14 Jan Promise for continuation of a unique proposition
Gábor Futó, Founder and Co-Owner, Futureal Group, aims to form long-standing partnerships that would spread even more the group’s quality work
Up until last year, Hungary was the second fastest growing economy in Europe. As an expert in the sector, could you share with our readers the main trends in the pre-COVID-19 setting? What are the most dynamic segments? What kind of appetite have you seen both from local and global investors?
Futureal Group has grown from a very small operation, one project 17 years ago, into a market-leading developer today. We have more properties than any other company in Hungary. Our group consists of three parts: Futureal Group, which is commercial real estate, mostly in offices and retail; Cordia, which is the market leading residential developer; and HelloParks, which is a logistics developer and our latest addition.
Futureal Group has been market leader in office developments in the last 10 years and we are also developing the only major shopping centre left in the city. In fact, this is the largest shopping centre on the Buda side and that gives us a perspective on the retail and office market. Cordia has grown into a regional multi-country diversified residential developer. We have operations beyond Budapest, in four cities in Poland, in Romania, south of Spain, in Costa del Sol, and lately in Birmingham, in the UK. We have a wide view and ability to compare different markets from the residential development perspective. HelloParks has been newly launched, but we already have half a million square meter pipeline on logistics and we are quite excited about that.
Regarding the office market, there has been a very intensive growth in office demand and a decline in vacancy rates. We see migration to the city and urbanization of Budapest. We also see a significant amount of outsourcing from the western markets in terms of shared service centres, business process outsourcing and R&D centres. We have been able to serve these needs, so we just contracted after the COVID-19. There has been a very strong trend. We have been a beneficiary of that, because we were able to deliver some really high quality core products at traffic locations. At the same time, beyond the strong space demand, we also saw an increasing investor demand. Hungary is still offering a huge yield pickup compared to western European markets, with the credit quality of the tenants being basically the same. This additional yield which is coming from two factors: a liquidity premium and a country risk premium. The country risk premium was mostly associated with political questions. We have seen in the last few years this country risk premium, which is how much more yields people demand from an asset in Budapest than in Prague for example. This has been shrinking as investors get more comfortable with the risks associated with this market. Hungary is an extremely stable economy and has an extremely stable government, so the risk premium has been steadily decreasing. It is difficult to say what is happening now, because there are not many transactions, but we expect that to continue. The economy and the leadership has been highly focused on creating an investor-friendly environment, the critique has been obviously on the democratic institutions, the praise has been on the stability of the economy and also work with a relentless focus on creating a balanced economic growth. Our government debt to GDP has been declining steadily and the western focus has been shifting from questioning the political risks to focusing on the achievements. That has definitely brought down risk premiums and brought us investors. Cap rates went down from 7.5 percent to close to 5 percent. That is a huge change if you look at the coverage in the western press of the country. We believe that after the COVID-19 risk settles, we will see a continuation of that trend. There is still a big risk premium, yield premium in Hungary, which is attracting many international and local investors.
On the space demand side, work from home is raising questions about the sustainability of offices. We do not see where the market will settle yet, but Budapest is also better positioned in this regard than some of the core markets even London, because we have a higher natural growth rate. So the market has been growing by 4 to 5 percent every year. So that is how much new spaces needed – net absorption – whereas some of the more established markets have 0 to 1 percent growth. If you assume a 10 percent long-term drop in office needs, then Hungary needs two and a half years to work itself through that and maybe all the less growing markets would be 10 years to get over that. I am actually optimistic that even with a 20 percent drop, which seems to be a bit exaggerated on the office employment, which would not result in 20 percent drop in space needs, as people will not be sitting so densely together like they used to in service centres, the market will be able to ride out this risk in three to four years maximum. We will have stabilizing space demand, continuation of long-term trends for more office space growth and continuing investor appetite. We are delivering products into that. Most people were afraid, whether there was going to be any leasing transactions after this COVID-19 crisis hit. We are very proud of having closed the two biggest of these transactions since COVID-19. We have signed a 10-year lease with Vodafone, for the development of the new headquarters and also with British Telecom for the development of their shared service centre here. Most of these leases are major milestones, which we would have celebrated before the crisis as well, but after the crisis it is really a message that there is life, companies are growing and companies do need more space. I have to admit that these companies have incorporated some flexibility into their leases, because they themselves are not exactly comfortable with making predictions about what will be the proportion of work from home. Overall, I am very comfortable with the market and I think there will be a lot of Western European and American investors still seeking products and additional yields here.
On the retail side, there has been a hammering of that asset class across the board. People say retail is dead, because e-commerce takes over. I do not think that this true, there are markets like in the US and UK where there was a massive overbuilding. The retail concentration per person is a third or a quarter in this region. Furthermore, if you look at the e-commerce, it is growing fast, but it is still around 5 percent. Compared to that, the growth of the e-commerce, the general growth of disposable incomes and because of that growth in retail trade, has been so large that even with the e-commerce growing faster, what is left in terms of growth is still huge, as it has been very much growing in the last couple of years. Maybe they will not grow that much, but we do believe that the investor market is very much under-appreciating the strength of some of these assets. At the same time, the space demand is there. We have signed up most of the major tenants: Inditex Group is coming with all their shops with their newest concepts into the shopping centre that we are developing. We doubt that there will be another major shopping centre development in Budapest – probably ever. There is not much space for that, but we do believe that the core centres will offer unique value proposition and will be able to hold up the competition. E-commerce will be more problematic in the middle of the market where with time – talking at a decade perspective – some of the retailers will cut back on their stores but they will still want to have the customer experience focused on the best malls. Some of the medium market players will suffer. The only difference is that in this part of the market all this trend is much weaker.
On logistics, we have put together a new development company: HelloParks. We try to be market leaders from next year in the development. In four months, we assembled half a million GLA buildable square meter land bank. There is a significant investor rush into this asset class across the board. It has created bubbles already in some markets like Germany. We still have yields and we still have opportunities. Here the space demand is also growing quite significantly. I am very positive about that asset class. Hotels have been suffering, but I do believe that the international tourism will jump back. The question is obviously timing and it all comes back to be a global question; Hungary is not a special story. Budapest has been offering a unique value proposition for a couple of days, a long weekend type of tourism especially and we have seen tremendous growth in the last couple of years in visitor numbers. This will be back and so will hotels do; they would have to survive this barrier. We are planning our hotel developments, but we do not have any existing hotels.
I think that the government has been quite smart in this cycle. They created a moratorium for loans. Futureal Group has not asked for moratorium on any of its loans, because the banks appreciate that we have never defaulted on anything and we will never will. Generally speaking, it has been extremely helpful for operators and that will have them survive this huge drop. When there is no foreign tourism, there are no people in the hotels in Budapest. Countryside is different, because internet tourism has been actually growing. Summer was one of the strongest seasons. People wanted to go somewhere and they could not really go abroad, so they did it inside the country. I do think that this asset class will jump back relatively quickly, but whether it will take one, two or three years, it will depend on the rollout of the vaccines, business confidence and also tourism confidence coming back.
On the residential side, this has been an extremely erratic asset class in Budapest. We have been market leaders through our Cordia Development Company for the last 15 years in this segment. We have registered probably one of the fastest residential price growths, if you look before the COVID-19, of any country in Europe. The risk appetite has been extremely low; people were not taking big loans. Going into this COVID-19 situation, the market is not restrained. What was a problem though is that the government decreased the VAT on new apartments to 5 percent, which is a competitive rate. In the other countries where we operate it is also close to 5 to 8 percent, which is much more advantageous compared to the normal 27 percent. To the shock of most of us, they increased it back to 27 percent last year. Effectively, with a bad policy decision they sunk the market. Now they brought it back to 5 percent again, but again for a limited period of time. There has been a quite erratic policy framework, impossible to follow for the construction and the development industry. However, it looks like the message went through that this is not a sustainable long term policy and whereas in other parts of the economy, they do very sustainable, nice policies, in this market segment it was not.
With the decrease of the VAT and a tremendous amount of measures that were just announced in the last two months, we are heading again for a big residential boom. With the 5 percent VAT, the National Bank said that they will come out with a plan to back mortgages, making them cheaper. We have not seen the details yet, but it is a kind of a promise. The government came out with all kinds of subsidies for families. Put these together with the VAT, which is the biggest change, we think that we are entering again a time of a quite exciting market. So very good prospects for the next few years until the VAT lasts, and then we will have to see whether the policy will remain where we think it should. That is basically a brief rundown on the real estate segment.
If you just take another perspective, real estate, at least, is extremely capital intensive and, therefore, lending and credit conditions are of major importance. There, the management of the banking sector, as well as the central bank, has been unbelievably proactive. They are non-traditional policies. It looks like the world has been moving in that direction actually. At some point, with the deepening of non-traditional monetary tools, some of those things are now considered great choices that were made. They kept the banking system at a very healthy position. They came up with this program, motivating the banks to keep lending with very cheap capital, very low interest rates, to businesses with a national bank backstopping them with long-term loans to the banks at basically zero interest rate. That program has actually pushed the banks to lending and created lots of credit. Now, when there is obviously a hit to the economy, the system actually works. The banks are not foreclosing on loans, banks keep lending, which is not the case in the UK, for example. We actually can get very attractive loans for even real estate developments, whereas in other parts of the world, you cannot really get loans for real estate developments. To a big extent, we can thank that to the fact that the banks have been managed very carefully, but also to the fact that the National Bank jumped in when it was needed, backstopping the banking sector. The management of the economy was very much focused on keeping the balances right. Today that is not the right approach. At the end of the day, if there is no lending, there is no business. That has been key to ensure that. Some of the lending that is available today is so attractive that many people do projects. There is no stopping because of lack of lending. There is a lot of lending and the Central Bank is pushing further lending and that is extremely important today that we do not have a very tightening credit.
What are some of your flagship projects that you are most proud of in Hungary? How are you also seeking investors for this project? What type of clientele are you targeting?
We have 600 people in our real estate organization. It is by far the largest real estate company in Hungary and also one of the largest in Central and Eastern Europe. We have been covering all these segments, but I would emphasize on the fact that we have been involved in large scale urban regeneration projects. That is a different skill set and not many companies have done that. Our flagship project was Corvin Promenade, which is a city centre urban regeneration project, the largest in Central Europe. It was chosen by New York Times and Frankfurter Allgemeine as the best mixed use project in Europe. That has been operating well. It is been the most successful residential project, the most successful office campus and a great retail and leisure location. We have been working on that since 2004, a long project and we are not finished. We are building the last office building and the last residential building now. It is going to finish very soon, but it is almost two decades. To work on one urban scale project for two decades is quite a learning experience for the whole team. We are very proud of this project. As part of the project, by the way, we also created new public spaces, we moved out 1000 families, we created social housing program within the district to house half of those people. It has been a tremendous success and my heart breaks that it is finishing. We did find a new project and we acquired in Budapest a very large plot, half a million square meters for anew construction.
Then we actually acquired a project of similar scale on the Danube, 1,2 kilometres of Danube shore, with metro access and shopping centre services. That will be for us the next big thing in Hungary. The project is called Marina City. It is going to be mixed use.
We are also running another urban large scale project which is not a regeneration. It is more like a traffic-led project, which we call the south Buda city centre where there is metro and train station and 80 bus lines. This is the biggest traffic hub in the city. We bought all the privately available lands around that and we are building there the Etele shopping centre, which is going to be the number one shopping centre in Buda side of the city. We are also building an unbelievable, beautiful office building, there, where, by the way, Vodafone, British Telecom, Oracle, Estee Lauder and Infosys moved in. That project is going to be finished within two years and will function as an integrated centre with both retail and office working together with this traffic hub.
So we have Corvin Promenade, South Buda city centre and then Marina City, which we will start when this project is finished. That is our work in Hungary. We have a very large scale project in Poland: more than 3000 apartments, which is also like an urban scale project, but also in Poznan and even in Birmingham. We are looking into larger scale renewal projects. That is our kind of specialty, it does create individual projects, but to be able to take things and really make an urban revolution is a very exciting thing to do and we have been doing it for many years and we hope to be able to continue to do that.
What type of investors are you looking for these properties?
We are producing the most core products that you can imagine in Hungary. We are delivering the highest quality portfolio of any, because these projects are located at a very strong transportation networks and they are also with long leases to high-quality tenants, significant entities, beautiful architecture, good service environment and visibility. What we are looking for is to be able to partner with core money, not opportunistic money, that would come in as part owners. We would retain a stake in these projects and sell part of it, so that we can invest the money into more developments. We like to be at the riskier end of the curve and manage those risks with all the expertise and knowledge that we hope to have built. We wish to offer the ready, low risk, beautifully done, perfect product to the end investor. In these places you can buy things still at reasonable prices and create long-term sustainable cash flows with the same credit risks that you would do abroad. We would recycle some of our capital into the next risky thing, and on the other end stay inside with a stake in the project that they would know that we have a stake in a long-term to manage. When you change a whole neighbourhood, there is an inherent growth in value being created and added all the time. We would like to retain those assets partially, in order to also benefit from the value creation that we do to the whole neighbourhood.
What is your strategy for further expansion in the region? Which countries are most interesting for you? When are you looking at developing co-operations and partnerships as well?
We have a long established presence in Central and Eastern European markets. We have done commercial projects and residential as well in both Poland and Romania. We have just entered the UK market, both on residential and on commercial, as a small player, as well as on Southern Spain. In all of these markets we are planning to grow and acquire new projects and development sites. We will probably do more value add than opportunistic investing than we did in the past, to complement the development focus. In addition, this year we acquired a stock exchange listed developer in Poland with a lot of history as well as another developer in the UK. We bought a housing association venture with a financial investor in the UK. We are looking at buying properties and companies and we are quite excited about all the opportunities that we see.
As we are closing this year, and getting ready to open a new chapter, how would you summarize your priorities for the next five years for the group? What would you like to achieve and what would you focus on?
We need to focus on deliveries, because we have acquired a lot of very exciting projects of large scale. Our residential pipeline has grown to 14,000 apartments to be built. At the same time, we have very interesting commercial projects and logistics. There is a massive pipeline already and for the next five years. The most important is to deliver those and continue our diversified growth strategy in Hungary as well as in the region. If you are able to become a regional diversified player, it also means that come any shock, you are better able to navigate it as you are standing on different legs: we have office and residences, logistics, hotels, developments and investment, all that together, different markets, different geographies. We should do that in a very prudent way like we used to. We have never defaulted on a bank loan in our history, even in the midst of the global financial crisis or now and we want to do it the same way and to deliver whatever we promise, to our customers, banks and partners. At the same time, keep our people happy, engaged and excited.
What would be your final message to our readers?
This country has delivered a lot of innovation and stable growth. People should trust this market, they can come here and they will find an educated, sophisticated business environment in an economically stable country. They can trust that those achievements that have been visible in the last couple of years will continue after COVID-19.