No malls please, we're Hungarian

At the beginning of the year a new law - dubbed by local media as the plaza ban - came into effect in Hungary. It requires all retail developments of above 300 sqm to be personally approved prior to planning permission by György Matolcsy, the minister for national economy. The moratorium is to last until the end of 2014. The legislation was purportedly introduced in order to maintain the stability of the market, however opinions differ widely.

Developers voice their opinions
As for developers they are unsurprisingly frustrated. "The law is vague. The procedures aren't clear at this stage. And we don't see the need for it," says Árpád Török, CEO of TriGranit. He concurs with TriGranit president Sándor Demján, who was reported by local media as describing the law as "dumb." According to Árpád Török, the ban affects not only retail developments, but also office and residential projects, because most of such projects reserve the ground floor for retail. He points out that "no administration has been set up yet to handle project applications. We have our reservations concerning the purpose of the ban and how it will function in practical terms. We have to wait for precedents to take place before the industry will understand it. Though in the next couple of months we might have more information on what exact procedures we have to follow and what the criteria are for receiving approval for a retail development." TriGranit is not the only developer to express its misgivings regarding the new regulations. Echo Investment is currently building the first stage of its Mundo development. The shopping centre is to offer almost 35,000 sqm gla and should be completed in 2013. As such, it was one of the last developments to be approved before the new regulations came into force. However, the Mundo project manager, Ahmet Cetin, agrees with much of what was said by the TriGranit CEO. According to Mr Cetin, in order to apply for an exemption it is necessary to prepare a market impact study. After this, "you must write a report showing why the project needs to be done. You need the support of the local authorities. Up to here there is nothing new - it is the same as what was required during the building permit process. The only change is that it is now dealt with by a central committee, not by the local building authorities. The problem is, which criteria are the committee going to focus on? This is not at all clear and leads to the impression that the decision of the committee will be subjective. In fact, the committee only really makes a suggestion. The final decision is taken by the minister." However, not all developers are worried by the changes. Futureal has announced that its Etele City Center project has already received approval from the National Architect Committee (Központi Építészeti Műszaki Tervtanács), but it has not yet sought the approval of the Ministry for National Economy (which it expects to do in April or May). The project comprises a 45,000 sqm shopping centre connected directly to both the Kelenföld Railway Station and to a new metro station that is to be completed in 2014. According to project director Márk Balástyai, for a large and complex project such as Etele City Center, the plaza ban is simply a requirement to submit additional documentation to the authorities. "I don't know what the idea was behind this law. For me it's just a more thorough documentation process to show that the development is needed." In his opinion the need for Etele City Center is clear: "It provides an outstanding opportunity. There is not much competition in the area and demand exists locally. This project is one of the few that should go through. The Hungarian retail market has to be considered very closely. Across the country there isn't a great deal of demand, and to just think that a new shopping centre is required is questionable. In order to go ahead you have to be very careful. The plaza ban is just an additional barrier. Genuine demand exists for the centre." Surprisingly, Márk Balástyai is not the only person relaxed about the approval of large complex projects. Despite his scathing criticism of the new regulations, Árpád Török is not worried about receiving approval for TriGranit's WestEnd II project. WestEnd II is the expansion of a current TriGranit mixed-use development in Budapest. New offices, retail space and a hotel are to be built, with over 203,000 sqm gla. "It's a very complex project," he says. "We still have to seek an exemption, but we would have had to go through extraordinary procedures anyhow." He goes on to explain how the Hungarian market was only a small proportion of TriGranit's portfolio: "We have up to 25 pct of our portfolio in Hungary and are developing in both Poland and Slovenia." Maybe in the short term the effects of the ban will not be particularly pronounced, because at present there are few retail developments in the country, which is due to a lack of financing on the market. However, Mr Török foresees three clear effects of the legislation: "There will be more bureaucracy, less transparency and EUR 1 bln less construction." Echo Investment's Ahmet Cetin also makes a prediction. He believes that the ban will produce a rise in rents: "The lack of competition will result in an increase in demand from tenants. We're expecting rents to rise in the near future. Tenants cannot simply call another mall." More surprising still, Tesco also appears sanguine about its future development in the country. In a statement that was sent to us, the group stressed that the current trend was for smaller stores anyway. "Building new stores is becoming more and more difficult in Hungary, just like in any other country. It is obvious that the moratorium has made the development of hypermarkets more difficult. However, Tesco has already been expanding its focus on multi-format stores for a long while. This means that we have, for example, Express stores whose sales areas are smaller than 300 sqm. What is more, we have built hypermarkets in all areas of the country, so it is questionable how many hypermarkets we would be able to open if the moratorium had not been passed." The Ministry for National Economy, of course, sees very few adverse effects. In a statement we received, it defended the ban: "The government does not predict a decline in retail trade due to the ban on new malls. The retail service network is fully developed. The volume of retail trade depends primarily on the disposable income of consumers and not on the number of retail units. Available demand can be met by the current system, too. If, however, a new facility is required in a certain area and it would not significantly burden the environment, a ban exemption can be acquired and the ban can be lifted."

Explanations for the moratorium
What could possibly have motivated the government to dream up such a ban? Part of the answer lies in the fact that the original proposal for a moratorium did not come from Fidesz, the current ruling party in Hungary, but from the LMP (Politics Can be Different), otherwise known as the Hungarian Green Party. Indeed, one of the criteria that developers must now address when applying for an exemption is the impact of the project on the environment. However, there are two other criteria on the list. Applications to the ministry must also take into consideration the impact on local retail entities and also on local market conditions. As the Ministry for National Economy explains: "The key objective of the government in introducing this ban was to provide sustainability. In Hungary there are more retail units than the European average. There are almost 15 retail units per 10,000 people, whereas the figure is 11 across the EU." The statement then goes on to talk about the impact of the retail industry on (of all things) agriculture! "Another related issue is that several shopping malls are built on areas which could have been utilised for agricultural production. All the above factors also had an adverse effect on the development of the countryside, as rural areas could have developed more had there been agricultural production instead of shopping malls on the fields." All of this appears rather confusing, but perhaps that is exactly what it is meant to be if (as is rumoured) the regulations are really supposed to be a covert form of protectionism. "The aim is to protect the small scale retail sector - at least that is what is being said," confides Gábor Czike, a partner at CMS Cameron McKenna. He too admits that the law is vague: "The government was expected to issue a decree laying out the parameters. These details are missing. On the basis of the law you don't know what you have to submit."

Can the law be challenged?
Even if the goal of the law is to limit trade, it is unlikely to be revoked. The Fidesz party holds a two-thirds majority in the Hungarian parliament and, according to Gábor Czike, there are few grounds for questioning the legislation's constitutionality. However, he did point out that the law might be challenged, but only in regard to preliminary building permits that are currently in force. "This regulation is also to be applied to ongoing applications. In this sense it is retrospective for pending procedures and therefore unconstitutional. It should only be applied to new applications." Nevertheless, "an individual's procedural right to turn to the constitutional court in these kinds of matters has recently been curtailed," he says. As for challenging the legislation in regards to its compliance with EU law, Gábor Czike claims that there is little point researching the issue, because "it would take three to four years to get a ruling," - by which time the moratorium should have been lifted. "It might be repealed by the government, but it won't be set aside by any forum or the EU," he says. Again, he reiterates Árpád Török's concern that the law could affect developments other than retail, "This law is so strict and the threshold is so low that it will prevent mixed-use development. 300 sqm is such a low threshold that you can easily bump into this limit. It is quite strange. I don't know why this power to make decisions was given to the minister. It is such a high level that it is unreasonable."
Perhaps the biggest irony of this legislation is that if (as many assume) it was introduced to protect small retailers, it is such people who might be hurt most. Developers of large projects expect close scrutiny from the authorities, and although for them more bureaucracy is frustrating, they are able to navigate through it. Smaller retailers do not have such abilities. Árpád Török gives the example of a restaurateur with 250 sqm who wishes to build a 100 sqm extension onto his restaurant. Since January 1st this year he is obliged to apply for ministerial approval.

Statement from MP Rebeka Szábo of LMP (the Hungarian Green Party)
The LMP proposed a six-month moratorium on retail centres in March 2011, because we wanted better, community-based regulation in this field, with clear rules to sufficiently protect the urban and natural environment, local producers and family merchants, to channel effectively the interests of local communities and protect them against corruption. Fidesz first pretended to support our proposal but afterwards twisted it, banning all shops above 300 sqm and creating a central governmental commission, going absolutely against our proposal, which was strongly based on the opinions of the local stakeholders. The central authority the government established has the right to give an exemption from the moratorium, but they have not defined any criteria for this. So it's centralised, instead of decentralised, and it's arbitrary, instead of based on clear criteria. The LMP had to withdraw its proposal when we saw that the government, which has a two-thirds majority, had the intention of twisting it and going against its original goal.