The commercial real estate market was generally characterised by favourable trends in H1 2022, but in the latter half of the year, risks associated with the business cycle increased in Hungary. Vacancy rates have increased since and are expected to go up for the rest of this year, the Hungarian Central Bank (MNB) reports.
By the end of 2022, vacancy rates in the Budapest office market and the industrial-logistics market increased by 2.1 and 0.6 percentage points to 11.3 per cent and 3.8 per cent, respectively, compared to a year earlier. Although the current office market vacancy rate marks a cyclical peak, it is substantially lower than the historical high seen in 2009, while the vacancy rate in the industrial logistics segment is quite low in a historical comparison.
No significant volume of new office projects was launched in H2 2022, but thanks to the strong demand a large number of developments commenced in the industrial-logistics market, despite the low ratio of pre-lease agreements. Based on construction in progress, there is a risk that substantial oversupply may evolve in the office market within one year as well as in the industrial logistics market over the medium term.
There was a nationwide correction in the offered rental rates of shopping centres, with the largest decline in offered rental rates typically registered for shopping malls in regional cities. In 2022, the turnover of domestic hotels improved significantly in year-on-year terms; nevertheless, the number of overnight stays still fell short of the level registered in 2019 by about one-quarter. In 2023, almost 3,500 new hotel rooms may be completed (6 per cent of existing capacity), but there is considerable uncertainty about these completions materialising.
Excluding intra-group sales and purchases, the Hungarian investment market registered a turnover of €0.9 billion in 2022, a decline of 28 per cent compared to investment turnover in 2021. Almost three-quarters of the annual transaction volume was linked to domestic investors. Owing to the uncertainties related to economic prospects and lower yield premiums due to the rise in risk-free returns in the international interest environment, starting from 2022 Q2 investors took a wait-and-see position.
The effect of this will likely be felt even more strongly in the 2023 investment turnover. Based on the changes in prime office yields and rents, the calculated capital values fell 3 per cent on average in the CEE region and 14 per cent in Budapest by end-2022 in year-on-year terms.
By the end of 2022, credit institutions’ CRE-collateralised project loan portfolio had expanded by 7.4 per cent in year-on-year terms but stagnated after adjustment for exchange rate developments. The foreign currency ratio of the outstanding project loans rose slightly in annual terms, to reach 81 per cent at the end of the fourth quarter.
In 2022, banks disbursed project loans secured by commercial property in a similar volume as one year ago. Half of the disbursements were still related to office buildings and shopping centres, while almost one-fifth was linked to the industrial logistics segment. In 2022, the volume of project loans extended to finance housing estates was twice as high as the new contracts concluded in 2021.
According to the Lending Survey, commercial real estate loan conditions continued to grow tighter in 2022 H2, and looking ahead a net 31 per cent of banks anticipated further tightening. Overall, the project loan exposure of domestic credit institutions secured by commercial real estate as a proportion of regulatory capital is less than one-half of the levels seen after the 2008 crisis. In addition, the estimated decrease in the capital value of domestic prime offices is also significantly smaller: it decreased by around 30 per cent in the year following 2008 Q1 and by 34 per cent throughout one and a half years. At the same time, current trends related to changes in the value of real estate must be closely monitored from a financial stability point of view.
