Budapesti Ingatlan Hasznosítási es Fejlesztesi : BIF Annual Report 2021

Report of the Board of Directors on the business activity of

Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt. in 2021

Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt. (registered office: 1033 Budapest Polgár utca 8-

10.; Company Registration No.: 01-10-042813; website:www.bif.hu;hereinafter: the "Company" and/or "BIF") hereby informs its shareholders, business partners and investors on the management, the business activity in 2020 and the financial position of Company.

I.

Management of the Company

The Company operates under a single management system. The Board of Directors is the Company's management body, representing the Company before courts and other authorities and in dealings with third parties.

The Board of Directors has established its rules of operation and has operated in accordance with its adopted By-laws for the year 2021. The majority of the members of the Board of Directors are independent.

The Board of Directors acts as a body. It decides which of the matters falling within its remit of duties should be placed on the agenda of its meeting, appoints the member of the Board of Directors and/or of the management responsible for preparing the matter, discusses the matter submitted to the Board meeting, makes a decision on it and monitors its implementation. The Board of Directors must fix the dates of its regular meetings and, to the extent necessary, the expected agenda for its regular meetings for the period between the annual General Meetings to close the balance sheet.

The Board of Directors held 1 meeting in 2021. The Board of Directors made a further 14 decisions electronically in 2021.

Members of the Board of Directors of the Company (31 December 2021)

Name	Position	Beginning of assignment	End of assignment
dr. Anna Ungár	President	15/08/2017	15/08/2022
Kristóf Berecz	Vice President	15/08/2017	15/08/2022
Julian Tzvetkov	member	15/08/2017	15/08/2022
dr. Frigyes Hárshegyi	member	15/08/2017	15/08/2022
Miklós Vaszily	member	22/12/2017	15/08/2022

II. The Company's business policy and business activities in 2021

In 2021, the Company performed its business activity in accordance with the development strategy and objectives listed below:

• ➢ Identifying office and other buildings that fit into the Company's existing portfolio of income-generating real properties and making acquisitions.

• ➢ To maximise the income potential of the existing real property portfolio and optimise the operation of office buildings.

• ➢ Optimal utilisation of the Harsánylejtő development site owned by the Company in District III of

  Budapest.

Since 31 December, 2018 the Company has been active as a regulated real estate investment company

(hereinafter: "SZIT/REIT") under Act CII of 2011 on regulated real estate investment companies

(hereinafter: "SZIT/REIT Act") engaged in real property development and utilization for its own

properties (offices, other buildings and parking garages) by leasing, further development and the sale of construction sites in its ownership, the implementation of real estate developments on them, and the utilization and sale of completed properties.

The Company is active in the following main segments of the real estate market according to the types of properties owned:

• ▪ Office buildings

• ▪ Parking garages

• ▪ Building plots

• ▪ Residential properties

• ▪ Hotels

Office buildings

In 2021, a total of 44,000 sq. m. of new office space was delivered in Budapest, an 81% decrease compared to the previous year, which was due to the fact that some of the office deliveries planned for the end of 2021 had been postponed to 2022. The Váci Avenue office corridor remained the main target for investment in 2021, with the South Buda submarket coming in second. The total modern office portfolio had exceeded 3.95 million sq. m. by the end of 2021. In H2 2021, the modern office stock in Budapest did not add any new office buildings, the lowest number of office deliveries in a year since 2013. The completion of most of the development projects has been postponed to 2022, and this means that already in Q1 2022, twice as many office deliveries are expected as in 2021, i.e. approximately 302,000 sq. m.

The vacancy rate increased slightly compared to 2020, standing at 9.2% at the end of 2021; the most saturated sub-market was Buda-Centre with a ratio of 5.5%. Taking into account the continued expansion of developments and the pandemic situation, real estate marketers expect the vacancy rate to continue to increase slightly, although not at the same pace as in the first waves of COVID-19. Demand for office space reached a low point before the start of 2021, but started to increase after the COVID restrictions were lifted, bringing annual demand to 365,000 sq. m., a more moderate (9%) increase compared to the previous year. (Source: CBRE, BRF)

The office market's Q4 2021 results continue to reflect the uncertainty caused by the pandemic, but there is cause for optimism with a slight increase in annual gross demand, an increase in the number of transactions and stagnation in the vacancy rate. Rents are not expected to change significantly in 2022, but it is clear that operating costs will increase. Average operating fees in early 2022 ranged between EUR 3.5 and EUR 5 for most Category A buildings, possibly due to increased cleaning and disinfection needs, more modern mechanical equipment and significantly higher energy prices. (Source: CBRE, Portfolio.) Given the above, older but well-maintained properties may benefit from pricing flexibility against new projects increasingly constrained by cost pressures.

As of 31 December 2021, the Company owned seven Category B and two Category A office buildings in prime locations in terms of infrastructure and transportation. The revitalization of one of the existing Category B office buildings (the office building at 12-14 Városmajor Street, District XII of Budapest, hereinafter: "Major Udvar (Városmajor u. 12)") to convert it to Category A is currently underway and is expected to be handed over in May 2022. Our existing and operating office buildings typically operated at an average occupancy rate of 88% during the period, which is marginally below the market average.

In H1 2020, our Company acquired the former Posta Hotel at 114-116 Üllői út, Budapest, District X of Budapest, an iconic 13-storey tower building in the area, which will be converted into a Category A office building (hereinafter: "BIF Tower") in a development project launched in 2021. Construction is expected to be completed in Q3 2022. The adjacent three-storey building, formerly operating as an educational centre (hereinafter: "Üllői úti Oktatási Központ"), has also been included in our portfolio, and we aim to use it as an office or educational centre in line with market demand. The two buildings will add more than 10,000 sq. m. of office space. The property can be used for the development of a further 13,000 sq. m. of gross floor area by modifying the parameters of the District Building Code, which will allow the Company to diversify its real estate portfolio by developing 4500 residential units and entering the dormitory market by selling them to foreign partners.

In the case of our office buildings, our main objective is to maintain tenant satisfaction and thus extend tenancy contracts, which is achieved through the introduction of new services and a continuous operator presence and maintenance. For our Category A office buildings, we pay particular attention to modernising the common areas and renovating and upgrading vacant office space.

Parking garages

Our Company owns 2 parking garages, the Aranykéz Parking Garage (Budapest V. district Aranykéz utca 4-6.) and the Parking Garage of Flórián Udvar Office Building (8-10 Polgár Street, District III of Budapest), located next to the Vigadó Palota Office Building (9 Apáczai Csere János Street, District V of Budapest, "Vigadó Palota Office Building"). The parking garage in the Flórián Udvar Office

Building is primarily intended to serve the tenants of the office building. Both parking garages are equipped with the latest Hungarian mobile-app parking system and modern payment facilities to ensure maximum service quality. The special emergency measures, including free parking in public areas, were extended up to May 2021. However, our tenants who continued to walk into their offices kept their leases for convenience, and some of our larger tenants requested additional leases to support their employees' safe access to work. Hourly parking volumes declined during the curfew period, primarily affecting Aranykéz Parking Garage located in the downtown area.

Building plots and residential properties

By 2021, Duna House estimates that the residential property market would have returned to pre-pandemic levels, with a 15% increase in the number of transactions compared to 2020. (Source: Duna House Transaction Count Estimate.)

In new development projects, simultaneously with rising construction demand, some building materials saw a surge in prices in 2021, often accompanied by shortages of building materials and supply problems. In addition, government measures such as tax rebates and the Green Home Programme continued to generate demand for new housing beyond 2022. (Source: Portfolio Ingatlan)

Within the framework of the Harsánylejtő Kertváros project (District III of Budapest), the Company launched a development project (hereinafter: "Harsánylejtő Project") in several phases over the past

years, covering an area of approximately 39 hectares. As part of the project, land development, residential development and commercial units were developed as follows:

• ▪ A total of 153 land plots have been developed, constructed and sold within the framework of Phases I-II of the land development. The project was successfully completed in terms of development and sales (the total area of the above-mentioned Phases I to II exceeds 25 hectares).

• ▪ Residential property development

  • o In Phases I and II of the residential development, a total of 40 apartments of floor areas between 55 and 99 sq. m. were built on an area of about 1 hectare. The sale of the 20 apartments built in Phase I of the residential development project was successfully completed in 2019, and the sale of the 20 additional apartments built in Phase II of the residential development project was successfully completed in H1 2021. The owner of the project is Harsánylejtő Ingatlanforgalmazó és -kezelő Kft. (hereinafter: "Harsánylejtő Kft."), which is 100% owned

    by the Company.

  • o For two of the three plots of land on an area of more than 2 hectares suitable for residential development, sales contracts with reservation of title were signed in Q4 2021 (the termination of the reservation of title subject to payment of the full purchase price is foreseen for Q4 2022 and Q1 2023). The remaining property owned by the Company is currently zoned for the construction of a 50-apartment condominium, but the sale of the land could remain an alternative to development, taking advantage of the increased demand due to the reduction in VAT on housing.

• ▪ A plot of land suitable for the development of a commercial unit, comprising a retail unit of approximately 1000 sq. m. and a further 1500 sq. m. of office or other service functions on an area of approximately 0.4 hectares.

• ▪ More than 1 hectare of land suitable for office or residential development, suitable for the construction of an office complex of approximately 2500 sq. m. or condominiums.

The Company is constantly evaluating the best options for each property. So far, decisions have been taken on the implementation of Phases I and II of the Harsánylejtő Plot Development and Phases I and II of the Harsánylejtő Residential Property Development projects, which have been completed. For the

other development opportunities, the Company will consider the options of launching the development or selling it as a land parcel or project based on current market trends.

In addition to the residential property development in the Harsánylejtő Project, the construction of a significant development project of the Company had been completed at the end of July 2021 for the property registered under parcel number 6775 in District I of Budapest, located at 99 Attila Avenue, District I of Budapest, and 42 Logodi Street, H-1012 Budapest (hereinafter: "Attila99Loft" or "Attila Avenue Property"). Attila99Loft was the winner of the Real Estate Awards "Residential Property Development of the Year 2021" competition. The development project included 16 exclusive apartments, a 22-space robotic parking system, a restaurant and a bakery. In addition to its location in the Castle District and the unique style of the apartments, the exclusive services available within the building ensure the uniqueness of the building modelled on the "New York" style. After completion of the construction, the apartments and commercial premises are leased by the Company.

Hotels

In 2021, the hotel industry already showed signs of recovery, with Budapest improving 66.8% in terms of revenue per available room and 43% in terms of occupancy index in H2 2021 on a year earlier, mainly due to the easing of travel restrictions, allowing for example the hosting of international (sports) events.

In terms of the pace of recovery, experts expect the region's hotel market to recover by 2024. (Source: tourism.com, 3 February 2022)

The Company currently owns 1 property which is operated as a hotel by the tenant (the Company does not generate any income from accommodation or catering services, it only rents out the properties it owns). The Madách Square property (3 Madách Imre Square, District V of Budapest), which has one of the most prominent downtown locations for the purposes of tourism, is a 4-star hotel with 115 rooms.

A 3-star hotel operated as a transit hotel in "Building C" of the Üllői Avenue property complex (114-

116 Üllői Avenue, District X of Budapest), located in the airport corridor, in the vicinity of Liszt Ferenc International Airport (114-116 Üllői Avenue, District X of Budapest) up to 30 June 2021, which the

Company has been leasing out for student accommodation (hereinafter: "BIF HOSTEL") since September 2021, taking advantage of the favourable conditions of the building.

One of the most prominent properties in the Company's portfolio is located at 80-82 Andrássy Avenue, District VI of Budapest, and a World Heritage Site (hereinafter: "Andrássy Avenue Property"). On the more than 1400 sq. m. site, the Company is exploring the possibility of a residential development with upscale apartments and services, in addition to the Boutique Hotel concept, taking into account the changing market needs and the district regulatory conditions.