Investing in Hungary 2022 Sample

2022

INVESTING P r i c e : HUF 2.9 9 0 Ι E UR 9

BENEFITS • CASE STUDIES • COMMERCIAL REAL ESTATE • FDI FIGURES • HUNGARIAN INVESTMENT PROMOTION AGENCY • STATE SUBSIDIES

IN HUNGARY

INVESTING IN HUNGARY Photo by katjen / Shutterstock.com

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INTRODUCTION This time last year, the Hungarian government was predicting a GDP growth rate of 3.5% for 2021. In reality, it did somewhat better than that. It is fair to say that the Q3 figures were rather disappointing after a stellar second quarter, although that was not really the country's fault.

A successful vaccination campaign left Hungary in a good position to start reopening its economy earlier than many other countries. That meant Hungary closed Q2 with growth of 17.8%, and while nobody expected that to continue, some analysts were speculating about the possibility of double-digit growth for the whole year.

When Minister of Finance Mihály Varga met with the American Chamber of Commerce in Hungary back in October 2021, he said he would be happy with 7.5% growth. "Even the most pessimistic say 7% growth can be counted on," he told members.

Within a few weeks, that had been downgraded, with Varga now talking about 6.8% for the whole year. The recalibration came about on the back of the Q3 figures, which showed 6.1%

growth. That still took Hungary above its pre-COVID levels (and it got there earlier than much of the EU), but it was equally clear that Hungary was being held back by global issues, such as the shortage of microchips, rather than anything specific to its economy.

Inflation may also have a role to play; it certainly has the attention of the National Bank of Hungary, and it could well impact the global picture too.

All of which underlines both how hard predicting anything is right now and how interconnected Hungary's economy is. But that does not make it an unattractive place in which to invest and reinvest, as is made clear by our piece looking at German investor sentiment. German companies may have concerns, not least finding enough workers and the rising cost of paying them, but they show no sign of wanting to move on. The vast majority are already back at pre-crisis levels, and many are looking to expand services or headcount. It is not just German money pouring into Hungary, of course. The past two or three years have seen South Korea and China

battling it out to take the top spot in the FDI league table, the new trends of e-mobility, in particular, driving investment. That is hugely heartening news for Hungary because that is not a trend that will go away anytime soon. The new BMW factory in Debrecen, when it opens, will make electric vehicles exclusively. Many of the batteries that will power those cars are also being made in this country.

In the spring of 2022, Hungary holds a general election. Since 2010, one party has been in power, with Prime Minister Viktor Orbán an everpresent force in domestic politics. Fidesz politicians have made much of the stability that continuity has offered. Arguably, for the first time since 2010, Orbán faces a credible, if relatively inexperienced challenger. Investors seem unlikely to be spooked, however, by a candidate who is a fan of the European Union and promises greater transparency.

Whether Péter Márki-Zay can hold together a multi-party opposition coalition might be more of a concern, but, for now at least, business seems happy enough with either outcome.

Robin Marshall Editor-in-chief Budapest Business Journal

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‘STRONG FUNDAMENTALS’ CONTINUE TO OFFER A COMPETITIVE INVESTMENT ENVIRONMENT In December 2021, the BBJ sat down with Róbert Ésik, the CEO of the award-winning Hungarian Investment Promotion Agency (HIPA), to discuss FDI trends in Hungary, the impact of the coronavirus pandemic, and what 2022 might have in store.

BBJ: Despite the pandemic, Hungary has been enjoying record or near-record levels of investment. What do you put this down to, and what are the latest figures?

Róbert Ésik: Despite the negative economic effects of the pandemic, HIPA contributed to the implementation of 57 large investment projects in the first 11 months of 2021, as a result of which investments worth EUR 3.952 billion were realized in Hungary, creating 8,881 jobs. It is highly probable that we will be able to surpass last year’s value data, given that in January, one of the world’s leading battery manufacturers, South Korea’s SK Innovation, decided to launch another major project in

Róbert Ésik, CEO of HIPA.

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ESG: THE TIME TO GEAR UP FOR THE NEW GREEN AGE IS NOW ESG reporting has become far more than a communications tool. Instead, it’s a management aid that helps achieve better sustainability performance and builds trust among stakeholders through transparency.

With legislative requirements getting stricter, most companies need to start gearing up for this new green age now; in time, compliance will be a matter of competitiveness and even survival.

István Szabó, a senior manager at KPMG in Hungary

By Levente Hörömpöli-Tóth The term ESG is becoming so ubiquitous you might have the impression it has been around forever.

In fact, it first popped up in a study entitled “Who Cares Wins,” endorsed by the United Nations and market-leading financial institutions, in 2005. The paper set up recommendations to better integrate environmental, social and governance issues in analysis, asset management and securities brokerage.

Meanwhile, the United Nations adopted its Agenda for Sustainable

Development and 17 Sustainable Development Goals (SDG) in 2015, which paved the way to the Paris Climate Agreement, a first-ever legally binding document in this field to set out a global framework to avoid dangerous climate change. The European Commission presented the European Green Deal in 2019, and Joe Biden’s administration is eager to push through a similar Green New Deal agenda across the pond.

Against this backdrop, businesses had better prepare for a whole new era predominated by one single color:

ENFORCEMENT THE ANSWER TO ‘DANGEROUS PLACEBO’ The term ESG is now enjoying something like cult status thanks to legal requirements and social expectations. But if you get the feeling that it might be a bit overrated in some instances, you are not alone. A report by InfluenceMap, a London-based non-profit,

found that 55% of funds marketed as low-carbon, fossil-fuel-free and green energy exaggerated their environmental claims, and more than 70% of funds promising ESG goals fell short of their target.

No wonder ESG was called a “dangerous placebo” by BlackRock’s

former CIO for sustainable investing, Tariq Fancy. This only shows the urgency of having enforceable and uniform global reporting standards, which can make concerns among investors and regulators about greenwashing and transparency disappear.

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AFTER 30 YEARS IN HUNGARY, SUZUKI STILL LOOKING AHEAD WITH OPTIMISM Magyar Suzuki has been one of the most influential investors in Hungary since it made the first significant (HUF 16.3 billion) greenfield investment in Esztergom 30 years ago. In this exclusive first interview since he took on the CEO’s role at Magyar Suzuki, Masato Atsumi talks with the Budapest Business Journal about how COVID has impacted production this year, workforce issues in a tight labor market, the future of automotive and his hopes for 2022.

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SYMBIOSIS, STYLE, AND FLEXIBILITY The way we work is changing, and a fresh concept describes that change: flexible premium solutions.

The recently upgraded myhive Haller Gardens in Budapest is the location for this offering with highquality serviced offices. With the addition of flexible premium solutions, IMMOFINANZ is, once again, in a great position to respond to the growing tenant demand for more flexibility on space and contract length.

IMMOFINANZ’s innovative approach extends the concept of serviced office space to include the many factors that startups, young companies, and even solo entrepreneurs now need. They all have a common need for a great working environment that is flexible and adaptable to their purposes. One day they may just

need a desk space, but a meeting room or presentation area in the next.

And all this must be in a place that is contemporary, stylish, and positively reflects a company’s values. This is a big task for any business finding its way in the world, which is where the new, innovative concept scores.

IMMOFINANZ provides the complete

infrastructure for business success, coupled with an encouraging and supportive sense of community.

THE SOCIABLE NETWORK Community comes from shared spaces such as the five reception areas, the beautiful roof terrace, the green areas around the building, internal gardens, and a convenient café and restaurant serving delicious cuisine. Then there are the stunning views over the Danube to take into consideration, the extensive parking possibilities, and a modern fitness center. Put this all together, and the result is an inspiring mix that allows business people to be creative and concentrate on what they do best. myhive Haller Gardens is also a place to which any company can proudly invite their prospects and clients. It has all the features to be expected of the most advanced office spaces, with availability as required.

The benefits of the community feeling that comes from the flexible premium

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THE CONTINUATION OF A BEAUTIFUL FRIENDSHIP The appetite for German companies to invest in Hungary shows no signs of decreasing. Optimism is fueled by a cocktail of a businessfriendly economic climate, rosy outlook, and generous government incentives. Supply chain disruption, rising labor costs and a workforce shortage might be areas of concern, but all in all, German-Hungarian business relations are certainly deep-rooted nowadays.

By Levente Hörömpöli-Tóth New investments by Villeroy & Boch, Mahle, and Beurer worth a total HUF 4 billion in Hódmezővásárhely, Balassagyarmat and Veszprém, respectively. A brownfield project by Vitesco Technologies worth HUF 47 bln in Debrecen, including non-refundable funds of HUF 10.5 bln.

Schaeffler’s latest HUF 23.5 bln factory, which won HUF 5 bln of government incentives.

Sometimes eye-watering sums at random locations all over the country, and the list goes on. These are just a few examples from this year’s most significant investment announcements by German-owned

businesses in Hungary. There are about 2,800 such companies operating here, and they play a crucial role in the Hungarian economy.

According to the latest data from the Hungarian Statistical Office (KSH), they generate about 14% of the total value added in the private sector in Hungary and employ more than 220,000 people.

SWEETENING THE DEAL “Made in Hungary” was yesterday; “Invented in Hungary” is the new buzz phrase thanks to a paradigm shift in long-term government economic strategy launched a few years ago. The idea is that the assembly line image, long associated with FDI in Hungary, should be molded to a fresh concept that prioritizes higher value-added investments.

Accordingly, R&D incentives are targeted to draw foreign capital to the country. Non-refundable funds are available for investments with a minimum value of EUR 3 mln up to 25% of the total investment if at least 25 new R&D-related jobs are created. This incentive is also available in Budapest (not

always the case given the level of development in the capital and EU restrictions), just like another one subsidizing training. The latter offers a maximum of EUR 5,000 per person up to half of the total training costs.

A separate category concerns regional funds, where eligibility is subject to deviation from the EU wealth average. These are meant to help underdeveloped areas catch up. Four out of the seven regions in the country have a maximum funding rate of 50%.

This type of incentive comes in the form of non-refundable cash or tax breaks, the latter representing an 80% cut of the company profit tax for 13 years. Businesses usually

prefer the former option since it appears in their cash flow instantly.

A fourth incentive was introduced due to COVID. EU law allows member states to provide aid to companies that encountered difficulties because of the lockdowns. The third round of such incentives provided funds up to a maximum of 20-33% for investments worth at least EUR 2 mln. The first two rounds, meant to help maintain competitiveness, drew applications from 1,338 companies.

According to data from HIPA, around half of total investment projects are eligible for government incentives, which accounts for about 10% of the total volume.

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K E Y C O N S I D E R AT I O N S F O R E V E RY L A R G E C A P I TA L P R O J E C T

HOW TO AVOID TODAY’S RISKY FIXED-PRICE CONTRACTS WITH EPCM If you are planning a large capital project, to be successful, you must choose the capital project management strategy that matches today’s turbulent times. In the fall of 2021, investors keep facing unpredictable materials costs, and short supply of quality contractors.

Many partners are demanding to renegotiate the fixed contracts.

This volatility is causing many companies to re-think their strategy for managing

capital projects. After all, when capital projects come in over budget and late, the entity most negatively impacted is you. If your factory or plant costs more than you budgeted, and if it gets commissioned months (or years) later than you planned, you are out of pocket in both increased capital costs and lost profit potential.

For these key reasons, many organizations are moving away from design & build (general contracting) and EPC and towards EPCM as a project strategy.

EPCM offers flexibility with timelines because it lets you implement your project in stages. This lets you implement design changes at any stage, or even refine the strategy during project execution. EPCM also helps you attract the best engineers and other subcontractors for each stage of the project (architectural, civil, mechanical, electrical).

EPCM mitigates risk by eliminating fixed-bid contracts and the

We are writing this in the fall of 2021, a time of unprecedented instability. You might even describe the current environment as a crisis. Here are the top three drivers of today’s uncertainty.

For one thing, the cost of building materials is dramatically increasing, with the price of iron core alone doubling in the last six months. Unpredictable prices mean contractors and organizations alike cannot set realistic budgets.

The sudden and rapid rise in building material prices has had an immediate cooling effect on contractors. Contractors who signed fixed-price contracts before prices skyrocketed are now demanding that their clients renegotiate those contracts.

Many contractors are threatening to halt work or to walk away unless their clients increase their budgets to cover the increases in raw materials, increases that will bankrupt contractors if they are forced to absorb the increases themselves.

The third contributor to the current crisis in capital construction is a shortage of contractors who are willing to sign contracts under the present conditions.

Despite the high cost of building materials, the marketplace is red hot right now.

Contractors have no shortage of projects they can bid on. Many of them are now only bidding on the projects that suit them.

They are rejecting requests for bids if the scope of work does not interest them.

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STATE AND PRIVATE INVESTMENTS DRIVE TOKAJ WINE REGION DEVELOPMENTS Located roughly 200-250 km northeast of Budapest, the Tokaj wine region produces Hungary’s most internationally famous sweet wines via a centuries-old method whereby ripe grapes remain on the vine and are attacked by “noble rot” to produce shriveled, intensely sweet aszú berries.

By Kester Eddy It’s a time-consuming, risky process during which a lot can go wrong; the entire harvest can be lost through inclement weather, for example. Even more went wrong post World War 2, when vineyards were nationalized or forced into cooperatives, emphasizing volume rather than quality.

SMALL IS BEAUTIFUL IN ERDOBENYE

By Eva Glass and Kester Eddy Rémusz Dávid, MD and owner of the Budaházy-Fekete Kúria winery, is desperate for his latest vintage to mature “You want wine and wine tourism development? I think you’ve come to the perfect place!” says Dávid, sitting at his kitchen table at the winerycum-restaurant in the settlement of Erdőbánye, about 60 km northwest of Miskolc.

Presumably, this is how he works, and it explains how he’s developed his ecologically certified winery in the past decade.

“My parents bought this mansion in 1996, just as an investment, as a getaway home from where they live, in Debrecen. I started the winery because we have all the ingredients here. Actually, I borrowed money from my parents and that was my starting capital,” he recalls. He also bought five hectares of vineyard and meanwhile drifted out of university.

His first vintage was in 2013, and his small vineyard produces between 10,000-15,000 a year.

“We do dry and sweet [wines]. If the year is good, we do everything from dry furmint to aszú,” he says.

He sells most of his output onsite, either over the counter or via his restaurant-pizza business. He prefers that to life in a car trying to find customers.

“The EU, through the government, has pumped money in here, millions of euros, and also a lot of private investment. This village is a perfect example: 10 years ago there were two old, family wineries, now there are 13.”

“What I know now comes from learning in the fields. Also, for the first five years, I hired a consultant, and that’s where I gathered all my knowledge, piece by piece.”

“Before COVID, I sold maybe 50% of my wine wholesale to Budapest and foreign countries, mostly Poland.

Then COVID struck, and I lost all the markets from Budapest and everything, and this hasn’t started up again. […] I think the market is still recovering in Budapest.”

Dávid speaks enthusiastically if a little ungrammatically (in English).

Since then, he’s added another 10 hectares, but that’s for replanting.

He employs two people in the vineyard, an office assistant and

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HANKOOK CONTINUES TO EXPAND TIRE-MAKING SITE UNDER NEW MANAGING DIRECTOR South Korean tire maker Hankook began construction of its first (and only) tire-making factory in Europe in the village of Rácalmás, near Dunaujvaros, 75 km south of Budapest, in 2006, with production starting a year later. The plant has since more than tripled in size, representing an investment of EUR 880 million, with a production capacity of 55,000 tires per day.

By Eva Glass and Kester Eddy The following is an edited interview with Hyung Yun Kim, who has been managing director of the plant since the beginning of 2021.

BBJ: The Hungarian press has featured stories recently that you are planning new warehouse capacity. Could you give us some details? What is the present storage, and what will it mean when the project is finished?

Hyung Yun Kim: Currently, almost 90% of finished tires are stored in the factory’s on-site warehouse, with the remainder, and a significant proportion of incoming raw materials, stored in off-site warehouses. Our new

warehouse project, worth more than EUR 32 mln, will consist of two units, one with a floor area of around 13,000 square meters for the storage of raw materials like chemicals, textile and steel wires, carbon black, silica, and block rubber.

The other building, with a floor area of 20,000 square meters, will increase the finished tire storage capacity to 1.5 million tires.

These improvements will enable us to meet our current storage needs in-house without the need for outsourced services.

BBJ: Expanding warehouse space is usually an indication of increased production; is that the case here? Or is it needing

more flexibility for storage, perhaps because of fluctuations in demand? As we know, automakers are suffering worldwide from chip shortages.

HYK: This investment improves our services while simplifying workflows. The solution for storing more raw materials for production on-site will be a big step forward for the plant and will make the work of our employees easier.

Deliveries will become more practical without outsourcing the storage of finished tires.

Besides taking a significant transport burden off the company’s shoulders, it will also reduce the negative environmental impact of road transport operations. This

INVESTING IN HUNGARY

FORGET THE PANDEMIC, PILOT SHORTAGE IS THE REAL AVIATION PROBLEM The coronavirus pandemic might have caused a temporary halt in aviation, but it has not changed the industry’s fundamentals: the pilot shortage is and will remain the one problem that might slow growth down in the longer term. Wizz Air has been training its own supply of pilots for years which may well, in the longer run, give the airline an advantage over peers that rely on external sources.

By Zsófia Végh Summer gave air travel a push and airlines began hiring again.

Initially, they are rehiring pilots who were laid-off due to the pandemic; however, it won’t long before they will have to start selecting from fresh graduates, experts warn. So, becoming a pilot these days is a good

investment, but it takes time to reap the benefits as training is expensive and still out of reach for many. To avoid compromising on growth, Wizz Air decided years ago to train its own supply of pilots.

“The signs of the pilot shortage could be traced as early as 10 years ago,” Captain Attila Tóvári, head of Wizz Air

ATO (Approved Training Organization, responsible for initial pilot training) told the Budapest Business Journal.

“So, we started to think about ways for how to attract people who would be loyal in the long term and plan a career with our airline.” The airline launched its first dedicated cadet program in 2015. Later, to make

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MAKING INNOVATION AND INCUBATION INTERNATIONAL Startup Campus is an international innovation center and incubator that develops and implements innovation programs for corporations and governmental partners and supports innovative projects with educational, incubation, investment, sales and foreign market entry services from early-phase ventures to SMEs with great growth potential.

By Zsófia Végh The agency stands out because, unlike its peers in other countries that focus on developing programs for their country, the campus also has offices in London and Berlin. Specific programs to enter, say, the German market, do exist, but none that would provide access to markets in both Central and Western Europe.

“Most countries promote their own markets.

We see a value proposition in offering a gateway not only to Hungary but also the British and the German markets,” Zsolt Kovács, the CEO of Startup Campus, tells the Budapest Business Journal.

“Europe, in general, is an important reference for any company wishing to move forward to the U.S. or other markets,” he adds.

The original idea behind opening offices abroad was to help Hungarian startups enter foreign markets.

Zsolt Kovács, CEO of Startup Campus

“We have been working on creating such a network since 2018 in close cooperation with the Ministry of Foreign Affairs and Trade and the incubators of many countries,”

“Most countries promote their own markets. We see a value proposition in offering a gateway not only to Hungary but also to the British and German markets. Europe, in general, is an important reference for any company wishing to move forward to the U.S. or other markets.”

Kovács says. Initially, there were other potential hubs on their list, including New York and Shenzen.

“Later, we realized that it is more sustainable and effective to focus on fewer, the ones we are in closer contact with,” he adds.

The office in Berlin works as a typical boutique agency. In the past three years, the hub, which focuses primarily on the health industry and medicine, has managed to gain recognition as a supplier of promising health tech and related enterprises. The team of experts, mentors and investors has so far organized more than 200 business meetings and helped

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Corvin Innovation Campus by Futureal.

HUNGARY OFFERS QUALITY PROPERTY INVESTMENT ASSETS Hungary has a reliable pipeline of assetgrade products to meet investor demand, particularly in the office and industrial sectors.

Investors see the country as an attractive investment destination with a significant yield premium on Western Europe and Poland and the Czech Republic. However, the availability of suitable products at the right price continues to be an obstacle.

By Gary J. Morrell Volumes for 2021 should be relatively similar to 2020 at around EUR 1.1 billion in Hungary, according to the consultancy Avison Young.

“After a quiet period in mid-2021, there is good momentum and a significant number of deals in the pipeline. I am confident on the activity level in the coming months,” comments Benjamin Perez-Ellischewitz, principal at Avison Young Hungary.

Colliers estimates the investment volume for Hungary in 2021 at EUR 1.2 bln from a total investment volume for the Central European-6 of EUR 10 bln-11 bln.

Hungary recorded EUR 6.8 bln in the period from 2017 to the third quarter of 2021, placing the country in third spot in the CEE region after Poland and the Czech Republic, according

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CENTRAL EUROPEAN REAL ESTATE REMAINS ATTRACTIVE FOR INVESTORS Analysts believe there is a robust potential pipeline and stock of asset-grade products in Central and Eastern Europe to meet investor demand, particularly in the office and industrial sectors and, increasingly, in large-scale residential projects.

By Gary J. Morrell With a substantial amount of global and CEE capital looking for a home, investors will undoubtedly make acquisitions if the right asset or platform is available, especially given the background of a limited supply of products.

Longer-term concerns remain regarding the fundamentals in the hotel and, particularly, the retail sector, although retail parks have become a new investment destination of choice.

A low supply of assets is a common problem across the region, limiting investment activity, with high demand from domestic, regional and global institutional and private investors.

The region offers significant yield differentials, with the lowest in Poland

Cordia residential project in Poland.

and the Czech Republic, followed by Hungary, Slovakia and Romania. This allows investors to make acquisitions in the various countries based on their desired risk profile and yield, provided they can source products, of course.

The investment markets look relatively optimistic for 2022 as international money returns and intra-CEE investors are now rivaling European peers.

THE 2021 STORY The total investment volume for Central Europe (the Czech Republic, Hungary, Poland, Romania and Slovakia) for 2021 is estimated at EUR 6.7 billion for the first three quarters of the year, representing a 13% decrease on the same period in 2020, according to Cushman & Wakefield.

Although down in investment volume, Poland is expected to represent

around 60% of the total Central European investment for the year.

Concerning overall activity in the coronavirus/lockdown/travel restriction period of 2020, investment volumes at EUR 10.4 bln were 20% down on the previous year for CEE (the five CE countries plus Bulgaria), according to Colliers.

Investment activity peaked in 2018 with a total of EUR 14.4 bln recorded according to figures presented at the “CEE Investment Briefings 2021/2022” event by realasset Media and Colliers.

Although Central Europe has successfully attracted investors, and international developers are delivering assets of the expected standard and sustainability levels, investment activity for CEE is still low by European standards.