000 Corvin Offices 19,000 Infopark D 17,500 Váci 33 17,400 Office Garden 15,000 Studium Office Building 13,000 From the point of view of location, it is interesting to note that Pannon GSM Zrt., having discovered Budaörs as an office location, continues to draw off from the city centre building a large, all-green house of 26,500 square meters at Törökbálint. This is a novelty not only in terms of the location, but also with the use of the hot desking system (today a rarity in this country yet), which means that the employees shall not have a Arena Corner Mester Park covering the Danube side in Ferencváros, Könyves Kálmán körút Hungária Róbert Károly körút, primarily its hubs with connection to the underground line, and this shall be even more true for the projects already announced for a longer time horizon. Even if this axis, most of all because of the differences in transport connections shall never be as homogeneous as the corridor of Váci út, the quantity of the development areas available here and their prices indicate that in the long run, a new office space centre is under formation here. It might add to the popularity of the area that the M0 motorway annulus, to be finished by the end of 2008, might well take up the truck and trailer traffic, a burden on the external boulevards at present. At the same time, the fact that for the government district, the area behind the Nyugati railway station was selected, might give another impetus to medium- and long-term development projects in the inner portion of Váci út. fixed desk. This is a tool to reduce the number of implemented workstations by 30-40%, the area gain to be used by Pannon for the provision of ample community areas. Events on the office market in the last six months include the repeated call for tenders by the Post, where the most important lesson is that even on a market producing such a strong supply, one shall consider thoroughly what shall be the requirements from a large tenant, far above the average size and what shall be the timeframe selected. As a result of the low completion volumes and the strong demand in the first half of the year, the vacancy rate continued to decrease, from 12.8% in 2006, to 11.6% at end of e 2007. Rentals actually remained unchanged in a comparison with last year. In the case of newly built offices, the monthly level remained 12-16 EUR/sqm, while in the Category A buildings delivered in previous years, the monthly rentals are 11-14 EUR/sqm. 3
Industrial properties The market of industrial/logistic developments in and around Budapest seems standing still too, since out of the 150,000 square meters of new capacity planned for the year a mere 26,000 square meters were actually handed over in the first half of 2007. Such a slow developers activity produced a volume less than one half of the one in the same period of last year, and even this was thanked mainly to the booming city logistic developments within the boundaries of the capital. The first phases of Mester Park (4,000 sqm warehouse and 8,000 sqm office space) and of Citypoint9 (4,200 sqm) - both in the district 9 were completed, as well as the 5,000 sqm C-Moll project in South-Buda, next to Harbor Park. In the agglomeration only one delivery was recorded, the 13,000 sqm first phase of Segro s Tulipan Park in Vendel Park, Biatorbágy. However, the picture is much brighter taking into account more than in the first six months of 2006. The most significant ones were pre-lease transactions for warehouses to be delivered in the second half of the year, with the biggest one signed by Tesco for the 15,000-sqm second building of Agrogate to be completed in October. While the only tenant for the also 15,000-sqm first building is Raksped with its 2,400 sqm need. The most popular location was however the ProLogis Sziget Park in Szigetszentmiklós, where Behrtrans leased a total of 8900 sqm to be occupied in three steps by the end of the year, besides Filtrona (3,000+4,000 sqm) and NCR (3,500 sqm). While ProLogis Budapest Park, located next to the M5 motorway, saw high demand too, Geodis signed for 6,000 sqm, New Optic for almost 4000 sqm and Iron Mountains for more than 2,000 sqm here. Consequently, the southern region of the agglomeration was responsible for about one half of the total space rent. In the western region (close to M1-M7) Gefco leased 2,400 sqm in Segro s Tulipan Park, Mid Tulipan Park Market Central Ferihegy ProLogis Gyál the further 90,000 sqm capacity already under construction: a total of 57,000 sqm in the logistic parks of ProLogis (27,000 sqm in Harbor Park, 16,500 sqm in Sziget Park, and 13,500 sqm in Budapest Park). In East Gate Business Park, which is still the only player in the eastern agglomeration, the already existing 16,500 sqm capacity is being expanded by a further 9,000 sqm. While on the submarket of city logistic facilities InNove s first 6,000 sqm and the second phases of Mester Park and Citypoint9 are being developed. In addition, looking beyond the agglomeration we find ProLogis delivered its first building of 22,600 sqm in its new logistic park at Hegyeshalom (on the Austrian-Slovakian border), which has a total capacity of 148,000 sqm. In 1H 2007 the strong momentum of the demand side seen in the last months of 2006 remained present: lease agreements were signed for a total of 65,000 sqm space, which is 17% Atlantic Films (2,180 sqm) in Euro Business Park of IMV and ProLogis Harbor Park will accommodate Trilak s 1,500 sqm and Herlitz s 5,000 sqm new need. New city logistic parks have also seen their first tenants: Johnson Controls and Aldes moved into Mester Park, Color Life Benetton into Citypoint9. Due to the slow deliveries and the high demand of 1H 2007 vacancy rate has moderated. According to our calculation, including the buildings expected to come to the market by the end of the year, the available capacity is about 150,000 sqm in the capital and its agglomeration. We have not seen any major movement in rental fees since end of 2006. Typical monthly levels are 3.7-4.2 EUR/sqm in the logistic parks of the agglomeration - although amid fierce competition it can slide below this level, while 5-5.5 EUR/ smq in the city logistic parks within the boundaries of the capital. 4
Eston International Property Advisors 2007/1 Retail After a relative still last year, the Budapest market awaits another large shopping mall to be completed. According to the promises of the developer, Plaza Centers, Aréna Plaza, offering space for 200 outlets on 68,000 square meters, shall be completed in October 2007. The transport connection of the new shopping mall is a bit poor in a comparison with the usual standards, as it is not easy to access either by public transport or by car. In addition, it is close to one of the most successful shopping malls, Árkád. Still, given that Aréna Plaza shall be not only the newest, but also the biggest one among the competitors, tenants do not want to be left behind, in spite of its weak points. This is why contracts were already concluded not only with tenants known from other Budapest shopping malls, but also with premium brands like Tommy Hilfiger, Boss, Ralph Lauren, Paul & Shark, Lacoste or Peek & Cloppenburg. In the next two years, no further shopping malls are expected to open in the capital, but preparations are in process for several development projects. These include, the construction of Neo Center (with 17,000 sqm of retail space and 17,000 sqm for Fashion Street offices) at Határ út, in southern Pest where Europark is also considering an expansion and Köki, just one stop with the underground from there. ING plans to complete its shopping mall in 2009, to be built on the lot of the former Buda Skála department store, where the demolition works have already started. Meanwhile, the shopping mall fever seems to have reached the eastern part of the country, where in the next 12-18 months, larger shopping and strip mall openings are planned in Eger, Miskolc, Nyíregyháza and Debrecen. In downtown Budapest, the ING project on Vörösmarty square (with 6,000 sqm area already rented) is expected for completion, after several delays, also in October 2007. With a full refurbishment of Deák Ferenc utca, the Fashion Street of Immobilia created a total of 11,000 sqm of new retail area, highly in demand. In addition to branded garment shops, a restaurant also opened here, the first unit of Vapiano, an Italian restaurant chain with German background. In the former stock exchange building, Orco is only planning its shopping gallery of 9,000 square meters, while the overhaul of the former Luxus department store may be ready by October 2007, to accommodate two Spanish chains, Behrska and Stradivarius. The retail outlets of the refurbished Klotild Palace, 2,000 square meters shall be completed soon, but also in the side streets of Váci utca, there are shops waiting for tenants. Next year, Gucci shall open a shop in Budapest. According to the news, as opposed to Escada, moving to Dorottya utca, Gucci shall have opted for Andrássy út, to become a neighbour of Louis Vuitton. Another luxury brand, the British Burberry is also expected to appear soon. In downtown, several mixed-purpose development projects are also underway or under preparation, where in addition to hotel space, the implementation of significant retail areas is also planned, like in Europeum, at Blaha Lujza tér, or, in a more distant future, in the project at the site of the Ballet Institute, on Andrássy út. Meanwhile, at a proven location on the outskirts of Budapest, at Biatorbágy, two projects are underway, for completion by the end of 2007. In the last, third stage of Premier Outlets Center, on 6,000 sqm, 20 shops will be accommodated. Next to that place, but with an even faster access from the motorway, the M1 Outlet Center, to be ready also in the fourth quarter of the year, shall not follow the strip mall layout, but shall be a two-level shopping centre. The developer, FTB Invest implements shops of 23-800 sqm on the 16,500 square meters area available, for outlets offering luxury and Category A brands. Also in the suburbs, close to the airport, the Ferihegy Market Central project of AIG Lincoln is underway, with 44,000 square meters. The two strong magnet tenants, Tesco and Praktiker reserved 65% of the area, and there is strong interest in the smaller shops as well. Along the eastern sector of M0, where the offer does not include any shopping mall or hypermarket yet, in the coming months, several new projects are expected at the motorway junctions. In the coming years, the German Aldi discount chain shall be an increasingly active player of the retail outlet market in Hungary, in particular, in the countryside. Even though the opening dates were further postponed and are expected now only for 2008, these shall take place, in addition to Budapest, in seven cities, namely Gyôr, Zalaegerszeg, Pécs, Szeged, Debrecen, Miskolc and Veszprém. In 2007, the rentals of the retail outlets in the capital are moving upwards. An exception thereof is Váci utca, where the new offer coming to the market does not allow to move away from the range of 80-100 EUR/sqm. At the same time, due to the strong demand on Andrássy út, the monthly rentals per square meter increased from 25-35 euro a year ago to above 30-50 euro, whereas the monthly rentals of the shopping centres with the highest vendibility persist at around 100 EUR/sqm. Investment properties In accordance with international trends, on the market of investment properties in Hungary, the total transaction value is expected to be well above the volumes realised in 2005 and 2006, with 1 billion HUF in both years. A limit to that can be actually put only by the number of products coming to the market. And that may result in a slower decrease in yields and an increasing number of forward purchase agreements. Worldwide, a huge amount of capital is waiting for investment 5
2007/1 on the property market, while favourable opportunities are scarce. On the most developed markets of Europe, in London or Paris, due to the abundant liquidity, the return on premium offices already fell below 4%, while the yields of the 5-10 years government securities, that can interpreted as a reference yield, are at 4.1-4.2%. And so, the risk premium has been priced out to an extent that is no longer justified by the low vacancy rates or by the strong demand from tenants, but perhaps not even by the increasingly frequent sale-and-leaseback agreements either. Therefore, increasing attention and volumes of capital turn towards the secondary markets in Western Europe, where yield levels of around 6% are typical, and towards capital cities with similar standing in Eastern Europe, including Budapest. Domestic property funds, holding a total of 2.2 bn EUR at the end of e 2007, join that vivid international demand. Even if the overall assets of the 19 public funds decreased by 100 million EUR in the last six months, this amount is still 30% above the stock of one year ago. The reduction in the last months was due to a number of factors. One of the reasons was that in the case of funds launched earlier, the vesting period, when a withdrawal of capital is penalised by a higher commission, was over. Dominant yields on the real estate market and variation of ECB base rate On the other hand, alternative investments became more attractive, with a central bank prime rate of 8%, the annual yields of money market investments was also promising, while commercial banks offered deposit rates above 10% and BUX rose 16.4% in the first half of 2007. Three quarters of the assets under management are held by the four largest funds (Erste 535 million EUR, OTP 511 million EUR, Raiffeisen 407 million EUR, Európa Fund 200 million EUR) and this already makes them important players, with a high implied potential, because assets invested in properties actually represent only 35-40% of all assets under their management. But interest is not matched, with investment products of adequate quantity and quality on the Hungarian property market, and the impact thereof is a further decrease in yields, even if these are considered already depressed. Even though a number of premium office buildings will be completed in the coming months, only a small portion of these shall appear on the investment market, some of them were already sold earlier in forward purchase agreements and because in a regional comparison the Budapest developers propensity to sell is considered to be low. AIM-listed Ablon, for instance, declared its willingness to keep the ownership of its completed houses and is ready to sell these only upon an exceptionally attractive bid. One of the most significant transactions on the office market was concluded by Raiffeisen Property Fund, with the involvement of Eston International, when it bought, prior to the start of the construction, the Könyves Kálmán Office Building (26,000 sqm), to be built opposite to Népliget, from Biggeorge s NV. In a much smaller transaction, the French Kleppier purchased, after the retail outlets of Duna Plaza, the offices in the building as well, for a consideration of 14.2 million euro. While Arena Corner was also waiting for its buyer in the first half of 2007. The sale of the European industrial business of Parkridge had an impact on the logistics property market in the surroundings of Budapest as well, because in the framework of the deal, logistics parks at Szigetszentmiklós and Százhalombatta, earlier under the Parkridge name, were transferred into the portfolio of ProLogis. Thus, the ProLogis capacity in Hungary includes 310,000 square meters of built halls, with further 330,000 square meters that can be built, and so, it clearly became the largest player of the market. In early 2007, two modern industrial halls exchanged hands: the one in Gyôr occupied by Renault, an the other in Jászberény by Hilite International. The British Standard Life Investments paid 38 million euro for these and for another distribution facility in Budapest, fully rented before completion. According to market information, a far more important deal is also in preparation. The would-be largest shopping mall of Budapest, Arena Plaza shall be purchased from Plaza Centers for 400 million euro, prior to its completion in October 2007, by the property fund of the British Active Asset Investment Management. If the deal is made, it will probably be the largest investment transaction of the year on the Hungarian market. 1138 Budapest, Váci út 141. Tel.: (+36 1) 452-6970 Fax: (+36 1) 452-6969 e-mail: info@eston.hu www.eston.hu