Crossing the River Danube that divides historic Buda and workaday Pest, it is apparent that the Hungarian capital has a split personality as well as a split geography. The immaculately preserved castle district, with its classical music, opera and fine art, overlooks a city whose rampant consumerism would put many a Western metropolis to shame. And nowhere is this more visible than in one of the city’s many shopping centres.
Western brands, fashionable bars and ostentatiously dressed Hungarians are testament to an economy in which consumption is soaring. This is a country in which those with spending power are not afraid to show it.
Budapest’s main downtown pitch, Váci Utca, is small and tourist-oriented. So Hungarians have flocked to the shopping centres, making them as much places in which to meet and be seen as to shop.
Charles Taylor, managing director of Cushman & Wakefield Healey & Baker’s office in the city, explains: “Consumption has increased by 15% over the past two years. People are not saving, and they have access to finance through mortgages. Through second incomes and company cars, they have more money to spend in the shops,” he says.
Buda’s Mammut centre and Pest’s West End centre are the most popular with retailers. They are built to international specifications and host a number of Western brands, including Marks & Spencer and Diesel. According to Taylor, many similar brands are keen to enter the market but are awaiting the right location. He claims that six-figure premiums are being paid for the city’s best units.
“In some respects retailers left it a bit late,” he says. “Before 1999 you could buy off plan and pick the location. No one knew how successful shopping centres would be. There was a lot of waiting and seeing.”
Nevertheless, Taylor believes that a new 7,000-8,000m2 unit on Váci Utca, developed by ING, could revitalise the street and provide international retailers with an alternative to the shopping centres.
Thus far, a further barrier to such retailers has been the import tariff, which is due to vanish when the country joins the EU next year. James Kinnell of Bradmore Consulting explains: “Companies have to pay to bring Western goods into the country. It’s more expensive than Germany or Austria. This has caused a certain amount of cross-border migration.”
Many units are still rented by low-quality Hungarian retailers. Turnover rates remain high, but commentators believe that the less competitive retailers are beginning to exit the market, leaving more space for more reliable covenants.
Nevertheless, Kinnell urges caution. “The amount of retail space per person is low compared with Germany or France. While there is still potential for growth in the market, we shouldn’t overlook the fact that disposable income is low compared with Western Europe,” he explains.
Thierry Delvaux, managing director of Jones Lang LaSalle in Budapest, agrees. “The market is saturated with local retailers, not internationals. A lot of shopping centres are full, but the tenant mix needs to be improved before the landlords can put them on the investment market.
“Váci Utca remains disappointing. Hungarians like to go to shopping centres, and don’t favour high street shops.”
John Verpeleti, central European director of DTZ Zadelhoff Tie Leung believes the whole region is overshopped. In particular, he points to Tesco, which has more than 30 stores in Hungary, including the largest single store in Europe.
“We have 23 mayors in Budapest, and each one wants his own shopping centre. There have been many indiscriminate developments, and tenant covenant is a problem.”
He agrees that there is a high turnover of Hungarian retailers and that this has left rental levels artificially high.
There is a huge weight of money earmarked for both the office and the retail investment markets of Central and Eastern European. The problem in both sectors is the lack of product.
In contrast to office schemes, retail developments are full but of the wrong tenants. Many of the western brands are franchises. And Hungarian landlords do not understand the importance of tenant mix, anchors and strong covenants. They see immediate income as more important than creating a long-term product that appeals to the investment market. This is, however, beginning to change.
But there are rumours that some poor management decisions have been made, with units and car-parking spaces in the most appealing centres sold off to retailers. Western investors are, as a result, not interested in buying a share of an otherwise highly desirable product.
There are clearly structural problems. But if GDP and consumption both continue to rise, then investors and key retailers will undoubtedly overcome their concerns. It could take decades for the Hungarian economy to catch up with the rest of the EU, but soon Western companies may be wondering why they did not take risks and enter the market earlier.
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Budapest office statistics |
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The market remains oversupplied |
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New supply |
4,700m2 |
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Letting transactions |
27,300m2 |
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Total rental stock |
1.3m m2 |
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Vacancy rate |
19.4% |
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Largest transaction |
3,000m2 |
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Average transaction |
720m2 |
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Prime office rent |
€18 per m2 |
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Source: DTZ/Cushman & Wakefield Healey & Baker |
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Hungary retail |
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Some claim that rental levels are artificially high |
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Rent (€ per m2) |
Yield |
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Váci Utca, Budapest |
87 |
9.5% |
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Duna Plaza, Budapest |
31 |
11% |
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Westend, Budapest |
69 |
9.5% |
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Debrecen |
28 |
13.5% |
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Miskolc |
23 |
13% |
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Gyor |
26 |
13% |
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Source: Cushman & Wakefield Healey & Baker |
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Office stability ahead |
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Budapest’s office market is burdened with the same problems as many other centres across Europe. Take-up is low, availability is high and rents have plummeted. But the country has been more exposed to the downturn than many. Thierry Delvaux, managing director of Jones Lang LaSalle, explains: “Construction levels have been very high, as financing was easy to get. There have been high numbers of completions, with only part of the completed space taken. Today, the prime rent is ¤17.9 per m2 per month, with the average transaction at ¤14. It has dropped to this level from a peak of ¤20.” There is hope on the horizon, however. “Since the beginning of last year, it has been more difficult to get finance. This year, the level of completions should be lower than take-up and, as a consequence, the vacancy rate should drop,” says Delvaux. He adds that the vacancy rate has dropped from a peak of 20% to around 16.5%. Delvaux points out that take-up has never fallen below 150,000m2 pa, although owing to short lease lengths and the amount of space available, much of this has been market churn. A number of call centres, including GE and EPS, opened up last year and Delvaux admits he has a 15,000m2 requirement for a major Western corporate. Chris Naylor, managing director of DTZ Zadelhoff Tie Leung’s Budapest office, agrees. “In some respects, the vacancy rate is inflated. But Hungary was the first Central European economy to really take off. Stupid property decisions were made in the early years, and many of the buildings will never get let. “There are a lot of major office requirements, with big Western companies setting up back office functions in Budapest. It’s not fair to say Hungary has been singled out, but Budapest is seen as being more liveable, bigger and more cosmopolitan than many of its competitors.” When Hungary joins the EU, it will offer the political stability that cannot be found in India or China. Labour costs are still lower than in the Czech Republic and the education level of the multilingual workforce is high. Nevertheless, the market is still being held back by a lack of good investment product, caused by the high vacancy rates in even the highest specification buildings. But investors could be prepared to take more risks and pursue active management opportunities in the Hungarian capital. |
