In 2023 H1, developments in the real economy were not supportive for the commercial real estate market. Inflation-induced declines in real wages were accompanied by falling retail sales and a decrease in domestic hotel guest nights. The contraction of GDP and investment activity also suggests a negative outlook for rental demand for offices and industrial-logistics properties. Rising interest rates on EUR loans have further undermined the propensity to invest in real estate, which has been weak across the region for a year now. Risks related to commercial real estate have increasingly come into focus at the international level, and in their reports on financial stability all of the major central banks have emphasised the risks related to commercial real estate stemming from cyclical factors (e.g. slowing economic activity, high inflation, high interest rate environment due to inflation) and structural trends (e.g. focus on hybrid working, e-commerce, nearshoring (relocation of production and suppliers closer to markets), energy efficiency).
The vacancy rate in the Budapest office market increased by 1.3 percentage points to 12.6 per cent in 2023 H1, while the vacancy rate in the industrial-logistics market rose significantly by 4.8 percentage points to 8.6 per cent. Despite these increases, vacancy rates in both of these segments remain lower than the historical peaks, but the high levels of planned completions and the low net market absorption in the first half of the year reinforce the risk of further increases. No significant volumes of new office projects were launched in 2023 H1, and the volume of new developments in the industrial-logistics segment also decreased. However, based on the construction work currently underway and the H1 demand data, oversupply (i.e. a vacancy level that is persistently higher than manageable from the perspective of real estate utilisation and operation) may be seen on the office market within one year and on the industrial-logistics market within two years.
The Hungarian investment market registered turnover of EUR 0.25 billion in 2023 H1, down 60 per cent on 2022 H1. In the first half of the year, 80 per cent of the transaction volume was linked to domestic investors. The economic slowdown, uncertain growth outlook and high financing costs are leading to low investment activity in Hungary and across Europe. Most countries in the CEE region have seen a decline in investment turnover and an increase in prime office yields (which applies for the best category properties). In year-on-year terms, capital values calculated on the basis of prime office yields and rents dropped by an average of 10 per cent in the CEE region and by 19 per cent in Budapest by the end of 2023 Q2. While the rate of depreciation is lower than what was seen in the 2008 crisis, current developments in real estate values need to be monitored closely from a financial stability perspective.
In 2023 H1, banks’ disbursements of project loans secured by commercial real estate was down 44 per cent on the same period of the previous year, with new loan issuance falling for all property types except hotels and housing estates. According to MNB’s Lending Survey, after a year and a half of tightening, banks left the terms of commercial real estate loans broadly unchanged in 2023 Q2 and had no plans to change such in 2023 H2. 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. At the same time, due to the potential increase in risks, the system risk capital buffer (SyRB) will be reactivated from 1 July 2024 for preventive purposes, after having been suspended indefinitely during the COVID-19 epidemic, which will strengthen the banks' ability to withstand shocks.
In 2023 H1, developments in the real economy were not supportive for the commercial real estate market. Inflation-induced declines in real wages were accompanied by falling retail sales and a decrease in domestic hotel guest nights. The contraction of GDP and investment activity also suggests a negative outlook for rental demand for offices and industrial-logistics properties. Rising interest rates on EUR loans have further undermined the propensity to invest in real estate, which has been weak across the region for a year now. Risks related to commercial real estate have increasingly come into focus at the international level, and in their reports on financial stability all of the major central banks have emphasised the risks related to commercial real estate stemming from cyclical factors (e.g. slowing economic activity, high inflation, high interest rate environment due to inflation) and structural trends (e.g. focus on hybrid working, e-commerce, nearshoring (relocation of production and suppliers closer to markets), energy efficiency).
The vacancy rate in the Budapest office market increased by 1.3 percentage points to 12.6 per cent in 2023 H1, while the vacancy rate in the industrial-logistics market rose significantly by 4.8 percentage points to 8.6 per cent. Despite these increases, vacancy rates in both of these segments remain lower than the historical peaks, but the high levels of planned completions and the low net market absorption in the first half of the year reinforce the risk of further increases. No significant volumes of new office projects were launched in 2023 H1, and the volume of new developments in the industrial-logistics segment also decreased. However, based on the construction work currently underway and the H1 demand data, oversupply (i.e. a vacancy level that is persistently higher than manageable from the perspective of real estate utilisation and operation) may be seen on the office market within one year and on the industrial-logistics market within two years.
The Hungarian investment market registered turnover of EUR 0.25 billion in 2023 H1, down 60 per cent on 2022 H1. In the first half of the year, 80 per cent of the transaction volume was linked to domestic investors. The economic slowdown, uncertain growth outlook and high financing costs are leading to low investment activity in Hungary and across Europe. Most countries in the CEE region have seen a decline in investment turnover and an increase in prime office yields (which applies for the best category properties). In year-on-year terms, capital values calculated on the basis of prime office yields and rents dropped by an average of 10 per cent in the CEE region and by 19 per cent in Budapest by the end of 2023 Q2. While the rate of depreciation is lower than what was seen in the 2008 crisis, current developments in real estate values need to be monitored closely from a financial stability perspective.
In 2023 H1, banks’ disbursements of project loans secured by commercial real estate was down 44 per cent on the same period of the previous year, with new loan issuance falling for all property types except hotels and housing estates. According to MNB’s Lending Survey, after a year and a half of tightening, banks left the terms of commercial real estate loans broadly unchanged in 2023 Q2 and had no plans to change such in 2023 H2. 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. At the same time, due to the potential increase in risks, the system risk capital buffer (SyRB) will be reactivated from 1 July 2024 for preventive purposes, after having been suspended indefinitely during the COVID-19 epidemic, which will strengthen the banks' ability to withstand shocks.