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Developer forecasts big overhang for office sector if work-from-home spreads

Longer-term risk to commercial real estate expected; residential homes likely to get a boost

Budapest

THE shift to work-at-home programmes during the coronavirus may pose a longer-term risk to commercial real estate while potentially lifting the market for apartments, according to the head of one of central Europe's largest property developers.

With the region emerging from lockdowns and a recession gripping the global economy, employers are already looking to cut back desk space by as much as 30 per cent to save money and maintain social distancing practices that are the new norm, said Gabor Futo, the co-founder and co-owner of the Budapest-based Futureal Group.

As companies ranging from the largest financial firms like American Express and Nomura to tech giants such as Google relax their work-from-home policies, weakening demand for office space, the question for developers like Mr Futo is just how bad the hit will be for commercial real-estate.

"The office sector is being questioned with home office" and a "new equilibrium" is about to emerge, he said in a video interview on Monday. "I think that the market can absorb a one-day-a-week home office. If it's 2-3 days, there could be a huge overhang over the office sector."

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In Warsaw, Budapest and Prague alone, there is about 13 million square metres (140 million square feet) of existing office space, with a further 1.6 million sq m under development and planned for delivery over the next two years, according to a first-quarter survey of the central European office market by Colliers International.

Mr Futo estimated that two days of home office a week would cut office-space needs by a third.

While Hungarian competitor Wingholding remains optimistic that the office-market will hold up through the pandemic and beyond, and is planning bond sales to expand, Futureal scaled back its exposure even before the coronavirus.

The company has sold about 600 million euros (S$945 million) of commercial property in the past three years, Mr Futo said, citing the possibility of overheating amid unprecedented global monetary stimulus.

With the virus, it's also now encountering deteriorating discipline among tenants when it comes to paying rent.

"Tenants have thought it justified not to pay rent just because of the Covid-19 pandemic," Mr Futo said. "Even Fortune 500 companies were sending us emails that they're not paying rent."

Still, Futureal is moving ahead with three new office buildings under preparation in Hungary of 70,000 sq m altogether.

Prices for well-located, prime office space will be more resilient in the post-pandemic era, Futo predicted.

But the focus is shifting to residential development via Futureal's Cordia unit, which has 19 projects for a total of more than 4,000 units under sales or construction in Hungary and Poland, boosted by its acquisition of Poland's Polnord this year that gave it access to projects in Warsaw, Poznan and Krakow.

Poland now accounts for almost half of Cordia's portfolio, with almost 40 per cent in Hungary, 10 per cent in Romania and 2 per cent in Spain.

Another 44 projects of a total of more than 6,000 units are under preparation, including on Spain's Costa del Sol. Future expansion may be partly financed by a close to US$100 million bond sale.

"The residential market is the winner in the medium and long-term, we've just found out the importance of the apartment," Mr Futo said.

"It's now also the place for educating your kids and to work. If anything, the residential market has been strengthened." BLOOMBERG

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