Budapest office market holding up: DTZ

Hungary's deepening economic crisis has damaged investor sentiment towards the country, but Budapest's occupational office market has proven more resilient to the downturn, according to DTZ's latest Office Market Report.

Budapest's dominance of the Hungarian economy, in particular the financial and business services sectors, and recent supply and demand patterns have benefited central locations, cautioning against a uniform assessment of the office market, DTZ said.

The report also emphasises that Budapest's office market has performed well relative to other European office markets, most of which enjoyed significantly stronger economic conditions over the past couple of years. Budapest ranks second behind Frankfurt among major European cities in terms of the ratio of take-up in the first quarter of 2009 to the average quarterly take-up level between 2005 and 2008. Prime rents also proved relatively resilient between Q1 2008 and Q1 2009, remaining flat compared to steep falls of 43% in Moscow, 27% in the City of London and 16% in Warsaw.

The recent deterioration in Budapest's occupational office market has been strongly influenced by the weakening fundamentals in the market's non-central locations. DTZ found that three less mature sub-markets - the Outer Ring, South Buda and South Pest - accounted for 40% of the new supply between 2006 and 2008, or 56% if completions in Vaci ut corridor, Budapest's leading sub-market since 2004 in terms of take-up and supply, are excluded.

Central locations have fared much better, DTZ said. Three well established sub-markets - the CBD, Inner Pest and Central Buda - accounted for less than 12% of the new supply between 2006 and 2008 but generated 27% of the total take-up. Business and financial services accounted for between 40% and 60% of the demand in these three sub-markets. Central locations are also shielded from the significant amount of developments in the pipeline, with non-central locations accounting for 70% of planned supply.

'Hungary is undoubtedly the sick man of Central Europe at present, yet the linkages between Hungary's economic cycle and Budapest's office market cycle are patchy,' says DTZ’s Nicholas Spiro, Director in the CEE Investment team. 'Just as there has been a tendency to lump all countries in Central & East Europe (CEE) together irrespective of market fundamentals, insufficient attention has been paid to the diverging performances of Budapest's office sub-markets. Against arguably the harshest economic conditions in Hungary since the early 1990s, central locations have proven fairly resilient to the downturn. This strengthens the case for a discerning approach to investing in CEE commercial property.'