In 2024 H1, yields stopped rising in the commercial real estate market, but lower-than-expected GDP growth was not yet able to significantly support domestic CRE activity. This is also reflected in the cyclical perception of the market, with the proportion of market professionals who believe that the market hit the bottom of its cycle was nearly two-thirds, while further 19 per cent already indicated upturn phase in the July survey by the Royal Institution of Chartered Surveyors (RICS). Looking ahead, faster and broader-based GDP growth may mitigate cyclical risks, but some segments will continue to face challenges stemming from structural changes.
Among the CRE segments, the performance indicators of the hotel sector improved, mainly due to foreign guest stays, but in conjunction with rising real wages the number of overnight stays by domestic guests also increased year-on-year in 2024 H1. In line with the improving trend in consumer confidence, retail sales rose and vacancy rates in this segment also improved, both in rural areas and in the capital’s shopping centres. From 2025 onwards, we expect that some of the deferred investment projects will begin and external demand trends will start to improve, leading to more balanced growth with positive effects on demand in all CRE segments.
The vacancy rate in the Budapest office lease market rose by 0.6 percentage point to 13.9 per cent in 2024 H1, while the industrial-logistics market recorded a decline of 0.1 percentage point to 8.5 per cent. Given the levels of demand seen in recent quarters and the amount of new floorspace slated for completion, the indicator is expected to rise further in both segments. The volume of office space under construction increased in 2024 H1, mainly due to the start of construction of several owner-occupied office buildings during the period, including a number of office buildings for public institutions. The pre-lease rate for new space planned to be completed in 2024 H2 was 77 per cent in the office segment and 64 per cent for industrial-logistics projects, higher than in the previous two years, which should ease the upward pressure on higher vacancy rates. However, in light of the net absorption figures for the office and the industrial-logistics segments in the first half of the year, there is still a risk of oversupply.
In 2024 H1, investment turnover on the domestic CRE market amounted to around EUR 180 million, down 21 per cent on the already low level from 2023 H1. Rising yields, still high financing costs in euro and subdued rental demand continue to encourage investors to wait, portending low investment flows for 2024 as a whole. In contrast to the domestic trend, average investment turnover in the CEE region already increased by 35 per cent, while the prime office yield (on real estate at prime locations and of the highest quality) stagnated. With investment flows in Czechia and Poland also expected to rise substantially for 2024 as a whole, the potential persistence of continued low and declining domestic investment turnover with high, 79 per cent proportion of domestic investors may pose risk to the perception of the domestic market. Capital values calculated on the basis of prime office yields and rents decreased by an average of half a per cent in the CEE region and 3.6 per cent in Budapest in 2024 H1, with cumulative depreciation of 14 and 24 per cent, respectively, over the past two years. However, with low investment turnover in all markets, this estimate is uncertain.
In 2024 H1, banks disbursed 37 per cent more CRE-backed project loans compared to the low base from one year earlier, with 80 per cent of the period’s disbursements related to construction loans. Except for hotels and other real estate, all property types showed an increase in the volume of new loans. However, risk aversion continues to dominate market perceptions. According to the MNB Lending Survey, banks tightened lending conditions mostly for office buildings in 2024 Q2 and they plan further tightening in 2024 H2, citing changing risk tolerance and industry-specific challenges. Overall, the exposure of domestic credit institutions to project loans backed by CRE is less than half of the post-2008 crisis level in terms of both balance sheet total and own funds, and there has been no significant deterioration in the share of non-performing loans in the portfolio. In October 2023, due to potentially rising risks in the CRE market the MNB’s Financial Stability Board reactivated the Systemic Risk Capital Buffer (SyRB) in a revised form for preventive purposes from July 2024, which was suspended for an indefinite term following the outbreak of the coronavirus pandemic.