Budapest Property Investments

Hungary became a democratic republic once again on 23 October 1989. This event was an integral part of the social and political transition that took place in 1989 and 1990 and saw Hungary become a democratic, market economy. Since that time there have been a number of milestones on the road to liberalisation and European integration:

• NATO membership (12 March 1999),
• The signing of the European Union Treaty of Accession in Athens on 16 April 2003
• Hungary’s accession to the European Union as a full member state on 1 May 2004.

Hungary has seen a successful transformation from a centrally planned economy to a free, fast-growing market economy in the past 15 years. A successful privatization process has now been completed in most sectors, bringing foreign strategic investors as well as know-how, technology and best international practice into the country. As a result, the private sector accounts for over 80% of GDP today.

Since joining the EU in May 2004 Hungary continues to achieve strong economic growth with real GDP growth expected to be 4% in 2006. Inflation expectations remain low evidenced by a rate of 3.5% in 2005. In terms of currency stability, the Hungarian forint appreciated by nearly 7% against the euro last year as investors were attracted by Hungary’s higher relative interest rates.

While much of Europe struggles with high unemployment rates, Hungary has a comparatively low unemployment rate of 6.1%.

Hungary’s domestic industry represents one of the fastest growing in the European Union.

Investment volume grows much faster than the gross domestic product and household consumption. Two-thirds of total investments were realized by three big investment sectors, namely the processing industry (15%), forwarding, post and telecommunications (15%), and real estate and business services (13%).

Foreign Direct Investment

In the initial years of transformation, Hungary had the highest level of FDI in absolute terms in the region. With inflows ebbing in recent years, it has lost this top position to Poland. However, in relation to population or economic output, Hungary is still far ahead of Poland reaching EUR 48 billion by the end of 2005, and ranks second only to the Czech Republic.

Germany is the most important investor in Hungary accounting for over 30% of all foreign direct investment. About three-quarters of foreign capital come from the member states of the European Union, with Germany heading the list far ahead of the Netherlands and Austria.

Investors are already experiencing very high returns on capital. Highest returns can be achieved in the up and coming areas of Districts 8 and 9 and the inner parts of District 7 – price rises average between 9-15% per annum in these areas. The other Districts for consideration are 5, 6 and 13 where property prices are increasing between 7-12%. Please note – returns are typically greater for newly built properties since demand is greatest in new developments. [Overview of Budapest Districts]

Overall, property prices in Budapest are far below the EU average, particularly when comparing to its major cities. 1 Bedroom apartments start at £30,000 (EUR 45,000) and 2 Bedroom apartments at £53,000 (EUR 79,000).

Overall, in 2004, the European real estate sector outperformed equity and bond markets. Total volume invested in prime CEE property since 1998 reached EUR 11.6 billion by end-Q3 2005. The annual volume by year-end 2005 is expected to surpass EUR 4 billion. The pace of activity has increased substantially each year. 2005 is set to break further records, with several large deals pending for Q4. Poland, the Czech Republic and Hungary continue to be the major destinations for capital, although investor interest in emerging destinations elsewhere in CEE is huge.

Following the record successes of 2004 with an investment volume of €900 million, the Hungarian investment market has continued its development. While 2005’s volume is not expected to exceed this record, investor appetite remains very strong. Fuelled by the prospects of rental growth within the office market and the further compression of yields across all sectors, owners have been encouraged to bring stock to the market.

1. It is estimated that 8% of accommodation in Hungary is rented, compared to the EU average of 35%. The rental market in central Budapest, therefore, It is driven largely by demand from foreigners. Budapest’s expat population is currently 7%. The rental market in the city is divided into 3 distinct groups:
   • Students
   • Local Hungarians
   • Expat/corporate lettings
2. Each category having their own demands with regard to quality, location and price, you need to know what can be rented out in Budapest, and what will sit vacant unless you drop the price well below what you had in mind when you bought the flat.
3. Car parking, as in any major capital city is vital and well-positioned secure underground car spaces already rent for between EUR 80-150/month. A lack of car parking in the city has a major impact on the value of these apartments.

Leasing contracts

1. Apartment leases can last for up to 3 years but the standard is 1 year. Rents are payable in HUF, EUR, USD or GBP. Leases are similar to UK leases with the main difference being that tenants also pay the building service charges (known in Hungary as common charges) separately to their rent.
2. Usual payment terms:
   • months deposit needs to be paid upon signing the rental agreement
   • The monthly rent shall be paid to the owner’s representative by the 5th day of the relevant month.
   • Besides the rental fee the Lessee shall pay utility charges (common costs, heat, electricity, telephone, cable TV, internet, hot-and cold water).
     

Rental income

1. Renovated, fully furnished apartments in central areas - Districts V, VI VII and XIII in Pest and Districts I and II in Buda are very easy to rent. In the case of resale apartments the higher the standard of renovation, the more it appeals to the high quality, long term, western tenants. Ideally these tenants are business people, diplomats, or foreign students.
2. The anticipated rental income is EUR 400-500 for a small 40-60 sqm flat, Euro 800 and up for a larger two-bedroom apartments; this excludes utilities that will be paid by the tenant.
3. Investors can expect a 5% - 7% yearly rental yield on properties in Budapest.
4. Property management services
5. Managing a property in a foreign country can be a difficult task taking into consideration the distance and language difficulties. Therefore you will need a property management company that can deal with all the operational responsibilities.

Service charges

1. Typically a one time fee equalling 150 EUR+VAT plus management fee of 10% +VAT / upon each gross collection going forward.

Whereas Hungarian banks generally do not directly offer a mortgage to foreign citizens, private buyers can get easy finance in Hungary based on Euro or Swiss Franc.

1. The easiest way to get a mortgage is to submit the application at the financing bank of the specific real estate development.
2. Any application for mortgage can be submitted after you sign the preliminary purchase agreement for the apartment and pay the deposit (usually 10%).
3. Receiving a mortgage shall take 30-60 days approximately.
4. LTVs typically range from 40-70% depending on income coverage and other factors you should consult for. (in general individual application with income statements LTV 70%, without statements 40%, company applications 50%)
5. APR can be between 5 and 8% in case of a loan with 20 years maturity. The frequency of the interest payments will influence the effective annual interest rate and hence the monthly repayment.
6. Hungarian companies can get limited finance subject to the following conditions:
   • The company has been trading for at least one year
   • The company has complete balances signed by an auditor
   • The company has a proof of income
   • The loan will not exceed 50% of the LTV for a maximal period of 10 years
7. Current interest rates are around:
   1. Individual applications: 5.99% for Euro and 5.49% Swiss Franc
   2. Company applications: 8.15% Euro and 6.78% Swiss Franc (maturity 10 years)

Home Leasing

Leasing without down payment is new in Hungary, although more and more companies are beginning to introduce similar solutions. The first 4 entrants on the market are HVB Leasing, CIB Leasing, BG Lízing and OTP-SCD Leasing,

At OTP-SCD the preferential property leasing scheme (with no down payment) applies only to newly built homes, while 30% down payments are required for used flats.

For a Swiss franc-based loan with 25-year maturity on a flat worth Ft 14 million (EUR 56,500), the monthly leasing fee is under Ft 100,000 (EUR 400). This means that with an interest rate of ca 7,04%, the cost of home leasing isn’t significantly higher than commercial bank’s mortgage backed financing. The loans are expected to attract

• clients who do not qualify for government-subsidized home loans. for example corporate clients!!!
• people who are unable to come up with the necessary cash to make a down payment, but are willing to pay a higher leasing fee from their income

There is no upper limit for the loans, which are offered at maximum 25-year maturity and can be denominated in forints, euros or Swiss francs.

According to expectations, amount of home leasing will reach HUF 25-30 billion in 2006.