Investment market most active at the moment

Now Hungary is a member of the EU, and its capital city has all the trappings of a western European city: modern office blocks, hotels, shopping centres and mushrooming residential development. For most people, these buildings just appear. “They” are building a new office block, complains a taxi driver while crossing Árpád Bridge, “Where is the money coming from?”

The simple answer to his question is that the money comes from investment banks and funds in the West. The interesting difference between the real estate market in Budapest - and other post-Communist central European capitals - and those of western European cities is that it developed rapidly in just 15 years.

Feeding the need
In 1990, there were many western companies who wanted to set up shop in the emerging markets of Hungary, Poland and Czechoslovakia. They sent out teams of managers to open offices - but where? There were no office buildings that met the standards demanded by multinational companies (class “A” offices, as they are known in the trade), and many had to set up offices in tatty rooms with only one phone to field calls and receive faxes. Clearly there was a demand, and the first development company to meet it in Budapest was Swedish firm Skanska; its East West Business Center opened at Astoria in 1991.
The big name international real estate consultancies all opened offices over the next few years: DTZ, Jones Lang LaSalle, Colliers, Cushman and Wakefield and CB Richard Ellis. They profited by helping investors, who often had scant knowledge of the region and the peculiarities of its emerging markets, to find projects to sink their money into. A latecomer on the consultancy scene is the UK-based property advisors Savills PLC, which is seeking to expand operations in mainland Europe and opened an office in Budapest in the summer of last year. The Budapest Times talked to managing director Peter Chatfield, who has been working in the region since 1996, about the current state of the Hungarian commercial real estate market.

What to watch now
The commercial real estate market is generally broken down into the subcategories office, investment, logistics and retail. Residential real estate is, for several reasons, treated as a separate market, and accounts for little of the business of the companies listed above.
“The investment market is the most dynamic in Budapest at the moment,” said Chatfield. In recent years, investors could be heard complaining at international real estate conventions that there is a lack of decent buildings to buy in Hungary. Institutional investors such as western European or US pension funds want large class “A” office buildings that are fully let to reliable long-term tenants. Is there still a large weight of “frustrated capital” looking for investment opportunities in Central Europe? “If anything,” he said, “that weight has increased.” Western European, US, and now, Asian and Middle Eastern investors are looking for opportunities in the region.

10% growth predicted
Last year saw EUR 900,000 of institutional investment sales in Budapest. Chatfield thinks this figure is likely to top EUR 1 billion for 2007. There have been a few transactions recently, for example German developer IVG forward sold building “D” of its huge Infopark development earlier this year after securing T-Online as a tenant. When asked if Savills is working with any institutional investors at present, Chatfield said negotiations are in progress with large Irish investors, and he hopes to be able to announce some major transactions in the coming months.

Office work
Five years ago, the Budapest office market was characterised by the high level of vacancy. Up to 25% of newly built office space was empty, and fierce competition for tenants had driven rents to rock bottom. Developers slackened the pace of construction. Now it is healthier.
“Vacancy is now down to about eleven or twelve per cent,” said Chatfield. “and last year take up was g