JANUARY 2015

RETAIL MARKET OVERVIEW HUNGARY

A Cushman & Wakefield research publication

YEAR-END 2014

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OVERVIEW 2014

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ECONOMIC SNAPSHOT Q4 2014

ECONOMIC SUMMARY – DECEMBER 2014

ECONOMIC INDICATORS* 2012 2013 2014F 2015F 2015F

GDP growth -1.5 1.6 3.2 2.5 2.6

Consumer spending -1.9 -0.1 1.5 3.1 2.9

Industrial production -1.4 1.4 7.8 3.7 3.4

Investment -4.2 5.2 14.9 3.5 3.0

Unemployment rate (%) 10.4 9.8 7.6 7.3 7.2

Inflation 5.7 1.7 -0.2 0.7 2.6

HUF/€ (average) 289.3 297.0 308.4 308.6 304.1

HUF/US$ (average) 225.1 223.7 231.8 249.9 251.9

Money market rate (%) 7.0 4.3 2.4 1.9 3.2

Interest rates 10-year (%) 7.9 5.9 4.8 3.9 5.0

MARKET

OUTLOOK

GDP GROWTH is moderate but remain above-average in

2015

INFLATIONIs likely to stay negative until mid 2015

INTEREST RATEcuts are likely in HI 2015

EMPLOYMENTconntinues to improve graduallyTHE HUNGARIAN ECONOMY IS PERFORMING STRONGLY

aided by accommodative monetary policy, low inflation and rising consumer spending. Consumer

confidence is now at levels last seen in 2006, helped by the robust recovery in the labor market, which

has seen the unemployment rate falling.

NOTE: *annual % growth rate unless otherwise indicated. E estimate F forecast

Source: Oxford Economics Ltd. and Consensus Economics Inc

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FORECAST

FORECASTS FOR THE HUNGARIAN ECONOMY HAVE BEEN

UPGRADED FURTHER,growth of 3.2% is now expected for 2014 (the best performance since 2006) followed by 2.5% in 2015.

THE 2014 PERFORMANCE IS EXPECTED TO EXCEED the Slovakian, the Czech and the Romanian performance.

Given the INCREASINGLY CHALLENGING EXTERNAL CONDITIONS and

a tighter fiscal policy, the consumer sector is anticipated to come to the fore later in 2015.

THE LONG-TERM OUTLOOK FOR THE ECONOMY IS BRIGHT as the

country’s GDP remains below its 2008 peak, implying ample scope for catch-up.

SIGNIFICANT DOWNSIDE RISKS remain, including further anti-business policies and a

resulting erosion in the country’s competitiveness as well as an escalation of the crisis in Ukraine and

sluggish growth in the Eurozone.

CONSUMER

SECTOR GAINS

MOMENTUM

Consumer prices are falling on the

back of a plunge in global oil prices,

sharp falls seen in unemployment and

low interest rates continue to boost

households’ disposable incomes.

Private consumption is estimated to

have grown by 1.5% in 2014 and is set

to accelerate to 3.1% in 2015.

GDP GROWTH

3.4CONSUMER SPENDING

3.1

3.2 1.5

2.3 1.4

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COUNTRY OVERVIEW

DEMOGRAPHICSHUNGARY with a population of

9.9 million (2013) and a land area of

92,340 sq km, is bordered by

Slovakia to the North, the Ukraine

and Romania to the East, Serbia and

Montenegro and Croatia to the

South and Slovenia and Austria to

the West. The country is situated in

the centre of the CEE region

connecting Western to Eastern

Europe.

BUDAPEST is the economic and

political capital with some 1.7 million

inhabitants. This constitutes 17% of

the country’s population which is

proportionately high compared to

the capitals of Poland (5%), Slovakia

(8%) and the Czech Republic (12%).

Hungary has only nine towns with a

population over 100,000.

TRANSPORTROAD: Hungary is well served by a

Motorway network that is still being

extended, with the M1 leading to the

west of Hungary and on to Vienna,

the M7 to the tourist destination of

Lake Balaton, Croatia and Slovenia.

The M5 leads to the south to Szeged

then Serbia, while the M3 leads to

the east, and Romania and the

Ukraine. The Hungarian motorway

network is Budapest-centred.

AIR: There are two passenger

terminals at Budapest’s Liszt Ferenc

International Airport, which is 16 km

south-east of the capital.

RAILWAY: Budapest is the hub of

the Hungarian railway network, with

three large stations. From Budapest a

7,607 km network radiates through

the country with various connections

to the larger towns. Whilst many

domestic lines are dated,

international connections such as

from Budapest to Vienna are efficient

and comfortable.

COUNTRY DATA

Population 9.9 million (2013)

Top Cities

Budapest 1,700,000

Debrecen 204,000

Miskolc 163,000

Szeged 161,000

Győr 129,000

Currency Forint

VAT - Standard Rate 27%

ECONOMIC & POLITICAL BREAKDOWN

GDP US$ 130.9 billion (2013)

Public sector balance -2.2% of GDP (2013)

Public sector debt 79.2% of GDP (2013)

Current account balance 3.0% of GDP (2013)

ParliamentMajority government of Fidesz and KDNP

President János Áder

Prime Minister Viktor Orbán

Election dates

October 2014 (Municipality)

2017 (Presidential)

2018 (Parliamentary and Municipal)

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RETAIL SNAPSHOT Q4 2014

-20,0%

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

20,0%

3,00%

4,00%

5,00%

6,00%

7,00%

8,00%

9,00%

dec..04 dec..06 dec..08 dec..10 dec..12 dec..14

AN

NU

AL R

EN

TA

L G

RO

WT

H (y/y)

PR

IME Y

IELD

Rental Growth - Prime Yield - Prime

PRIME RETAIL VALUES - HUNGARY

The outlook for the retail sector is generally stable, albeit there are some concerns over the

potential impact of increased state intervention in recent months.

A new law was passed in December, which forces non-family owned retail stores that are larger than

200 sq m GLA to shut on Sundays, which may dampen investors appetite and cause some

international occupiers to re-consider expansion plans in the country. This is in addition to an already

approved levy of up to 6% on retail activities and a rule that will revoke a trading license if there are

two consecutive years of trading losses.

MARKET

OUTLOOK

PRIME RENTSAre stable with some upward pressure

for Váci utca

PRIME YIELDSForecast to remain unchanged at current

levels in 2015

SUPPLYGood supply in most locations and

limited development pipeline

DEMAND Occupier demand is healthy for prime

locations whereas investment demand to

remain selective

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RETAIL SNAPSHOT Q4 2014

PRIME RETAIL RENTS – DECEMBER 2014

€ € US$ GROWTH %

HIGH STREET SHOPS SQ.M/MTH SQ.M/YR SQ.FT/YR 1YR 5YR CAGR

Budapest (Váci utca) 95 1,140 128 0.0 -1.0Budapest (Andrássy út) 40 480 54 0.0 -7.8

€ € US$ GROWTH %

RETAIL PARKS SQ.M/MTH SQ.M/YR SQ.FT/YR 1YR 5YR CAGR

Budapest 7.50 90 10.1 7.1 -3.6Budaörs 7.00 84 9.4 0.0 -4.9

PRIME RETAIL YIELDS – DECEMBER 2014

HIGH STREET SHOPS CURRENT LAST LAST 10 YEAR

(FIGURES ARE GROSS, %) QUARTER QUARTER YEAR HIGH LOW

Budapest (Váci utca) 6.75 6.75 7.00 8.50 5.50

Budapest (Andrássy út) 7.00 7.00 7.25 11.00 6.00

RETAIL PARKS CURRENT LAST LAST 10 YEAR

(FIGURES ARE GROSS, %) QUARTER QUARTER YEAR HIGH LOW

Budapest 8.50 8.50 8.50 8.50 6.25

Budaörs 8.50 8.50 8.50 8.50 6.00

SHOPPING CENTRES CURRENT LAST LAST 10 YEAR

(FIGURES ARE GROSS, %) QUARTER QUARTER YEAR HIGH LOW

Hungary 7.25 7.25 7.25 7.50 5.00

With respect to the yield data provided, in light of the lack of recent comparable market evidence in many areas of Europe and the changing nature of the market and the costs

implicit in any transaction, such as financing, these are very much a guide only to indicate the approximate trend and direction of prime initial yield levels and should not be used

as a comparable for any particular property or transaction without regard to the specifics of the property.

MARKET

OUTLOOK

OCCUPIER FOCUSDemand remains healthy, with a growing

number of international mass-market and

luxury operators actively looking for space in

key high street locations and in the best

performing shopping centres.

There is a relatively good supply of retail

units in most locations.

Prime rents are under pressure in Váci

utca to rise further.

INVESTMENT FOCUSInvestment demand for retail assets is

patchy and the majority of deals tend to be

smaller sized lots, with local investors

dominant in this segment.

International investors are typically only

interested in larger shopping centre and

portfolio deals.

Total investment volume were €193 mn in

2014, which is better than in recent years

but still below the peak annual volumes of

€946 mn in 2007.

Prime yields were unchanged across the

country.

HighstreetRetail

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HIGHSTREET RETAIL

The Main Streets Across the World 2014/2015 Cushman & Wakefield Research Publication identified 31

high street locations in the CEE region. Budapest Váci utca is the third most expensive retail location in

the region, just after Prague downtown areas but outstrips Warsaw and Bratislava high streets.

Source: Main Streets across the World, A Cushman & Wakefield Research Publication http://www.cushmanwakefield.com/en/research-and-insight/

RANK COUNTRY CITY LOCATIONRENT

Sept 2014

RENT

EURO/SQ.M

/YR

RANK COUNTRY CITY LOCATIONRENT Sept

2014

RENT

EURO/SQ.M

/YR

22. Bulgaria Burgas Alexandrovska 25 300 6. Poland Warsaw ul. Chmielna 70 840

22. Bulgaria PlovdivAlexander

Batenberg25 300 11. Poland Warsaw ul. Jerozolimskie 47 564

13. Bulgaria Sofia Vitosha Blvd 44 528 7. Poland Warsawul.

Marszalkowska60 720

18. Bulgaria Varna Kniaz Boris I. 30 360 4. Poland Warsaw ul. Nowy Swiat 85 1 020

6.Czech

RepublicBrno

Ceska Street /

Svobody Square70 840 14. Poland Wroclaw ul. Swidnicka 40 480

1.Czech

RepublicPrague

Na Prikope /

Wenceslas

Square

185 2 220 14. Romania Brasov Strada Republicii 40 480

2.Czech

RepublicPrague Parizska Street 180 2 160 10. Romania Bucharest

Bulevardul

Magheru50 600

14. Hungary Budapest Andrássy út 40 480 12. Romania Bucharest Calea Victorei 45 540

3. Hungary Budapest Váci utca 95 1 140 15. Romania Cluj

Memorandumul

ui, Napoca,

Eroilor

37 444

19. Poland Gdynia ul. Swietojanska 29 348 23. Romania Constanta

Stefan cel Mare,

Rascoala din

1907

20 240

9. Poland Katowice ul. 3 Maja 53 636 23. Romania IasiStefan cel Mare,

Cuza Voda20 240

5. Poland Krakow ul. Florianska 75 900 16. Romania Timisoara Victoriei 35 420

21. Poland Lodz ul. Piotrkowska 26 312 14. Slovakia Bratislava Downtown 40 480

8. Poland Poznan ul. Polwiejska 55 660 8. Slovenia Ljubljana Copova 55 660

17. Poland SzczecinAl.

Niepodleglosci33 396 20. Slovenia Ljubljana Slovenska ulica 27 324

8. Poland Warsaw Trzech Krzyzy 55 660

MOST

EXPENSIVE

LOCATIONS

IN CEE

NA

PRIKOPE &

WENCELA

S SQUARE

€

SQM

/M

€185

PRIME

YIELDS

CURREN

T VALUES

5.00%

PARISKA

STREET

€180 5.00%

VÁCI

UTCA

€95 6.75%

UL.

NOWY

SWIAT

€85 7.50%

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BUDAPEST

Budapest’s high street shopping area is concentrated in 3

major shopping streets located in the city center.

VÁCI UTCA is the main shopping street of Budapest, attracting most mass market

retailers. The street is pedestrianised, and generates circa 25,000 pedestrian traffic on a

daily basis. Retailers present include H&M, Promod, Zara, Douglas, Mango, Swarovski,

L’Occitane, Salamander, Foot Locker and Deichmann.

FASHION STREET is another shopping destination targetted by middle to high-

end retailers with current tenants Hugo Boss, Furla, Lacoste, Lloyd, Massimo Dutti,

Starbucks, Zara Home and Oysho. This is located in the vicinity of Váci utca, forming an

„L” shape shopping area. Footfall is in the range of circa 15-18,000 people per day.

ANDRÁSSY ÚT (Andrássy Avenue) has become the main destination for luxury

retailers since the opening of Louis Vuitton. The avenue is part of the National Heritage

site, and has excellent potentials. Retailers, such as LV, Burberry, Gucci, Max Mara,

Nespresso, Boggi, and Hublot have already opened their flagship stores, and others are

investigating. Footfall at Andrássy Avenue is in the range of 8.000 – 10.000 people / day.

Petőfi Sándor Street, running parallel Váci utca is an emerging high street destination since

the street was partially pedestrianised. International retailers are not yet concentrating on

this location.

While there are a select number of luxury brands considering expansion in Hungary,

jewellery and fashion segment were the most active in recent years. Newest openings

include Il Bacio di Stile department store and Breitling on Andrássy út; Oysho, Intimissimi,

Subway, and Zara Home on Fashion Street and Desigual, Pylones, Deichmann in Váci utca.

LOOKING AHEAD,

ANDRÁSSY ÚT

IS EXPECTED TO SEE NEW ENTRANTS

AND PRIME RENTS – WHICH ARE

CURRENTLY MUCH LOWER THAN THE

MAIN SHOPPING STREET IN BUDAPEST

AND RANKED ONLY 14 IN CEE

COMPARISON – SHOULD RISE.

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Shopping Centre Market

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EVOLUTION OF THE MARKETThe first modern, first generation shopping centres opened in the second half of the 1990’s.

Typical examples include Duna Plaza, Pólus Center and Mammut1.

The second wave of the evolution happened in the early 2000’s when schemes having an

excellent strategic location came on the market. Examples are Westend City Center, Mammut II,

MOM Park, and Árkád Budapest; all of them producing outstanding footfall and turnover figures

since then.

The third wave of the evolution started in November 2007 with the opening of Aréna Plaza, a

scheme of 65,000 sq m GLA. Its retail concept and unique tenant mix fundamentally changed the

dynamics of the Hungarian market. ING’s Allee Shopping Centre, opened in November 2009, is

another prime example where best of class international anchor tenants are present. In Q3 2011,

the locally developed KÖKI Terminal opened with 55,000 sq m GLA, but is currently in

bankruptcy. The second phase of the Árkád Center opened in Q1 2013 (20,000 sq m), and thus

Árkád has become the largest scheme of the country.

In a CEE context, modern retail stock is far the largest in Poland with 9.0 million sq m GLA,

well above the CEE market average of 3.3 million square metres.

Hungary is one of the smallest markets by country comparison with 1.9 million square metres

GLA, but one of the largest markets by capital comparison with 778,000 square metres. Almost

60% of the Hungarian stock is concentrated in Budapest, which is the highest share in the region.

The highest saturation in the region can be found in Prague and Warsaw, followed by Budapest.

SHOPPING CENTRE MARKET

BUDAPEST IS ONE

OF THE LARGEST

MARKETS IN CEE

0% 20% 40% 60% 80% 100%

Bulgaria / Sofia

Hungary / Budapest

Czech Rep. / Prague

Romania / Bucharest

Poland / Warsaw

SHARE OF MODERN SHOPPING CENTRE SPACE IN

CAPITAL CITIES VS REGIONAL CITIES

GLA open in capital city GLA open in regional cities

0 100 200 300 400 500 600 700

Sofia

Budapest

Prague

Bucharest

Warsaw

SHOPPING CENTRE SPACE PER 1,000 POPULATION IN CEE

CAPITAL CITIES

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STANDARD LEASE TERMS

GENERAL

DOCUMENTATION No standard form of lease contract is

available, whilst most modern leases are corresponding to Western

European standards. Landlords generally provide standard format lease

contracts for multi-tenanted offices and shopping centres.

ENFORCEABILITY OF LEASE Leases are enforceable on court,

but not widely tested.

RESTRICTIVE USER CLAUSES Premises may only be used for the

purpose defined in the lease. Any change will require the landlord’s

prior consent.

LEASE TERMS

DURATION OF LEASE 5-10 years

BREAK OPTIONS Negotiable, albeit generally implies penalty which

amounts to the total gross rent for the remaining lease term.

RENTAL PAYMENTS

RENT PAYMENT AND FREQUENCY Euro per square metre

per month, due monthly or quarterly in advance. In most cases payable

in HUF.

RENT DEPOSIT For retail properties a security deposit equivalent

to three months rent plus service charge is usually required or the

equivalent bank guarantee.

RENT REVIEWS No rent reviews, only indexation is common. For

retail properties a lock-up clause is common whereby turnover rent is

payable if is higher than the base rent.

INDEXATION Rents are indexed annually to HICP 27 or MUICP

index of Eurostat, generally at the start of the calendar year, or at the

anniversary of the lease commencement date.

SECURITY OF TENURE No automatic renewal option is defined

by law, whilst negotiable. Not common in Hungary.

PREMIUM/KEY MONEY Premiums are common in high street

retail only.

TURNOVER RENTS Turnover rents are common and subject to

the actual retail profile. Usually are in the 3-12% range.

SERVICE CHARGES, REPAIRS & INSURANCE

REPAIRS

Tenant Internal repairs only Landlord Structural repairs - charged back to tenant in the

service charge.

INSURANCE

Tenant Internal areas Landlord Main structure

SERVICE CHARGES Typically covers all operating expenses including management fee, security and cleaning costs, maintenance of

common areas, elevators, water / electricity / heating / air conditioning systems, snow clearance, property tax and property insurance.

UTILITIES INCLUDED IN SERVICE CHARGE For common areas only.

TAXATION

LOCAL TAXES

Tenant Local Business Tax - the maximum rate is 2% of gross

sales revenue less cost of goods acquired .

Landlord Property Tax - for buildings is based on GLA

(maximum HUF 1,821/sq m pa), or on the market value

(maximum 3.6%). For land, the tax is based on size (maximum

HUF 331/sq m pa), or on the market value of the land (maximum

3%).

VAT ON RENTS 27%

MEASURING CODE

MEASUREMENT PRACTICEGross Internal Area

LEGISLATION

LEGISLATION IN RELATION TO LEASE CONTRACTS Hungarian Civil Code.

PROSOPECTIVE CHANGES TO LEGISLATION None.

DISPOSAL OF LEASES

ASSIGNMENT AND SUB-LETTING Leases generally do not allow sub-leasing or assignment, but it is negotiable and subject to

the landlord’s written consent. The majority of the office leases allow sub-letting or assignment to an affiliate company.

EARLY TERMINATION Not allowed if the lease is concluded for definite term.

TENANT LIABILITY The tenant is generally responsible for reinstating the premises to their previous state, with the exception of

wear and tear. No further liability after lease expiry.

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SUNDAY TRADING BAN

On 16 December 2014, the Hungarian Government

voted to restrict retail trade on Sundays effective from

15 March 2015. The ban applies to most shops with very

few exceptions such as pharmacies, bakeries, retail at

international airports, railway stations, bus terminals,

hospitals, petrol stations, hotels, entertaining and spa

facilities, shops located within the World Heritage zone,

and family businesses of less than 200 square metres.

In 2015, 38 Sundays will be affected considering the

Advent period (four weekends before Christmas) will

not be banned. which corresponds to a decrease of 10%

in trading hours per annum. If calculating this figure for

the whole year, the decrease in trading hours is

equivalent to 13% per annum, which is almost

three times higher than the loss caused by public

holidays.

Studies of trading liberalisation have confirmed the

presumption that larger retail schemes benefit to a

greater extent from the Sunday trading than their smaller

counterparts or high street retail, therefore with an

opposite regulation one would expect larger shopping

centre schemes and out-of-town retail warehousing

including big boxes, retail parks, outlet schemes will be

more hit.

Studies suggest that Sunday trading is important in fields

where time intensive search has importance. These are

the products where there are high consumer loyalty. We

consider that strong property fundamentals such as in-

city location, public transport links and tenant mix could

counterbalance the loss in trading hours.

Our investigations amongst core retailers reveal

that they are expecting a decrease in turnover

of 7-9% in the short-term. The impact of the new

regulation will be different amongst retailers and some

(e.g. cafes in shopping centres) will likely to be more

dramatic. Those who will likely be less affected will

move to alternative days or e-commerce or will seek to

open for longer hours, although the Government is

restricting retail trade beyond 6 am-10 pm on weekdays.

Studies also suggest that confectionery, tobacco and

drinks being goods with little consumer loyalty to

particular outlets, therefore here the Sunday closing

might have impact that is more significant. The view

however, of a prime FMCG retailer is that the regulation

will not affect the FMCG market, since they sell

“essentials”. Shops with 200 square metres or less GLA,

or those, which are family-owned will only be allowed to

open, meaning that large supermarkets / hypermarkets

will have to shut, losing a strong sales day and sending

customers towards smaller rivals. We consider in

situations like this, alternatives such as e-shopping and

delivery services are likely to be developed further, albeit

the government intends restricting Sunday delivery as

well.

Most retailers

believe that these

measures will not

last – the ICSC is

currently preparing for

the public voting against

the regulation. Main

arguments include the

treat of significant staff

redundancies and lower

revenues through VAT.

The above will definitely

be a hot issue in the

coming months and will

emerge to cause

uncertainty on the

market. We are

continuously talking to

market players and will

keep you posted.

www.cushmanwakefield.com

ORSOLYA HEGEDŰS MRICSRICS Registered Valuer

Head of Research Hungary

Associate Valuation and Advisory

orsolya.hegedus@eur.cushwake.com