Entering a new golden age

Alex Hayes, ‘Eurobuild Central & Eastern Europe’: Bratislava, Warsaw, Budapest – in what ways are these markets the same and in what ways do they differ?

Árpád Török, CEO, TriGranit: As for the similarities, all three cities have already been on a growing, flourishing path for years, and still have room for new investments – GDP growth is expected to be around 2–3 pct, unemployment levels are low and the interest rates are also very favourable, making room for a flourishing real estate sector. Although the level of EU funding is different for each country, it should still boost the economies – in Poland we can see rising disbursements of EU funds, in Hungary new infrastructure projects are being launched in the context of the new cycle of EU structural funding, while in Slovakia the slowdown in the number of projects financed by EU funds in 2016 will be compensated by more new public infrastructure spending and stronger business investment. The differences lie partly in the size of the markets, in their economic maturity and – although this may sound strange – in the effects of the economic crisis. Warsaw survived the crisis best – in Poland it was less perceptible than in other European countries, in fact this was the only EU economy to avoid recession in 2009. Furthermore, retail sales clearly accelerated in late 2010 – in December 2010 they had increased by 9.1 pct in annual terms. Improvements in the labour market and in consumer and business confidence, the robust banking sector, the availability of financing and the appreciation of the złoty have all played a big role in maintaining stability. Slovakia and Hungary had much less stable economies at that time, and the economic crisis impacted both countries heavily. While Warsaw’s real-estate market became active again in the early 2010s, Budapest and Bratislava have come back onto the investment map only in the last couple of years. This ‘shift’ in 2015–2016 was, however, remarkable. Furthermore, in 2016 the financial conditions turned out to be contra- cyclical: in Poland they worsened slightly, but in Budapest they improved significantly. The increase in investor activity has been similarly notable in Hungary. While the investment volume rose in Warsaw by 13 pct over the last year, in Hungary it went up by a massive 226 pct. On the other hand, market size also matters. While Warsaw’s office stock reached 5 mln sqm last year, in Budapest the total market size is at 3.36 mln sqm and in Bratislava it is at 1.61 mln sqm. On a smaller market, there are always more limited opportunities.

Bratislava is the smallest of these markets. Do you see greater potential risks on this market when compared to elsewhere in the Central and Eastern Europe region?

I wouldn’t call it a risk, but rather more of an influential factor, when considering either acquisitions or developments in Bratislava. Even if the Slovakian economy is in an excellent state, the city is not the number one target for international companies and therefore the need for new office stock is also more limited. The size of the market has an influence on both the liquidity and the development capacity. In Warsaw or Budapest, for example, you can always find profitable investment options.

For many years the Budapest market had seemed all but dead. Now that it has revived, has the market made up for the lost years of development? Could we say that there is still considerable under- investment on the Hungarian market?

We can definitely speak about what is almost a ‘Golden Age’ on the Hungarian office market. The office pipeline, with a record breaking 330,000 sqm to be delivered by 2018, is more than impressive compared to the 68,000 sqm in 2014 or the 50,000 sqm in 2015. However, the office market has almost overheated. Several of the investments on the market are speculative, and in the case of the Váci corridor, for instance, 5–6 office complexes are to be built in close proximity generating a massive amount of competition for each other. We should also bear in mind the cyclical nature of the real estate sector and market. Previously, the market had cycles of 7–9 years: years of prosperity were followed by recession, crisis or market correction. Eight years have now passed since the last crisis. In the US, the percentage of non-performing corporate loans is on the rise, several branches are overproducing, and car purchases and student loans are climbing to very high levels. None of this has yet become critical, but should the trend continue it will have a negative impact on the US economy, which will also spread to Europe.

And what about Brexit?

It’s a question too early to answer. Everything still lies ahead of us. But generally I don’t think Brexit will greatly influence this region, and if it does at all, it should have a positive effect. There is a consensus that Western Europe is going to benefit the most from Brexit, since companies leaving London are going to relocate to financial centres there. A few SSCs might come to this region. Perhaps Warsaw will be one of the possible beneficiaries of the Brexit vote and this may have an effect on take-up levels.

Is TriGranit hoping to enter new markets in the near future?

For the time being, we are focusing on the Visegrád countries – Poland, Hungary, Slovakia and the Czech Republic. In terms of liquidity and size, Poland is way ahead of the others. It accounts for 50–60 pct of our portfolio and will continue to be our main focus. We will be concentrating on Warsaw and on secondary Polish cities. In the other three countries, we are focusing on the capital cities – Budapest, Bratislava and Prague. However, we are flexible in terms of portfolio acquisitions across the region, where TriGranit has a lot of experience and a proven track record. Previously, the company had been active in seven South-Eastern and Central European countries, building up its experience and knowledge-base. In the longer term, emerging markets such as Romania with its high economic growth and growing investment volumes or even some Western European cities may also become interesting to us.

This year your company is celebrating its twentieth anniversary. How would you summarise these last two ecades and what have been the high points so far?

We have always taken a pioneering approach to our real estate development. In the first decade of its operations, the company mainly concentrated on run-down city districts in need of redevelopment, where it created new city centres with its developments. The first brownfield investment of this kind was the WestEnd City Centre in Budapest, a 194,000 sqm gba multifunctional complex housing a shopping centre, hotel and office buildings that already met 21st century requirements back in the late 90s. The company then brought this knowledge to other countries, including Slovakia, Croatia and Poland where it developed the Bonarka City Center in Kraków and the Silesia City Centre in Katowice. Ever since then multifunctional developments have been part of the focus of TriGranit’s development activities – and this is what the company is now known for and where it has its greatest expertise. Over the years, TriGranit has created a very strong and unique combination of activities, providing a full range of real estate development and management services focusing on retail, office residential, hotel and leisure assets. Another important milestone was our reaction to the global financial crisis. In 2008–2009, TriGranit implemented a change of strategy and began to focus more on developing shopping centres and class ‘A’ office complexes. Our aim was to decrease our diversification. We continue to follow this line of business and our results confirm that it was the right decision. Even in these hard times, the company has been able to deliver at least one development every year. All of this led to the TPG transaction in 2015, when, by securing the backing of this huge multinational investor, TriGranit became a strong European player on the real estate market. TriGranit used to be a development and property management company. But with TPG now backing us, as well as development we are also focusing on acquisitions of operating assets and the sales of properties. What is important is that our main aim is not to carry out as many developments as possible and make revenue this way, but to achieve the highest possible returns through our activities. If the market leans more towards development, sales or acquisitions, we’ll shift our focus accordingly.

What are going to be the first projects of the next 20 years of TriGranit?

We are working on the launch of three new developments: the Millennium Gardens office building in Budapest with 37,000 sqm gla; Lakeside Park II, which is a 13,000 sqm gla office building in Bratislava; and – if all goes according to plan – in the first half of 2017 we are going to launch the next building of Bonarka for Business, building H with 10,000 sqm gla.