Invitech Solutions is responsible for the provision of professional services to the SME, corporate, institutional and wholesale customers of Invitel Group. As a professional partner, Invitech Solutions not only offers solutions to partial professional issues, but can also find comprehensive answers to complex business challenges, thus ensuring that the ICT and telecommunications needs of customers are fully met. The company’s clients include telecommunications companies, healthcare and financial institutions, companies in the energy sector and transportation businesses. An elegant, harmonious and comfortable interior will be awaiting patients at the Medicover Clinic on the ground floor of Eiffel Square.
In partnership with ConvergenCE as project managers, a full scale renovation has taken place recently at the health centre. „The challenge of the renovation was that it was carried out area-by-area, without any disruption to the work of the Medicover Eiffel Clinic” – says Csaba Zeley, Asset Management Director of ConvergenCE. The interior reconstruction of the Medicover health centre that occupies 2,200m² at Eiffel Square Offices, took four months. Medicover’s health centre has been successfully operating for six years at Eiffel Square. In addition to the centre’s high quality medical services and state of the art equipment, the excellent location and good accessibility of Eiffel Square have also greatly contributed to its success. Medicover Eiffel Clinic provides services to tens of thousands of patients annually, covering over 40 medical specialties.
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The 25,600m², six floor Eiffel Square Offices, hosting Medicover’s health centre, is one of the most popular office buildings in the capital, with an occupancy rate close 100%. Eiffel Square tenant Dealogic won the “Office of the Year” contest this year in the “Enterprise Category” awarded by iroda.hu. The annual “Office of the Year” contest is for the best offices and environmentally advanced real estate. This year the main topic was adaptation to change through long-lasting values, as evaluated by a professional jury. Dealogic participated in the contest with its fully refurbished offices. The 1,400 m² internal space was redesigned with creative solutions; an innovative metropolis is depicted, creating an office that offers space to every co-workers’ personal taste.
By transforming office time to quality time, Dealogic City became a second home to those working here. The favourite part of the design was the most unusual element: just beside the fruit market there is a real tramcar. The beautifully renewed tram had served for 50 years on the streets of Budapest, and now, after its retirement, it is the comfortable living room and the main community space in Dealogic City. The design and project management was provided by Stay In Hungary Ltd. The fitout was carried out by Telesis-Net Ltd., with the support of asset and property managers ConvergenCE on behalf of building owners KGAL.
With real estate investment transactions for 2012 totaling only €120 million and new supply of commercial real estate 75% or more down on historic levels for 2013 and 2014, it is clear that not only has there been a dramatic and necessary response to the oversupply of commercial space but that the availability of domestic bank debt financing is extremely limited. It would be easy to blame the lack of bank financing on the bank tax and political tensions between the government and foreign owned banks. However, the primary cause of the lack of bank financing to real estate is due to the foreign owned banks illiquidity, exacerbated by the increased capital adequacy requirements of Basle III. As in the early 1990’s recession, it is their natural tendency to withdraw funds from peripheral markets such as Hungary to protect the health and security of their home country core markets. Clearly also, the large portfolios of repossessed properties which the local banks have accumulated has not only caused them to view real estate financing as high risk but has consumed the time and resources of all of their in house real estate personnel for the last three years. These causes resulted in a total lack of bank financing for real estate from local banks in 2011, but there were some signs of a trickle of funds coming back into the market by the end of the year.
Two international banks were able (after approvals processes of up to 12 months) to provide financing to two large pre-leased office development last year. Of course, the interest rate margin terms are two to three times higher and the ancillary costs of this new debt are at least double what they were five years ago, on top of a maximum of 70% leverage. So does this trickle of new debt constitute the “green shoots” of a recovery in bank debt financing? Sadly not, in my opinion. The first problem is that very little of the banks repossessed properties have been released to the market at anywhere near realistic pricing levels. With sympathy for the banks reluctance to acknowledge and write down their losses, nevertheless the resulting lack of re-pricing of real estate assets in the market will stall any true recovery indefinitely.
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However, as the banks are no doubt discovering, the costs of holding these properties will, after two or three more years, exceed the potential loss write down they should ideally have faced between 2010 and 2012. It is only a matter of time therefore, before the banks will be forced to market repossessed stock and take the necessary write downs. In the meantime, therefore, is the outlook for real estate financing in 2013 completely negative? It does not need to be!
Traditionally in mature real estate markets, the lack of bank financing or the high cost of what little is available, creates opportunities for other sources. As mentioned above, the tendency of foreign owned banks to protect their home markets causes a strong argument for expansion of a more local banking market. This is an opportunity which has been identified by the likes of Granit Bank (although they are not yet providing real estate financing). We can also consider sources of private equity and mezzanine financing due to a reduction in the margin between their relative interest rates and costs compared to banks. However, their resources tend to be limited. Where to look then for large sources of alternative debt financing?
Not for nothing has the institutional investment market in the UK and Germany been dominated by insurance companies and pension funds for decades. Typically, such institutions have provided funding, either on a forward purchase basis for developments, or through their diverse fund businesses, to investors of built and let real estate, especially in the prime sector. Generally speaking, they have stepped into the market at exactly times like these, at the bottom of the value cycle, when the perceived and actual risks of value loss for their more conservative clients are limited.
In Hungary so far, this is a sector has largely failed to materialize. The reason is that it has been inhibited by past, well intentioned risk averse government regulation, which limited the extent of funds allowed to be allocated by insurance companies into real estate investments. In the continued absence of bank debt financing for real estate, therefore, it would be well worth the time of a government which wishes to revive this sector (with its large and direct impact on construction sector employment), to reconsider outdated statutory limitations on alternative sources of real estate financing. I would go further and say that positive encouragement through tax breaks and similar incentives, to investment in real estate by insurance companies and pension funds, would not only benefit the sector and the economy in general but also the long term investment returns of these institutions. The Christmas season is a time of trial and tribulation for those families who are struggling day by day to make their living. For most of these families, not only the Christmas presents are just a dream, but also their Christmas meals. They need help and support through the whole year, but especially in these days, when a small donation means enormous pleasure for them!
For this good purpose, Europa Fund II, the owner of Eiffel Square Office Building, decided to spend the amount of this years’ Christmas gifts on supporting an indigent family. In the frame of the ‘Cheer Up!’ program of the ‘Foundation for Children’s Feeding’ the family was selected, who will be supported month by month, for over a year as a result of this decision. We are delighted that we could bring joy to the Christmas season and to the everyday lives of these families!
When vacancy rates for most real estate sectors remain stubbornly high and the prospects of oversupply continuing for years to come present a gloomy outlook for owners of all except the best property, what can be done? Many building owners seem to hope for the best as far as keeping existing tenants is concerned and trust in the real estate brokers in the local market to bring them tenants when others leave. It seems that surprisingly few take proactive steps to avoid finding themselves in this situation, and fewer still understand the nature of the local broking market. Some do not consider retaining an asset manager, or those who have professional asset managers in-house, or as advisers, are most often based in London, Warsaw or Vienna. Others think that having good, efficient property and facility managers should be sufficient. The first misconception building owners need to face is that Budapest is a brokers market and a broker makes money on turnover.
No broker is therefore incentivized to help building owners keep tenants in a building, unless the fees the owner is prepared to pay are equal to, or greater than, the fees they would receive for taking the tenants elsewhere. One would think that this is obvious, but it is often a point which is not understood by owners coming from markets such as the UK and Ireland, where the brokers are normally part of a full service consultancy organization where a longer term outlook is taken, diverse services are packaged and provided by the same real estate consultancies and client loyalty puts a brake on the broker mentality. Secondly, rents levels for all commercial sectors of real estate in Hungary have now reached such low levels, that simply offering a lower rent or other financial incentives hardly has the effect it would have done five years ago.
The incentive rent level below competitors rent levels is now marginal. Indeed, reducing quoting rents and service charges has led some building owners into situations where they simply cannot provide any meaningful level of service to their tenants. Even inexperienced tenants sense this when searching for occupational property and I would maintain that the effect has almost become counter-productive for some buildings.
So what can be done? Every building owner needs to take a hard look at the placement of its building in the market, the benefits it offers to its tenants and its future competitiveness. This is a necessity, as the alternative of simply selling the asset (as was typically the case between 1989 and 2007) is no longer a possibility, unless the owner wishes to take a large loss. Very often, an objective view can only be provided by an external expert who understands the peculiarities of the local real estate market.
Location and quality are obvious enough, but what about an objective assessment of how competitive the building is in terms of its amenities, the true level of its property and facility management services and costs, its utility costs and how the building physically meets current and future demand trends? For example, the majority of recent new large office leases in Budapest have been to international service center tenants. Their requirement for large, efficient deep space capable of high occupational density, flexible technical solutions and low add on costs simply cannot be provided by many office buildings constructed in the 1990s. Assuming you are fortunate enough to own a building which can still be fundamentally competitive in terms of location and physical structure (following internal reorganization and renovation if necessary), how can a local asset manager assist you further? Quite apart from being able to act on behalf of the owner in managing the essential property and facility management services necessary in any building, to a competitive level (which requires knowledge of the respective levels provided by your competition) there are two key areas. The first, a strategic overview applied to buildings and portfolios based on local knowledge and experience, we have already touched on. Translating this advice into action which protects your buildings and tenants is the next step.
This is proactive asset management at the level of lease restructuring and renewals which we began back in 2007 on behalf of our clients. Yes, we had to accept concessions and some drops in income, but five years later, almost all of these tenants are still in occupation in our client’s buildings.
This was a course of action which many building owners either did not contemplate, or if they did, it was a case of “too little, too late”. What if the building was already substantially vacant, you may ask? Well, this presented a more challenging problem. If the building requires capital expenditure to become competitive, it is often not available, as neither owner (whose original 20% equity is often now worth nothing), nor debt providing bank are prepared to provide it.
In the case of the banks, this is a critical error arising from the fact that financial analysts cannot justify additional capex, due to a lack of knowledge about the details of real estate and therefore the prospects of its return. Unlike paper financial instruments, real estate is not a homogenous product which can be easily priced.
Many real estate assets have ended up in liquidation, forcing a write down of 50% or more of loan value, for want of a 10% (of value) capital injection as a result. For this reason, I would suggest that banks as “building owners” via debt can also benefit from specialist real estate asset management advice! The second key area comes down to relationships and understanding the local business environment. Budapest can now been seen as a reasonably mature real estate market.
It has experienced two boom and bust cycles since 1989 and 90% of the tenants in the market have been here for some time. How then to attract and keep these clients (and note that they are clients, not just rent payers as some buildings would treat them)? I would say that it is essential for any building owner not only to know who they are (directly or through brokers), but to know their decisions makers personally and to understand what drives their businesses. For example, service centers are far more sensitive to availability of public transport and local amenities due to the competition with other service centers for their personnel, than they necessarily are to rent and service charge levels. Logistic companies are not only sensitive to location and amenities but also to on park services and lease length, which is driven by their clients, and so on. This is not a level of relationship and understanding typically provided by a broker, but rather by an organization which is driven by a much more long term view and non-conflicting client loyalty. So, if you are a distressed building owner, you should ask yourself; „Do I have a local representative who I trust to pursue my best interests to a level which I myself would seek to attain if I had the necessary local experience, knowledge and contacts?” If the answer is „No”, then a reappraisal of your building or portfolio and your local advice is overdue!
It seems that there is no summer holiday season in Eiffel Square Office Building. Medicover Zrt decided to sign a long-term lease agreement, and thereby significantly expand its capacity to provide private healthcare services to its Budapest customers. The new Medicover clinic will open on January 1, 2012. Eiffel Square, developed by Europa Capital and its exclusive local partner, ConvergenCE, was completed in the second half of 2010 and only a year later reaching 90% occupancy. The building won the CIJ’s Best Office Development Award in 2010 in Hungary and won best runner up in the Best Office Development category in the FIABCI Prix d’Excellence Awards in 2011. Through a long and exhaustive process Medicover chose Eiffel Square in July 2011 to relocate from West End Business Centre and not only to modernise but also to more than double the size and capacity of this clinic. In this modern, state of the art facility, Medicover also plans to offer new services.
Peter Grossmann, the Chief Executive Officer of Medicover Zrt commented: “After the establishment of our own insurance company, the continuous growth of our corporate and individual client base and the expansion of our network in the major cities of the countryside, the next logical step was to further expand our capacity in Budapest. Medicover in Budapest is now present at Infopark, at the Szepvolgyi Business Park and soon at Eiffel square as well. Besides increasing our capacity to provide private healthcare services in Budapest, we also plan to offer several new services in this clinic. With this expansion, on the one hand we follow the demand of our increasing customer base and on the other hand we set standards and thereby strengthen our market leader position.” Csaba Zeley, the Asset Management Director of ConvergenCE added: „We are delighted to welcome the market leader Medicover and to increase Eiffel Square’s amenities with such a high quality private medical service.
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We are proud to announce that even during these challenging times we were able to hit the “magic” 90% occupancy rate within such a short time after completion.” “I can also confirm that we do not consider that market conditions are right for a sale of Eiffel Square. Instead we will shortly be re-financing the building.” – he added. Medicover joins such well-known international companies in Eiffel Square as Cetelem Bank, Sony Pictures Entertainment, Givaudan, Grundfos, Mastercard Europe and ESAB. Eiffel Square Office Building and Park in the heart of Budapest next to the West Railway Station, has opened its doors with six prestigious new office tenants. HAYS Recruitment will start their operations in August. SONY AXN, ESAB, AES Hungary, Eiffel Medical Centre and DJuice new headquarters are already in operation. At street level, the long awaited Costa Coffee flagship is setting a new standard with its plush first floor lounge and WiFi service.
Tesco Express, the BioBolt health goods store, the newly opened Eiffel Pharma pharmacy and the carwash provides the occupants and visitors of Eiffel Square with true in house convenience store amenities. In addition, the DJuice U26 and “Mix” restaurant, cocktail bar and event centre on the Square will shortly be fully operational. The developers, ConvergenCE / DVM Group expect to round off the convenience for office occupiers of Eiffel Square with a laundry and other services. Commenting on the current state of progress of the scheme, Alan A. Vincent, Managing Director of developer ConvergenCE stated: “Eiffel Square is the next step up in terms of city centre offices in Budapest.
Tenants are recognising not only its excellent location and quality but also its unique micro environment of the tranquil Park and the convenience of having restaurants and all the daily necessities for office workers in-house. The project is now 50% leased and strong interest is being shown for the remaining office space in the building.” Eiffel Square can still accommodate tenants from 300 m² to 14,000 m². While not making a big deal about its green credentials, Eiffel Square is aiming for a LEED certification and benefits from bike storage, washrooms and a number of “green” initiatives including extensive green roofing. Internally, the design aims to provide a clean contemporary image with the use of the high quality recycled materials in reception areas, lift lobbies and office spaces.
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