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Market Sentiment

SurveyH1 2015

Portfolio–RICS–EltingaMarket Sentiment Survey | H1 2015

03 Highlights

04 Explanation

05 Index

07 Office sector

11 Retail sector

15 Industrial sector

18 General sentiment

H1 2015 | Portfolio–RICS–Eltinga Market Sentiment Survey

3

Yield (%)Rent (€/sqm/month)

Typical Minimum Maximum

Top CBD office building 7.25 12 18 14.5

Prime non-CBD office building 7.75 10 14 12

Good quality non-central office building 8 8.5 12.5 10

Prime out-of-town logistics centre 9 2.625 4 3.25

Small Business Unit 9 3 5 3.75

Top 5 shopping malls 7 25 60 38

Mall-type retail park 8.125 7 15 10

Big box retail 8.25 5 9.75 7

Highlights– The Budapest Commercial Property Index has increased further after its latest significant im-

provement in 2014 H2. The change was over 1 point since our last survey, resulting from both rental growth in office segments and premium out–of-town logistics and yield compression in 4 segments reported by respondents.

– According to RICS Professionals, the Hungarian real estate market could be attractive for inves-tors in the next 6 months. Close to 75% of the respondents expect investment appetite to improve further, which shows that they are still optimistic about the future of the real estate market.

– Office yields are either stalling or slightly hardening. Office rent levels have not moved sig-nificantly from the level they were at in H2 2011. However, decreasing minimum rents and increasing maximum rents suggest a wider spread of building-specific rents.

– The most significant improvement in yield sentiment in the retail market was observered in the top 5 mall segment, where yield level expectations decreased by 25 basis points, and reached 7 %, the level quoted at the start of the survey in H2 2011. Rents remained stable in the retail sector.

– While there was no real optimism in the industrial sector in our last survey, now confidence in the sector is improving from both a development and an invesment point of view.

– Based on the answers, the reconstruction of Széll Kálmán tér is the most influential city devel-opment on the real estate market in Budapest.

All median figures for H1 2015


4

The most important output resulting from our research is the rental rates and yields data (presented in charts similar to the one below). As this publication is based on the opinions of individuals, these charts reflect the distribution of responses received with respect to a given variable, i.e. rental rates or yields related to a type of property. Extreme values were removed and the ranges of the remaining answers were then divided into subsections. The charts indicate the percentage of responses falling into each subsection, with the median value marked with a red vertical line (the median is the middle value of the data set when it has been arranged in ascend-ing order, i.e. the numeric value separating the higher half of the data from the lower half).

The survey included questions regarding the realistic minimum, maximum, and typical rental rates with respect to a particular type of property. While we also present all of these in a tabular format, the rate charts only include the responses to the question of typical rental rate levels.

Explanation

Rent (€ / sqm / month)

Distribution oftypical rent responses

median of typicalrent responses

median of maximumrent responses

median of minimumrent responses

Rati

o of

res

pons

es (

%)

Explanatory example chart


5

The starting value of the Bu-dapest Commercial Property Index was set to 100.00 based on survey data collected in the second half of 2011. By H1 2013, it had decreased to the region of 90.00, where it then floated for 18 months, followed by a 4-point increase in H2 2014. The latest survey added a further 1.21 to this, bringing the index value to 94.95.

The index is made up of a compound value that traces senior real estate profession-als’ assessments of current yields and rental rates for the commercial real estate market. A measure of value is created by dividing the median typical yearly rent by the current

yield for each of the eight sub-segments present in the sur-vey, and attributing weights to these values in order to reflect the relative volume of each sub-segment. The results are then added up and compared against the other surveys.

The majority of the difference between the current value and the start-ing 100.00 points is due to rents, which are perceived to have decreased since 2011. Yields also contributed to the shrinking index in earlier years, however, they would have moved it back very close to the starting value (to about 99 points) by now, had rents been unchanged throughout the period. It should also be noted that current yield opin-ions are likely to be based on much stronger transactional evidence while the answers

received in 2011 were almost entirely sentiment-based.

The slight improvement compared to H2 2014 is a result of yields being seen as somewhat harder; data on rents worked in the opposite direction. The most important drivers of this six months’ growth were a perceived yield compression with regard to Good Quality Non-Central Offices and Big Box Retail, as well as a slight rental growth indicated in relation to Prime Out-of-Town Logistics. Looking at trends since 2011 we highlight Big Box Retail, where decreasing rents are the single most significant factor in the overall shrink-ing of the index. Mall-Type Retail Parks have also made a negative contribution with the Top-5 Malls and Good Quality Non-Central Offices having improved their hypothetical sub-indices since the start of our survey.

94.95

BCP Index(H2 2011=100)

H1 2015 94.95

H2 2014 93.74

H1 2014 89.67

H2 2013 90.74

H1 2013 90.35

H2 2012 96.53

H1 2012 95.21

H2 2011 100.00

BCP Index


6

The survey uses eight hypothetical properties intended to represent major segments of theBudapest commercial property market. Their descriptions include typical characteristics interms of location, quality, size, and occupancy, making them suitable investment products.When asking about rental rates, hypothetical lease transactions were defined to reflect anaverage exchange on the given market in terms of both size and basic conditions. The photosaccompanying each detailed description of buildings are of properties that do not actuallyexist on the Hungarian market. However, they have been selected to create the rightimpressions of the scenario at hand and to ensure that all respondents consider the sameproperty categories when answering the questions.

Categories

1. Top CBD office building

2. Prime non-CBD office building

3. Good quality non-central office building

4. One of the Top 5 shopping malls

5. Mall-type retail park

6. Big box retail

7. Prime out-of-town logistics centre

8. Small Business Unit


7

In comparison to the results of the previous surveys, the yield level for good qual-ity non-central offices has shifted inwards by 37.5 basis points, thus reaching the softest yield in the history of this survey (from H2 2011). Other office yields stayed at the same level. That still shows an optimistic view of how the market has evolved in the last 24 months and indicates a narrowing gap between prime and non-prime yields. Rents show a more complex picture generally with decreasing minimum rents and increas-ing maximum rents. Typical

rents only increased in the ‘Top CBD Office’ category by €0.5, thus indicating a potential future return to the €15 peaking-out in H1 2014. Typical rents in the other two categories remained the same. A € 0.5 increase is shown in the maximum rents in both non-CBD categories while minimum rents decreased in all categories, suggesting a more diversified spread of rents among buildings within one office category. We have to note that the variance of the responses is relatively high in the first office category with most

of the responses falling into the 12-14 euro range, along with a high number of re-sponses also falling into the 15-18 euro range. However, as a result of the obverse movements in all office categories, rent levels have not moved significantly from the level they were at in H2 2011. On average, typical rents still continue to have the tendency of approximat-ing minimum rents.

Building specific rents are becoming widespread.

Office sector


8

Category A (according to BRF) office building

located within the CBD of Budapest:

– represents the highest standard in the

market in terms of technical specifications

and prestige

– it has an underground garage

– the building is at least 95% let to multiple

tenants,

– at least 80% of the tenants are international

companies

– the average unexpired lease term is at least

4 years

Market headline rental rate for a specific

letting transaction:

– 500 sqm office space

– 5-year lease term

– strong international tenant


located in an established, but non-CBD office

location:

– represents high standard in the market

in terms of technical specifications and

prestige



tenants

– at least 80% of the tenants are interna-

tional companies


4 years






1. Top CBD office 2. Prime non-CBD office

0%

4%

8%

12%

16%

20%

5-6

7-8

9-10

11-1

2

13-1

4

15-1

6

17-1

8

19-2

0

21-2

2

23-2

4

median = 14.5

0% 5%

10% 15% 20% 25% 30% 35% 40%

5-5.

25

5.5-

5.75

6-6.

25

6.5-

6.75

7-7.

25

7.5-

7.75

8-8.

25

8.5-

8.75

9-9.

25

9.5-

9.75

10-1

0.25

10.5

-10.

75

11-1

1.25

median = 7.25

0%

5%

10%

15%

20%

25%

30%

5-5.

25

5.5-

5.75

6-6.

25

6.5-

6.75

7-7.

25

7.5-

7.75

8-8.

25

8.5-

8.75

9-9.

25

9.5-

9.75

10-1

0.25

10.5

-10.

75

11-1

1.25

median = 7.75

0%

4%

8%

12%

16%

20%

24%

5-6

7-8

9-10

11-1

2

13-1

4

15-1

6

17-1

8

19-2

0

21-2

2

23-2

4

median = 12

Rent opinions (€/sqm/m)Rent opinions (€/sqm/m)

Yield opinions (%) Yield opinions (%)


9


located in a non-central office location:

– built no more than 10 years ago


– good public transportation


tenants, not necessarily of international

covenant


3 years





– reliable and financially stable tenant

3. Good quality non-central offices

0% 5%

10% 15% 20% 25% 30% 35% 40%

5-5.

25

5.5-

5.75

6-6.

25

6.5-

6.75

7-7.

25

7.5-

7.75

8-8.

25

8.5-

8.75

9-9.

25

9.5-

9.75

10-1

0.25

10.5

-10.

75

11-1

1.25

median = 8

0%

6%

12%

18%

24%

30%

6-7

8-9

10-1

1

12-1

3

14-1

5

16-1

7

18-1

9

20-2

1

22-2

3

24-2

5

median = 10

The investment market has been dominated by local players for quite a few years; this is changing this year with international investors becom-ing more active. I expect this trend to strengthen as they have plenty of money to spend and the first entrants will be followed by their peers. Banks appear more willing to finance invest-ment projects on acceptable terms than before.

Krisztián Hornok MRICS, Indotek Group

End of 2014 and start of 2015 has marked a clear return of posi-tive sentiment towards Hungary. Though the yield sentiment seems to be developing at a faster paste than activity on the occupational market, where the situation has stabilized, however despite decreasing vacancy we still expect a minimum of 12 months before we will be able to see improvements.

Jaroslav Kopac MRICS, JLL

Rent opinions (€/sqm/m)

Yield opinions (%)


10

Distribution of responses in ‘CBD office rent’ category

Distribution of responses in ‘Prime Non-CBD office rent’ category

0%

2%

4%

6%

8%

10%

12%

14%

6-7

7-8

8-9

9-10

10-1

1

11-1

2

12-1

3

13-1

4

14-1

5

15-1

6

16-1

7

17-1

8

18-1

9

19-2

0

20-2

1

21-2

2

22-2

3

23-2

4

Typical rent frequency (2015 H1) (MA) Typical rent frequency (2014 H2) (MA)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

5-6

6-7

7-8

8-9

9-1

0

10

-11

11

-12

12

-13

13

-14

14

-15

15

-16

16

-17

17

-18

18

-19

19

-20



11

Compared to the last results, the retail sector has again shown improve-ment in sentiment towards yield expectations and stability/bottoming out towards rents. Yields for the Top 5 Malls category have been oscillating between 7-7.25% ever since the introduction of this survey, with this round show-ing consolidation at 7%, moving 25bp down. For

Mall-Type Retail Parks and Big Box Retail we have also observed yield compres-sion (same as in the last round), and the resulting yields moving back to levels quoted at the start of the survey in H2 2011. Rents are stable. The above results support the general

news on improved activity among investors as well as reports on rising retail turnover volumes. This is despite the introduction of new legislation negatively affecting the retail sector in Q1 2015 (Sunday closures and food supervisory fee increase).

Yield levels have decreased in all retail categories.

Retail sector


12

Prime shopping centre located in Budapest,

at a metro station or central location:

– GLA is at least 40,000 sqm, no vacancy

– the property accommodates at least

2 major anchor tenants


5 years



– 200 sqm retail unit

– 5-7 year lease term

– strong international brand

– well-positioned unit within the centre

Retail park located in Budapest, in an

established location:

– GLA is approx. 12,000 sqm, no vacancy

– the property accommodates at least 1

major anchor tenant


5 years



– 300-400 sqm


– local company / strong international brand

4. One of the Top 5shopping malls

5. Mall-type retail parks

0% 2% 4% 6% 8%

10% 12% 14% 16% 18% 20%

5-10

15-2

0

25-3

0

35-4

0

45-5

0

55-6

0

65-7

0

75-8

0

85-9

0

95-1

00

105-

110

median = 38

0%

5%

10%

15%

20%

25%

30%

2-4

6-8

10-1

2

14-1

6

18-2

0

22-2

4

26-2

8

30-3

2

median = 10

0%

10%

20%

30%

40%

50%

60%

5.25

-5.5

5.75

-6

6.25

-6.5

6.75

-7

7.25

-7.5

7.75

-8

8.25

-8.5

8.75

-9

9.25

-9.5

9.75

-10

10.2

5-10

.5

10.7

5-11

median = 7

0%

5%

10%

15%

20%

25%

30%

5-5.

25

5.5-

5.75

6-6.

25

6.5-

6.75

7-7.

25

7.5-

7.75

8-8.

25

8.5-

8.75

9-9.

25

9.5-

9.75

10-1

0.25

10.5

-10.

75

11-1

1.25

median = 8.125



Yield opinions (%)

Yield opinions (%)


13

Retail park located in Budapest, in an

established location:

– GLA is approx. 12,000 sqm, no vacancy

– the property accommodates at least 1

major anchor tenant


5 years



– 300-400 sqm


– local company / strong international brand

6. Big box retail

0%

5%

10%

15%

20%

25%

30%

0-1

2-3

4-5

6-7

8-9

10-1

1

12-1

3

14-1

5

median = 7

0%

5%

10%

15%

20%

25%

5-5.

25

5.5-

5.75

6-6.

25

6.5-

6.75

7-7.

25

7.5-

7.75

8-8.

25

8.5-

8.75

9-9.

25

9.5-

9.75

10-1

0.25

0.5-

10.7

5

11-1

1.25

median = 8.25

We can see the continuing improvement of investor sentiment along with strengthening occupier demand and shortage of quality space. However, the appearance of large bulk of investors is still elusive. I would expect a slight sharpening of yields and increase in effective rents going forward.

György Lindwurm MRICS,DTZ Hungary


Yield opinions (%)


14

Distribution of responses in ‘rental rates for the top 5 malls’ category

Distribution of responses in ‘rental rates for mall type retail parks’ category

0%

2%

4%

6%

8%

10%

12%

14%

0-5

5-10

10-1

5

15-2

0

20-2

5

25-3

0

30-3

5

35-4

0

40-4

5

45-5

0

50-5

5

55-6

0

60-6

5

65-7

0

70-7

5


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0-2

2-4

4-6

6-8

8-10

10-1

2

12-1

4

14-1

6

16-1

8

18-2

0

20-2

2

22-2

4

24-2

6

26-2

8

28-3

0

30-3

2



15

Respondents are still cau-tious when considering rents. The results of the survey show hesitation in each category with a slight increase on the whole compared to the figures in December. Typical rents improved to a solid €3.25 per sq m per month in the

case of logistics schemes but decreased to €3.75 in the case of SBU. There is still a limited number of transactions in this sector to influence yield opinions, consequently a 9% result has remained stable ever since the survey started. However, confidence in this

sector is improving, both considered as a develop-ment and as an investment product.

Confidence in the industrial sector is improving.

Logistics sector


16

Category A industrial property located within

Budapest, close to main arterial road:

– GLA is at least 10,000 sqm (could be in

multiple buildings)

– the property is approx. 100% let to multiple

tenants


3 years

Market headline rental rates for a specific


– 500 sqm warehouse space


– reliable and financially stable tenant

Category A industrial property located

approx 5 minutes from a motorway:

– GLA is at least 25,000 sqm (could be in

multiple buildings)

– The property is approx. 100% let to multi-

ple tenants


4 years

Market headline rental rates for a specific


– 3,000 sqm warehouse space



7. Small Business Units 8. Prime out-of-townlogistics centres

0%

6%

12%

18%

24%

30%

0.5-

1

1.5-

2

2.5-

3

3.5-

4

4.5-

5

5.5-

6

6.5-

7

7.5-

8

median = 3.75

0% 5%

10% 15% 20% 25% 30% 35%

5-5.

25

5.5-

5.75

6-6.

25

6.5-

6.75

7-7.

25

7.5-

7.75

8-8.

25

8.5-

8.75

9-9.

25

9.5-

9.75

10-1

0.25

0.5-

10.7

5

11-1

1.25

median = 9

0%

10%

20%

30%

40%

50%

0-0.

5

1-1.

5

2-2.

5

3-3.

5 3.

5-4

4.5-

5

5.5-

6

6.5-

7

7.5-

8

median = 3.25

0% 5%

10% 15% 20% 25% 30% 35% 40%

5-5.

25

5.5-

5.75

6-6.

25

6.5-

6.75

7-7.

25

7.5-

7.75

8-8.

25

8.5-

8.75

9-9.

25

9.5-

9.75

10-1

0.25

10.5

-10.

75

11-1

1.25

median = 9

Rent opinions (€/sqm/m) Rent opinions (€/sqm/m)

Yield opinions (%)Yield opinions (%)


17

Distribution of responses in category ‘rent ofout-of-town logistics buildings’

0%

5%

10%

15%

20%

25%

0-0.5 0.5-1 1-1.5 1.5-2 2-2.5 2.5-3 3-3.5 3.5-4 4-4.5 4.5-5 5-5.5 5.5-6 6-6.5 6.5-7



18

General sentiment

Office 51%

Retail 19%

Industrial 17%

Other I don't know 2% 11%

Improve 74%

Same 23%

Worse 0%

I don’t know 3%

Office 64%

Retail 6%

Industrial 13%

Other 15%

I don't know 2%

Városliget(Liget Project)

14%

Széll Kálmán squarereconstruction

63%

Pest quayrecon-

struction23%

Buda Castlerecon-

struction 0%

Which commercial segment doyou think currently offers the bestconditions for an Investor?

How do you think investment appetite for property will change over the next six months?

Which commercial segment doyou think currently offers the best conditions for a Developer?

Which development will be the most influential on the related neighborhood’s real estate market?


19

Median yields (%)

Top CBD offices, rents (euro / sqm / month)

7

7.25

7.5

7.75

8

8.25

8.5

8.75

9

9.25

9.5

2011 H2

2012 H1

2012 H2

2013 H1

2013 H2

2014 H1

2014 H2

2015 H1

SMALL BUSINESS UNIT

PRIME OUT OF TOWN LOGISTICS

GOOD QUALITY NON-CENTRAL OFFICE

MALL TYPE RETAIL PARK

BIG 'BOX RETAIL

PRIME NON-CBD OFFICE

TOP CBD OFFICE

TOP 5 MALL

0

5

10

15

20

25

2011 H2 2012 H1 2012 H2 2013 H1 2013 H2 2014 H1 2014 H2 2015 H1

typical

maximum

minimum


20

Out of town logistics, rents (euro / sqm / month)

Top 5 malls, rents (euro / sqm / month)

0

1

2

3

4

5

6

2011 H2 2012 H1 2012 H2 2013 H1 2013 H2 2014 H1 2014 H2 2015 H1

typical

maximum

minimum

0

5

10

15

20

25

30

35

40

45

50

55

60

65

2011 H2 2012 H1 2012 H2 2013 H1 2013 H2 2014 H1 2014 H2 2015 H1

typical

maximum

minimum


21

A biannual publication, the Market Sentiment Survey is a collaboration between the EltingaCentre for Real Estate Research, Portfolio and RICS Hungary. It has been designed to provide a clear picture of how Hungary’s senior real estate professionals see current yield and rental rates, as well as general market expectations. The purpose of the Market Sentiment Survey is to improve transparency on the Hungarian real estate market by establishing a benchmark for sentiment drawing on a wide professional basis. All Hungarian RICS members (both full members and candidates for membership) were invited to fill in a questionnaire prepared by RICS and Portfolio.hu. They were asked for their opinions on current market yields and rental rates, as well as on future market expectations. A total of nearly 50 real estate professionals participated actively in the current Market Sentiment Survey. Of the respondents, 70% were full RICS members and more than 75% have over 10 years of professional experience. The completed surveys indicate that around 65% of respondents work for international companies. Respondents were asked to provide information on their industry and their personal specialty within their organisation. Nearly 60% of respondents work for consultancy firms. However, developers and asset management professionals also weighed in heavily within the survey. The respondents’ fields of specialisation were fairly diverse: valuation, investment, development and asset management were the best represented categories in the survey.

Ratio of respondents’ own work specialisation

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

asset management

development financing investment valuation other

2013 H1 2013 H2 2014 H1 2014 H2 2015 H1

About the survey


22

Market Yield: The current net annual income divided by the purchase price received by theVendor in a transaction where the asset has been traded at Market Value as of today. MarketValue is the estimated amount for which a property should exchange on a certain date;between a willing buyer and a willing seller; in an arm’s length transaction; after proper mar-keting; when both parties had each acted knowledgeably, prudently and without compulsion.

Market Headline Rent: The estimated amount for which a property, or part of a propertyshould lease on appropriate lease terms between a willing landlord and a willing tenant; ona certain date; in an arm’s length transaction; after proper marketing; when both parties hadeach acted knowledgeably, prudently and without compulsion.

Category ‘A’: A building that either conforms to all the „hard criteria“ and at least 6 of the„soft criteria“ or certified by Breeam / LEED. Hard criteria: modern cable management, a mod-ern air handling system, adequate provision of secure dedicated parking (at least parking ratioof 1/75 not applying to refurbishments and periphery sub-market), a high quality standardfinish, 24-hour access and security. Soft criteria: high speed modern lifts, clear ceilingheight of at least 2.70 m, prestige/quality reception area, flexible partitioning, high qualityarchitectural design, services in the building / immediate vicinity, power-supply back-up, double-glazed windows / anti-glare glass, restaurant/canteen, quality finish to working areas.

Budapest Research Forum (BRF): It was established in 2000 and currently include the followingmembers: CB Richard Ellis, Colliers, Cushman & Wakefield, DTZ, Eston, GVA Robertson,Jones Lang LaSalle. The aim of BRF is to represent a regulated framework where the leadingproperty advisors can discuss the problems related to the Budapest property market, shareand analyse market information.

Definitions


23

RICS – the Royal Institution of Chartered Surveyors – was created in1868 in the United Kingdom. It received a royal charter in 1881.RICS members are known as chartered surveyors, and are recognisedby the designation after their name – FRICS (for Fellow of RICS) orMRICS (for Member of RICS).

Today RICS is a global property professional body with 100,000qualified members in over 100 countries.The key roles of RICS areto regulate and promote the profession, maintain the highest educa-tionaland professional standards, protect clients and consumersthrough a strict code of ethics and provide impartial advice, analysisand guidance

Chartered surveyors help to sustain the use of land and unlock thelong term value of property.They are key to efficient markets inland, property and the environment without which important worldeconomies would not be able to function effectively.

Anna Orcsik, Regional Manager – RICS Central & Eastern EuropeE: [email protected] W: www.rics.org/europe

• Csanád Csűrös – Portfolio, Business Development Director

• Krisztián Hornok MRICS – Transaction Director, Indotek Group

• Áron Horváth – Eltinga

• Jaroslav Kopac MRICS – Jones Lang LaSalle Kft. National Director – Head of Valuation Hungary

• György Lindwurm MRICS – DTZ Hungary Kft. Associate Director – Investment

• Aliz McLean – Eltinga

• Tünde Madurovicz-Tancsics – Eltinga, Portfolio

• Edina Winkler MRICS – DTZ Hungary Kft. Senior Surveyor – Valuation, RICS Hungary Board Member

Contributors

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