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14 December 2020
media coverage
hungary

Real Talk on Real Estate in Hungary

First published on CEE Legal Matters, 02.10.2020

Laszlo Krupl, Attorney at Law and Head of the Real Estate Practice in Hungary at Schoenherr, on the status of the Hungarian Real Estate Market in a COVID-19 world.

CEELM: What was the state of affairs in Hungary's Real Estate sector in the years leading up to the COVID-19 outbreak?

Laszlo: I’d describe the last four to five years prior to the crisis as a period of stable prosperity. The market had a very good transactional pipeline, with five-to-seven percent yields being available depending on asset class and prime or non-prime location. There was also a good amount of greenfield investments keeping us busy, with a lot of international clients looking at the country, especially in the automotive industry. Overall, I’d say the pre-COVID-19 period was a very good one. 

CEELM: Was there a real downturn during the first wave? How did the market react to it?

Laszlo: When the shutdown came into effect, pretty much all of the sub-sectors of the real estate market basically shut down for a couple of months. Hotels didn’t operate. Office buildings cannot really be banned from use but most were pretty much empty. Retail was dead. It really was hit the hardest since non-essentials were not allowed to open at all. The same can be said about bars and restaurants, all of which led to a real downturn in these sub-sectors. The logistics sector was the one that remained relatively strong as a result of the shift towards home-office work and the rise of e-commerce.

CEELM: Would you say most players were prepared, in terms of cashflow, to take this kind of a hit?

Laszlo: That is the key question, isn’t it? I’d say different sub-sectors face different realities with regards to this. In terms of office leases for example, yes, we did get some clients asking whether lease agreements can or should be terminated, but two, three, or even four months is really a rather short time frame for these types of assets. Retail was in a far worse situation since it is very common to run those spaces on a turn-over rent basis. Immediate cash flow challenges there are far more impactful, and we did see some disputes resulting from that. 

In terms of ordinary people, I think many suffered some form of financial damage, and the biggest question in my mind for the future if these individuals will be able to keep up with private apartments’ rents and mortgages. The government did introduce a unilateral possibility to stop paying mortgages, but eventually these people will need to start paying again (the current statutory moratorium is set to last until the end of March, 2021). People staring down the barrel of this moratorium ending face a rough challenge since it has not been clearly communicated when payments will become due nor what will happen to all of the interest that has not been paid and that banks will be looking to capitalize. 

CEELM: Other than the moratorium, what else did the Hungarian Government do to help the real estate sector?

Laszlo: Aside from the moratorium on bank payments I already spoke about, one particularly useful element was the introduction on a ban on the unilateral termination of leases in certain sectors – in particular targeting the likes of gambling establishments, restaurants, and bars. This was clearly aimed at helping those enterprises hit hardest by the lockdown and I believe it was a rather good measure to patch up the hard-hit sector.  

CEELM: How are things shaping up in this second wave?

Laszlo: I am rather skeptical that the Hungarian Government will be brave enough to close down the country again, and, as a result, cause critical economic damage to the country. I just can’t imagine they’ll take that on despite the constantly increasing number of reported infections. The main messaging from the Government at this point focuses on masks-wearing, not on other drastic measures. I am not surprised. Before the crisis began, state debt was floating around healthy numbers. The newly communicated stats show a massive spike on that front so I think further economic strain would be a tough sell. 

That said, there are still ongoing transactions and development projects in the country, but the majority of these were commenced before the outbreak. The banking system did not crash and the Hungarian National Bank is trying to support financing but really, you can see the uncertainty levels taking a toll on the big market players. We are hearing of new developments here and there but not a lot in terms of deals taking place, so I think most are simply waiting to see how things will play out. 

CEELM: How have things evolved on the pricing side?

Laszlo: As I touched upon already, a few months are not really enough to have a great impact on a slow-moving mammoth of a vehicle that is the real estate market as a whole. Rental prices have seen a slight decrease but in the case of leases, while there were some attempts at renegotiating rates, I think most were unsuccessful. And I get it. As long as I ensure that the facility (such as an office) can be used, why should I accept a lower fee than what we already agreed upon? There were some lessors who agreed with their tenants to keep the assets alive by accepting a slight reduction, but others simply turned to their contracts and argued “there was no increase in the last few good years, why should there be one now in a bad one?” We also saw a few creative compromise solutions such as agreeing that tenants will no longer pay parking fees. Legally speaking though, it is not really possible to achieve a rent reduction on the basis of what is going on – at least not in a matter of the short few months we’re looking at. If that were to happen, it would have to be done in court, but that is a really slow route, and if it does happen, we’ll only see it next year. 

CEELM: What about the legal market — how have law firms been affected? Have fees been influenced? 

Laszlo: The first week of the lockdown was all about setting up the infrastructure needed to ensure the whole team can work remotely – which, between the flood of client questions coming up, was a bit of a challenge. We then had to adapt to working with our team members without regular contact and with our clients without personal meetings as well as go into overdrive in terms of informing our clients on the regular updates on the “COVID-19 laws” front. 

It is difficult to assess a negative impact on our real estate practice’s pipeline since a considerable amount of client requests came in that relate to COVID-19, which are less practice-specific but more of a set of holistic calls with clients seeking overall help. The workflow in summer actually seemed to reach the levels of February but we are seeing a bit more modest of a pipeline since the second wave. 

I wouldn’t say we felt much in terms of fees – I think we are doing fine on that front. I am not really seeing any decrease in the hourly rates of fees or increased demand for capped fees, both when it comes to the projects we already had in the pipeline as well as new mandates. I was personally expecting much worse.  

CEELM: What does the future hold for the Real Estate market — in terms of the short- and mid-term as well as in the long run?

Laszlo: I think retail will be critical. If the government decides to close down non-essential shops all shopping centers will really suffer. The office sector is interesting, not just in the short-term but also in terms of seeing what influence the work-from-home culture will have. If I had to place a bet now, I would estimate things will change, but in a manner that balances out. Yes, there will be fewer people working from the office, which would mean less office space rented out, but for those that do, more space will be needed to ensure separation/safety in this new world, so I think the overall area rented will balance out. 

On the tourism side, I’d say the summer period that just passed is not really representative since a lot of spots were full of Hungarian tourists. If you look at the March/April period, things were dead and I suspect the worry is that the conditions from then will reoccur, meaning there is not a lot of potential revenue that hotels can plan around. I even know of a couple of hotel openings that were planned but never happened. And things were made even trickier since the Hungarian Government introduced new FDI screening rules, based on which, special permission is needed for foreigners investing in hotels in the country. The case law on this is not yet known and in the few transactions this came up we did get a green light — but it slowed down the process considerably. Sure, that created more legal work but I worry it will discourage potential investors. 

CEELM: What are your projections for 2021?

Laszlo: I’d like to remain optimistic and we, as a team, are planning to grow. We’re not seeing a high downturn in terms of either workload or fees so we’re feeling like we’re on a relatively stable footing. Looking at the big picture, obviously, 2020 will not be the strongest year for anyone but I expect a slow pick-up of the real estate market in 2021, especially because I feel we all learned our lessons this year and I am eager to see how they are put to good practice in the next one.

László
Krüpl

Attorney at Law

hungary