This year is characterized by procurement difficulties related to the pandemic, strong price increases, general uncertainty caused by the war conflict, and the ever-increasing energy crisis. We talked with Balázs Gábosy, Director of Business Development, Sales and Operations at Nhood Hungary, about how our mixed real estate services company can remain successful in this challenging macroeconomic environment, about the experiences of the past period, as well as about future plans and objectives.
At Nhood, you are responsible for operational tasks, including leasing, marketing, property management, CSR, as well as the sale of larger properties and business development. In which area do you see the biggest challenges in the past year?
Since 2020, we always have to react to something. In the first half of this year, the Russian-Ukrainian war situation had the greatest impact on the macroeconomics. This did not directly affect us in the same way as Covid, when we had to close, but the effects of the crisis will be felt in the coming period, not least, since energy prices are really rising now. But the escalation in the price of raw materials was a challenge for our restaurants already in the first half of the year. Inflation has been rising month-on-month, was at 15.6% in August. Our tenants obviously cannot follow this rapid increase in their sales prices, which causes difficulties. Also, we don't yet see how the increasing energy prices will affect our tenants, or what effect this will have on consumption, because retail has always been a market that reacts later. For example, during the previous economic crisis, people continued to consume for a long time. It took a year for that to drop as well. I hope that this will not be the case now, but we have to prepare for that as well. However, to say something positive as well, tenant traffic in the first half of the year was very good despite the difficulties, as the stores, service providers and restaurants we operate recorded an average increase in turnover of 27% compared to 2019. If inflation is not taken into account, this still means a net turnover increase of around 10%. Overall, our analysis indicates that retail has returned to pre-Covid operations in terms of both sales and visitor numbers. It should be added that the shopping centers operated by us were less affected by the pandemic, since those customers who did not dare to go to downtown malls, still visited Auchan Korzó because of the need for grocery shopping, as well as the suburban location and the more spacious, open-air parking spaces.
You mentioned that the tenants of Auchan Korzó performed well during the first half of the year, but we didn’t discuss if there was any fluctuation.
At the moment, our occupancy rate is 97.5%. The remaining 2.5% are also more technical, most of them are shops in less attractive areas. But we are working to find suitable functions for these as well. Such movements take place within the shopping malls that, for example, a tenant changes concept and therefore wants a bigger store. In order to ensure this, we have to move several tenants. Such things happen all the time. At the same time, it is also no secret that the pandemic did not really favor the fashion goods segment, which is why last year Promod and Camaieu, while this year Orsay pulled out of Hungary and from us as well. In Orsay’s place a Retro shop opened, so the good news is that we can achieve a quality replacement even in the event of a closure, whether it's fashion or let’s say a restaurant. Fortunately, our tenants are generally optimistic and when we offer them an opportunity, they take it because they want to open more stores with us. The satisfaction of our commercial partners is confirmed by a recent tenant survey as well. When asked whether the services of the operator of Auchan Korzó are better or worse compared to those of competitors, the majority of respondents gave very positive feedback: almost 90% think we are better than our competitors in terms of flexibility and communication efficiency, 93% in terms of ethical approach and 77% in terms of child and family-friendliness of our venues, while more than 90% of our tenants found the efficiency of our management to be positive.
You can read a lot about the remodeling of larger shopping centers. What about the modernization of Auchan Korzós and what are the considerations?
Modernization is constantly needed at our sites. It’s a complex process, energy efficiency, operation, tenant and customer needs must all be taken into account. Most of these investments are not so spectacular. In September, for example, we will start installing solar collectors on the roofs at five of our locations, which will help us operate more sustainably and energy-efficiently in the long term. At the same time, it should be mentioned that our developments are significantly set back by the strong increase in construction prices. Currently, it is difficult to implement projects, because it is not possible to ask for as high a rent as the investment costs due to the increased prices of building materials. The lead time has also become longer and we often struggle with a shortage of raw materials.
You mentioned the uncertainty due to rising inflation and spiralling energy prices. Do we have a crisis scenario for Auchan Korzó tenants?
I think the fact that unlike most shopping centers and commercial properties, by which I mean office buildings, retail centers, logistics sites, we invoice in forints and we set our rents in forints as well is a great help in itself. This was a decision taken more than 10 years ago because of the economic crisis at the time, when the euro-forint exchange rate was similarly high. In addition, in January we indexed based on the index of the previous year, i.e., we increased the rental fees based on that, while, as I mentioned, the increase in turnover was much higher. At the same time, we are aware that the burden on tenants continues to increase, as restaurants and smaller shops may be affected by the KATA changes from September as well, in addition to the rise in raw material and energy prices. We are trying to be supportive in this situation as much as we can, just like we’ve been before.
Let's talk about the housing market now, which started off quite strongly in 2022, with a number of government measures helping families get a home. Since then, housing sales have slowed down somewhat as the crisis has started. How has the last six months been for us?
I can report on positive experiences, as our Boróka Lakópark real estate development in Kecskemét closed a very good first semester. There are only a few apartments left for sale in the second phase, C-D, and we will soon start selling the third phase as well. The interest in our apartments was extremely strong, which shows that there is a demand for high-quality properties built by a reliable developer, so we are optimistic about the next phase as well. 25% of the owners are loan-takers while 75% are cash buyers. This is not surprising, since the central bank's base interest rate has risen in recent months, it was 11.75% in August, which is why home loans have become significantly more expensive. This discourages those who buy real estate on credit for themselves, while high inflation drives cash investors towards property. It’s important to note that our prices are still favorable compared to Budapest, with a 1+3 half-bedroom apartment selling for 790,000 HUF per square meter, which would be at least double the price of a similar size new-build property in the capital. Our aim with this project is to create a new city center in the suburbs of Kecskemét that meets all needs. This is linked to the Nhood vision which is reflected in all our projects. We aim to create urban sub-centers where people can meet all their needs within 15 minutes, may it be housing, shopping, services or even leisure and cultural activities. Accordingly, in Kecskemét we plan to create mixed-function building complexes with shops, restaurants and cafés in addition to apartments, and in cooperation with the local municipality we plan additional services as well as to further expand the local Auchan Korzó we operate.
Our real estate services company, Nhood, was founded in January 2021. Where are we now?
The main direction at the moment is primarily to increase the value of the Ceetrus and Auchan portfolios, and in connection to this, we have a number of projects in preparation. I mentioned the real estate development in Kecskemét, but our development in Óbuda is similar, where we are also planning to create a new urban subcenter in line with Nhood's vision. According to our plans, mixed functions, shops, leisure facilities, restaurants, co-working offices, hotels and dormitories will also be implemented. In addition, we have a strip mall project in Budaörs, where we implement commercial functions on 16,000 m2. The opening is planned for 2024. We are also planning an expansion to our site in Dunakeszi, where new commercial units will open in the Auchan building, which will also be handed over in 2024. In addition, a nature trail will be created in Dunakeszi in a protected area, preserving natural values. Here, in fact, a leisure function will be created next to the shopping center in cooperation with the Danube-Ipoly National Park with restaurants and a playground. The project is already under approval and will hopefully be a real attraction for the local Auchan Korzó. Those who visit this site will be able to have lunch in addition to shopping, children can play on the playground, and the whole family can learn about the local flora and fauna. We want to hand over this green area development already in 2023.
What are the more distant goals and plans?
Our goal is to continuously increase the value of the real estate assets we manage, both in terms of quality, tenant mix and in terms of developing sustainable projects that strive to operate with a zero-carbon footprint. In addition, we would like to further increase the visibility of Nhood and use the know-how that our team has as widely as possible. We would like to make it clear that Nhood provides value-adding, innovative, complex real estate services that take into account the well-being of both the people and the planet, and that, in addition to managing the Ceetrus-Auchan portfolio, we are also open to creating, implementing, leasing, and operating projects for other clients. For the Auchan Korzós, it would be very good if we could maintain the net sales growth of around 10% for the full year that we mentioned earlier. We are prepared that the next year and a half will be more difficult, but the portfolio we manage has already proven to be crisis resilient during Covid. We are confident that our tenant mix will continue to be attractive and that people will want to come and shop at our sites. We also hope that there is optimism in the market, that tenants are looking ahead to 2023-24-25, and that for the projects that open in the coming years we will be able to attract international tenants who are exciting for customers and who believe that we are worth opening a new business with.