After an active first half, activity slowed in the second half of 2022
Uncertainty over inflation, increased energy costs, supply chain disruptions and the Russian invasion of Ukraine are just some of the challenges facing investors. The most important of these, however, is an entirely new interest rate environment that changed investor attitudes in the second half of the year.
Total investment in the Central and Eastern European markets reached €10.7 billion in 2022, an increase of 6.6% compared to 2021, despite the significant challenges in the post-Covid period. Central and Eastern European domestic capital was the most active, accounting for 35% of total volume. Czech, Hungarian, and Slovakian capital continued to be buoyant in cross-border transactions and there was also significant activity from South African capital.
Budapest’s office market
Budapest’s office market steadily on the road to recovery
The Budapest office market is already reaping the benefits of the full market reopening from Covid-related restrictions, with a total of around 400,000 sq. m of office space leased in 2022, an increase of 7% compared to 2021 and an increase of 16% compared to the low in 2020.
Reflecting the healthy fundamentals of the Budapest market, year 2022 saw the second-highest net absorption ever, exceeding the 2019 level. In other words, occupiers continue to focus on occupying the most desirable locations with the best quality space to make flexible working attractive to employees, as their retention and wellbeing remained one of the biggest challenges for senior leaders.
The strong credentials to logistical and industrial businesses have been maintained
Hungary retained its leading position in the world rankings in 2022, according to the annual Manufacturing Risk Index (MRI) survey by Cushman & Wakefield, which assesses criteria such as operating costs, labour, economic and political risks. Hungary was ranked 11th out of 45 countries in the world with the best manufacturing conditions.
With a more extensive transport infrastructure than its main Central and Eastern European competitors and one of the lowest labour costs in the region, Hungary is particularly well placed to benefit further. Hungary has a comparative advantage over Poland in terms of quality and skilled labour, over the Czech Republic mainly in terms of rental costs, and over Slovakia in terms of price advantage in local currency. These offer a number of opportunities for tenants, landlords/developers and agencies alike.
The development market has become active from 2021 onwards, responding to the local opportunity and the global logistics focus, with 349,000 sq. m of new space coming on to the market in 2021 and 333,000 sq. m in 2022. The new supply has been absorbed by the market. This trend is clearly visible in the extraordinary net absorption figures: 320 000 sq. m in 2021 and 303 000 sq. m last year, less than 60,000 sq. m of speculative space was put on the market in two years, which only slightly increased the vacancy rate.
Retail market trends - Hungary vs Budapest
With a metro population of more than 3.3 million inhabitants, which represents over 30% of the country’s population, Budapest is by far the most dominant capital of the CEE region.
Real wage growth accelerated in 2021 and became higher than in the pre-pandemic period, but purchasing power has recently started to decline, mainly due to high inflation and a depreciating currency.
The monetary policy rate will peak in the first quarter of 2023 and the forint will strengthen further against the euro until 2024. Moreover, inflationary pressures are expected to remain high, as in most countries in the region, but have already peaked. However, increased energy costs and soaring food prices have led to a sharp deterioration in the consumer confidence index in the last quarter of 2022.
Whilst the overall economic impact of the pandemic was weaker than anticipated and the consumption pattern has somewhat changed, the share of food & beverages sales remained dominant.
Hospitality in contextWhilst the hotel industry experienced a stronger than expected recovery in 2022, with many markets setting a “new benchmark” with record top-line performance, the impacts of COVID-19 alongside labour shortages have forced hotels to maintain lean operating structures and focus on driving rates instead of occupancy, improving the bottom line. However, as of the second part of 2022 hoteliers are facing yet another challenge, underpinned by inflationary pressures, geopolitical turmoil and the energy crisis. While this might hurt in the short-term, it will drive unprecedented investment into innovation and technology, energy savings and challenge unnecessary services, leading to even more efficient and sustainable operating models.
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