The decline of the domestic economy in 2023 and its structure did not support the processes of the commercial real estate market, which is therefore still surrounded by cyclical and structural risks.
Among the individual segments, the hotel sector’s performance indicators improved last year – thanks to foreign guest traffic – and in the other segments, individual investor and government decisions, as well as the return of economic growth this year, may bring some improvement – reveals the Hungarian National Bank’s (MNB) commercial real estate from its meaning.
Net absorption in the office market fell to a ten-year low in 2023, and with similar demand levels, the rising trend of the vacancy rate is expected to continue in 2024. Due to low demand, rents rose only slowly, even though the inflationary environment was at a record high.
What can be expected in the future?
In 2024, with the moderation of inflation (directly with disinflation), the rise of real wages and the strengthening of consumer confidence, internal demand items support the expansion of the gross domestic product (GDP), which can have a positive effect on both the retail and hotel sub-segments.
By the way, the central bank expects an economic growth of 2-3 percent for this year, which can probably trigger an increase in demand in the commercial real estate sector as well.
Sándor Winkler, the MNB’s leading economic analyst, said at the central bank’s press conference on Thursday: export performance is held back by the weak European economy, but at the same time, the realization of the ongoing and newly announced significant capacity-expanding foreign direct capital investments will help the expansion of exports in the long term, having a positive effect on the industrial for logistics demand and developments.
The utilization of the Budapest offices has increased
Last year, the vacancy rate in the Budapest office market rose by 2 percentage points to 13.3 percent, and in the industrial-logistics market by 4.8 percentage points to 8.6 percent.
In addition to the demand levels in 2023 and the volume of the new areas planned to be handed over, the indicator is expected to rise further – emphasized Sándor Winkler, head of department.
The downward trend in the volume of office space under construction was broken in the fourth quarter, due to the office needs of public institutions, the construction of several new buildings started. Last year, the volume of new developments started in the industrial-logistics segment decreased by almost a quarter compared to the previous year.
The pre-leasing ratio of the new areas planned to be handed over this year is also around 55 percent for office and industrial-logistics developments, which is higher than the data of the previous two years, alleviating the pressure in the direction of rising vacancy rates.
“This represents a 9 percent increase, overall favorable data,” underlined Sándor Winkler.
An increase in the number of delivered rooms is forecast in the hotel sector. There is also an increase in the number of guest nights spent last year,
- at the same time, this increasing trend can be attributed to foreign guest nights,
- the number of nights spent by Hungarians in hotels decreased.
There are also shortcomings from the investment side
Last year, the investment turnover of the domestic commercial real estate market amounted to 0.6 billion euros, which is 38 percent less than the turnover in 2022. However, the positive news is that 82 percent of this volume was linked to domestic investors.
Rising yields, high financing costs and moderate rental demand continue to encourage investors to wait, which predicts a low investment turnover for this year as well.
In all countries of the Central and Eastern European region, the primary office yield (i.e. for properties with the best location and quality) increased, while the investment turnover decreased by 24-68 percent per country.
Sándor Winkler drew attention to the decrease in value: the capital values calculated on the basis of primary office yields and rents decreased by an average of 8 percent in the region and 9 percent in Budapest compared to the end of December a year earlier, and a cumulative decrease of 13 and 21 percent can be seen in the past year and a half.
From a financing point of view, we are doing well
In 2023, banks disbursed project loans secured by commercial real estate in a 42 percent smaller volume, with the exception of hotels, the volume of new issues decreased for all types of real estate.
Based on the central bank’s lending survey, in the last quarter of last year, banks tightened lending conditions in all commercial real estate segments, and further tightening is expected for the first half of 2024 due to the changed risk tolerance.
Overall, the total balance sheet total and solvency capital of domestic credit institutions’ project loan exposure secured by commercial real estate is proportionally less than half of the level after the 2008 crisis, and there was no deterioration in portfolio quality either. Due to potentially rising commercial real estate market risks, in October of last year the Financial Stability Board of the MNB decided to reactivate the system risk capital buffer, which was suspended indefinitely at the outbreak of the coronavirus epidemic, from July for preventive purposes, strengthening the banks’ ability to withstand shocks.
In terms of lending and financial stability, the domestic banking system is very strong anyway, and the commercial real estate sector makes up a very small part of the financing mix, which is why the banks are able to effectively deal with the problems that arise.
Tags: hotels built Hungarians
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