06 May 2024
In 2023, the indicators of the commercial real estate market, with the exception of the hotel segment, showed an increase in risk. Low investment turnover and the increase in yields point to a decrease in real estate values. In parallel with subdued demand and substantial new deliveries, the office market and industrial-logistics vacancy rates continued to rise. Looking ahead, at the same time, falling inflation, rising real wages and growing consumer confidence will support economic growth and, through this, a pick-up in commercial real estate market activity in 2024. The quality of the project loan portfolio is favourable, credit institutions’ ability to withstand shocks is strong, and their capital provision is at an adequate level, which is further strengthened by the preventive capital buffer requirement introduced by the MNB.
The economic downturn in 2023 and its structure were detrimental to trends in the commercial real estate market, which thus remains exposed to cyclical and structural risks. Looking at the commercial real estate segments, performance indicators improved in the hotel sector (owing to foreign guest volumes) in 2023, while specific investor and government decisions and the return of economic growth this year may generate some improvement in other segments. Looking ahead to 2024, with inflation declining, real wages rising and consumer confidence strengthening, domestic demand items will support GDP growth and may have a positive impact on the retail and hotel sub-segments. Weak economic activity in Europe is restraining export performance, but the realisation of ongoing and newly announced significant capacity-expanding foreign direct investments will support export growth in the long run and will have positive effects on industrial-logistics demand and development.
The vacancy rate in the Budapest office market increased by 2 percentage points to 13.3 per cent in 2023, while the vacancy rate in the industrial-logistics market rose significantly, by 4.8 percentage points, to 8.6 per cent. In view of 2023 demand levels and the volume of new floorspace planned for completion, this indicator is expected to rise further. The downward trend in the volume of office space under construction was halted in 2023 Q4 as the construction of a number of new buildings started in response to demand for office space from public institutions. In 2023, the volume of new development projects started in the industrial-logistics segment contracted to nearly one quarter of the previous year’s figures. Pre-lease rates for office and industrial-logistics development projects scheduled for completion in 2024 are around 55 per cent both, which is higher than the pre-lease levels from the previous two years and should mitigate the upward pressure on vacancy rates.
In 2023, investment in the domestic commercial real estate market amounted to EUR 0.6 billion, down 38 per cent from 2022, with 82 per cent of this volume linked to domestic investors. Rising yields, high financing cost and weak demand for rental continue to keep investors on the sidelines, suggesting that investment flows will remain low in 2024 as well. Prime office yields (on real estate in prime locations and of the highest quality standard) rose everywhere in the CEE region, while investment turnover contracted by 24 to 68 per cent in the various countries. In year-on-year terms, capital values calculated on the basis of prime office yields and rents dropped by an average of 8 per cent in the CEE region and by 9 per cent in Budapest by the end of 2023, and over the last 18 months, there have been decreases of 13 and 21 per cent, respectively.
The volume of CRE-backed project loans fell by 42 per cent in 2023, with new issuances decreasing for all property types except hotels. According to the MNB’s Lending Survey, banks tightened their loan terms and conditions in all commercial real estate segments in 2023 Q4 and foresee further tightening in 2024 H1, due to changes in their risk tolerance. Overall, the exposure of domestic credit institutions to CRE-backed project loans is less than half of the post-2008 crisis level, both in terms of balance sheet total and own funds, and there has also been no deterioration in portfolio quality. In October 2023, due to a potential rise in risks in the commercial real estate market, the MNB’s Financial Stability Board decided to reactivate of the Systemic Risk Buffer (SyRB), which was suspended indefinitely in the wake of the COVID-19 pandemic, starting from July 2024 for preventive purposes, bolstering banks’ resilience to shocks.