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Budapest, April 20. 2009
All the players of the real estate market pay great attention to the movements of the exchange rate of the Hungarian Forint (HUF) versus other currencies. In the second of the sequence of four analyses, experts of international real estate agency Colliers International Ákos Balla, Head of Valuation and Szabolcs Koroknai, Senior Advisor of Retail examined the way the retail real estate market reacts to current challenges, mainly the changes of the EUR/HUF rate.
Szabolcs Koroknai, Senior Advisor of Colliers’ Retail division calls the attention to a special situation on the retail real estate and shopping center market. Due to foreign currency exchange rate fluctuations, retailers have suffered cost increases of almost 20%. In general, they have priced in their new spring collection at a EUR/HUF 300 rate, which will presumably show in inflation data.
Although wage costs are still HUF-denominated, the former price margin has narrowed, which is further deteriorated by a general setback of the retail turnover. This is not such a sudden and drastic notion in Hungary, rather a trend of almost one and a half years of continuous turnover decrease. The balance of forces between tenants and landlords has also changed on the retail market: a tenants’ market has evolved in the past half year. There is no unified pricing on the high street and traditional street retail market; therefore contracts are the results of individual price negotiations. The shopping center market is more homogeneous due to the smaller number of landlords.
On this market, rents are drastically differentiated on the basis of prime and worse-than-average retail units. Key money is paid only at the most outstanding locations. While amounts used to vary between EUR 300,000 and EUR 650,000, these have dropped significantly, according to Koroknai. Another new way of handling exchange rate risks is to include the rent band in contracts, which is a peak exchange rate for their foreign currency denominated rents that tenants can request. However, such a request is currently only fulfilled by landlords that do not have a significant loan stock, or will complete the payback of their loans in the near future.
A new trend on the market is a proactive approach on the landlord side to flexibly renegotiate contracts for shorter lease periods of two-three years. This is not the right time to sell real estate, but thanks to a “cash-flow approach” coming in limelight, sale-and-leaseback transactions are becoming more popular.
The winners of the short-term boom – the result of the Euro exchange rate fluctuation and the Forint depreciation – are retailers and service companies located close to the border in Northern Hungary (including Komárom, Győr, Miskolc and Sátoraljaújhely) and Western Hungary (Szombathely, Sopron and Kőszeg), as clients from the neighboring Eurozone countries have practically flooded to these areas. Meanwhile, Hungarians living close to the border and working in neighboring countries (e.g. in Austria), prefer spending their salary in Hungary.
Ákos Balla said that the exchange rate ups-and-downs also have a great impact on real estate development and keep property value under pressure. As owners calculate their income from rents, decreasing incomes affect the property value and also the demand towards the retail properties. Rents are now often calculated on a Euro basis, which is not sensitive to exchange rate fluctuations, but a weak Forint causes a greater burden for tenants. As a result, in Romania there is an increasing number of “ghost buildings” which also began appearing in Hungary as consequence of a poor retail or office development concepts. According to the Head of Valuation, after an unrealistic market expansion it is a must to return to tenants’ needs. In this situation the role of market research and appraisal will be more significant, and will bear more importance for decision-making of the real estate developers, investors and banks alike. Source: Colliers International |
