The Central and Eastern Europe region (CEE) has matured very rapidly in the last five years, and is quickly gaining more international attention as an important business location. The region boasts economic growth figures above the EU average and has recently witnessed many legal, fiscal and economic changes, in an effort to bring these countries in line with western Europe.
Hungary joined the EU on 1 May and Hungarians voted in their nation’s first European election on 13th June. The main opposition party, the right wing Fidesz-Hungarian Civic Union, won with over 47% of the votes - enough to garner half of 24 seats allotted to Hungary in the European Parliament. From 1 May the country began to experience some of the benefits that EU membership brings. One of the most immediate of these is that EU accession has put the new CEE countries on the map in many ways, and an immediate increase in interest from Western neighbours has been noted. Joining the EU has also lowered the perceived risk of doing business in these markets. Although all the affects of EU accession were not seen immediately, it is generally believed EU membership will bring increased investment and new companies into the region.
This has been particularly noticeable in the real estate market with a surge of property investments - 11 deals and over €600m of volume - making Hungary the current leader in terms of regional investment volume in 2004.
A significant contributor to this was the €285m purchase of 12 shopping centers in Hungary by Klepierre from Plaza Centers. By the end of the third quarter 2004, four of the prime office buildings will also have been traded in Budapest.
A factor differentiating Hungary is that there are a number of domestic, closed-end funds that have been very active. The third quarter of the year was marked by noticeable yield compression on the Budapest office investment market. At the beginning of 2004, the benchmark initial yield for investment grade was around 8.5-9%, whilst the end of the quarter - by virtue of real transactions - will be set at about 8%.
The purchase of science park (an office development by SKANSKA) by Sachsenfonds for €67.5m , sale of the East West Business Center (CBD), an office building of the first generation from 1991 to AIB Polonia fund at a price of €42m, and the ongoing sale of Alkotas Point office building (development by AIG Lincoln), one of the prime office buildings of Budapest will probably achieve a yield below 8%.
Logistics and industrial yields remain hard to benchmark due to very law transaction volumes. The market is undergoing major changes due to the removed borders, thus regional and cross-country logistics is becoming dominant. Hungary’s role in the region’s logistics is also changing and local players are experiencing a slight shift in their interest – furthermore, potential new entrants are expected to the market, both as logistics players and as developers.
New supply is mostly realised in existing logistics parks and mainly driven by pre-leases. There are, however, active new developments in the market:
q Parkridge starting construction of a 20,000m2 building in Szigetszentmiklós ;
q Altan beton completing a 9,000 m2 facility in two phases in Szigetszentmiklós ;
q WDW Logistics Park, also in Szigetszentmiklós, to be completed (10,000 m2);
q Dunec is planning a scheme in Biatorbágy (Vendel Park) of potentially over 40,000 m2;
q East Gate Business Park to be launched in M3 area by Wallis Group.
Demand also has been healthy, especially if compared to the general uncertainty in the first half of 2004, when a couple of larger transactions were closed, although started months prior to completion. Due to the relatively high demand the vacancy rate is fairly low - around 7% (source: DTZ) - as last year’s development activity was moderate, and therefore half of this year’s completions are absorbed by built-to-suit transactions agreed in 2003. Rents are moderately decreasing compared to the level of 1998 (about €7/m2 per month) down to €4-5/m2 per month; however 2005 is expected to bring in more competition on the development side, thus rents may further continue to decrease.
Retail warehousing and shopping centres continue to be the focus of international investor interest, while the high street provides attractive investment opportunities for private investors, although remains illiquid due to a lack of information. The country experienced the high demand of international institutional investors during this year, but due to the lack of quality products, significant competition put a pressure on developers to increase their activity in Hungary. On the other hand, the increased supply has not brought new requirements from tenants so several office buildings are suffering from high vacancy levels. The new supply has forced smaller local companies to leave their class B offices to change forclass A, and several developers have had to give away extra incentives to maintain the occupancy of their office buildings. All this has raised some uncertainty about the immediate future and may impact on yields after the boom in 2004 .
Peter Horvath works for ING Real Estate Invesment Management in Hungary

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