A landmark office deal in Budapest in the final quarter of 2016 is a sign that the Hungarian market is back, says CEO Arpad Torok
Budapest-based developer TriGranit is gearing up for a strong 2017 after its most successful year in 2016 in two decades of operation. The company, which was acquired by US investor TPG Real Estate in 2015, completed two landmark transactions in the second half of last year which set new records in their respective markets. In September, TriGranit completed the sale of the 92,300 m2 Bonarka City Center in Krakow to Rockcastle for €361 mln, the largest single-asset transaction in Poland over the year. Just weeks after closing the Bonarka shopping centre deal, the company spearheaded another market-defining transaction, this time in Hungary, with the sale of the Millennium Towers, a 70,400 m2 Class A office complex in Budapest, for €175 mln. The company claims this transaction is the largest-ever office deal on the Hungarian market, by both value and gross leasable area.
HUNGARY IS BACK
The Budapest deal in particular is a sign that the Hungarian market is back, the company’s CEO Arpad Torok told PropertyEU. ‘Poland and the Czech Republic were already back, in fact you could say Poland never went away. But the Budapest deal is a signal to the market that the Hungarian market is back as well.’ Torok declined to provide further details, but according to well-informed sources, the Budapest office exchanged hands at a yield of 6.85%. Since the outbreak of the global financial crisis in 2008, yields in this market had not dipped below 7%. Meanwhile, the Krakow shopping centre is believed to have fetched a record yield as well of 4.9%. This is just under the current level of prime office yields in Poland which are now fluctuating at around 5%.
While Poland has been an investor darling within the CEE region since the outbreak of the global financial crisis, Hungary has had a rougher ride and the election of the national-conservative government headed by Viktor Orban in 2014 has not cast the region in a favorable light in recent years. But Torok is optimistic about business prospects for his home country: TriGranit is currently working on a new office project in Budapest, the Millennium Gardens development, which will be located on a site by the banks of the river Danube close to the future Congress Center at MÜPA and the National Theatre. The scheme is set to provide over 37,000 m2 of office space and over 600 parking spaces for future tenants. ‘Millennium Gardens is important for us, as it will be TriGranit’s fist development in Hungary since 2011,’ Torok said. The company already has prospective leases and plans to start construction late in the first quarter of 2017, he added. ‘This development consists of two buildings that we would like to realize at the same time, but we are flexible enough to carry out construction in two phases if necessary.’ Torok is confident that office yields in Budapest will continue to decrease towards 6.5% over the next 12 months, although he is not betting on them declining beyond 6% during that period. Pointing to Prague and Warsaw, Torok noted that yields in these two CEE capitals are currently at pre-crisis levels of around 5% while Budapest has been trading above its competitors by 170-175 basis points for quite some time. It remains to be seen whether yields in Budapest will fall further given current perceptions regarding Hungary’s political risk, market size and liquidity, he said. And while he is optimistic prime office rents will continue to increase in the CBD of the Hungarian capital, he does not see significant rises elsewhere in the city due to current supply-demand conditions.
NEW DEVELOPMENTS IN POLAND
In Poland, TriGranit remains active in Krakow where it is proceeding with the development of the next phase of buildings in the B4B Class-A office complex. Building F, the sixth building in the office complex, was launched last September and Building G, another 10,000 m2 project is under development. The development of the next phase, another 10,000 m2 office codenamed Building H, is scheduled to begin this year. Meanwhile, in Bratislava, Slovakia, preparations are under way on the Lakeside Park Phase II office project, where TriGranit is working on a 15,000 m2 scheme. The focus is not only on offices: the Budapest-based investor is planning overall retail developments of around 70,000 m2 GLA in the region in the near future and is in the advanced stage of some possible acquisitions, Torok said. ‘We therefore expect 2017 will be even busier than 2016.’ The retail segment offers interesting opportunities, Torok said. ‘Office development is a local play, office tenants go for specific locations and you generally don’t have the same tenants in the same types of offices across different locations.’ The situation is quite different for retail, he pointed out. ‘In retail 80% of the tenants are the same and the products are very similar. That gives you more leverage as a developer.’ Given the potential for fertilization in the retail segment, it could make sense to extend TriGranit’s horizon to Western Europe, Torok conceded. ‘We always have plans and are constantly searching for alternatives. I’m not saying we won’t step out of CEE, but for the moment we have enough on our plate.’
Contrary to expectations, TriGranit has not embarked on any new acquisitions since TPG took ownership of the company in 2015. The focus in the past year has been on development and sales, Torok conceded. However, over the past few months, the company has screened a ‘very serious real estate portfolio’ of offices and shopping malls in the region worth €21.4 bn in total and covering more than 12 million m2. ‘We bid on about 30% of the total,’ Torok said. In some cases, the project tender was withdrawn, in others TriGranit was outbid. ‘There were also projects we did not purchase because they did not reach the required levels of economies of scale,’ he said. The company aims to focus on larger transactions and is monitoring portfolios that span several countries or asset classes, he added. ‘We have the flexibility to acquire cross-country portfolios and not only single assets where it’s more profitable. We are interested in both single assets and whole portfolios in several countries in the Central European region.’ In the case of shopping malls, the focus is on well-located assets of at least 25,000 m2 GLA with a value of around €100 mln, or that have at least a key position in the city where it operates. In case of offices, the smallest acquisition target TriGranit would be interested would be worth at least €25-30 mln.
As the economic outlook improves for CEE, Torok is also convinced that investors will change their perceptions about the political risk in the region. It is no longer possible to single out Central Europe as a politically risky region, he claims: ‘Previously unthinkable events have taken place in the developed West too,’ he pointed out in a recent interview with Hungarian financial news site Portfolio, citing the example of the Brexit referendum result in the UK. In any case, last year’s active investor activity in CEE is a sign of trust, he told PropertyEU. ‘If we look closer at Hungary, the country has high-quality assets and good tenants with good guarantees, these certainly help build trust. Commercial consumption is increasing and the economic indicators are strong. And investors have also been more positive regarding political risk. For the long run, however, it is important for the market to remain predictable – market-based regulations and decisions are necessary. Without that, international investors are going to turn their backs on Hungary.’ In that context, Poland also rates a mention, he said. ‘The country is performing well but the government’s increasingly interventionist agenda could have a negative impact in the longer term,’ he warned. Local liquidity is key to attracting significant numbers of investors, he said. If the domestic market is functioning properly, international investors have alternatives and that leads to greater stability in the long run. ‘Local capital does not leave in the event of an economic or other crisis, as opposed to opportunist global investors, who can leave easily. Domestic liquidity is like an anchor.’ On that front, domestic capital is starting to gain momentum in the Czech Republic while Hungary is performing better and better as well. Since 2013, 27% of investment turnover in Hungary originated from domestic capital compared to 29% for Czech Republic, he pointed out. ‘It is very interesting that there is no such phenomenon in Poland, but if REIT structures become more widespread, that could give the region’s largest market a boost.’ While Brexit has yet to eventuate, Torok does not see it having much of an impact on CEE. However, CEE could benefit from more consolidation of business process outsourcing (BPO) and shared services centres (SSC), he said. ‘The majority of the SSCs – or some 80,000 m2 – are already located in Krakow due to the city’s central location, the availability of universities and an educated workforce.’
Source: The original article appeared in the February 2017 issue of Property EU Magazine.