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REAL ESTATE OVERVIEW HUNGARY A macroeconomic and fiscal summary

INFORM

OBSERVE

INVEST

JANUARY – APRIL 2018


MACROECONOMIC SITUATION According to economic forecasts published in May by the Szazadvég Research Institute, an institution near to the government, but also to the Hungarian Statistical Institute (KSH), Hungarian GDP has increased by 4.4% based on gross data and 4.7% based on seasonally adjusted and reconciled data in the first quarter 2018 compared to the corresponding period of the previous year. The components of the tertiary sector were the main factors that contributed to the growth of the market, in particular trade and tourism. Compared to the previous quarter (Q4 2017), the volume of gross domestic product grew by 1.2%. In the period January-March 2018, the average number of unemployed was 178 thousand, 29 thousand less than a year before, and the unemployment rate decreased by 0.7 percentage points to a minimum of 3.9% .

Fundamental economic indicators (sources: Magyar Nemzeti Bank, FMI) GDP first quarter 2018 +1,2%

Annual GDP grow rate 2018 2017

MNB refinancing rate: +0,9%

2016 0,0%

Expected 2019 inflation rate: +3,3% Hungarian financial rating. Investment grade: medium-high quality of financial instruments. Fitch : BBB- (positive outlook) March 2018 S&P: BBB-/A-3 (positive outlook) August 2017 Moody’s: Baa3 (stable outlook) March 2017

1,0%

2,0%

3,0%

4,0%

5,0%

Italy

2016 0,9%

2017 1,4%

2018 1,2%

Italy

Hungary

2,0%

3,9%

3,9%

Hungary

In 2018 it is likely that overall growth will remain significant, but potentially less dynamic than in 2017, according to the analysis of specialists. The average expectation of market participants suggests an increase for the entire year 2018 close to 3.8%. This compares with the goal of the Hungarian government of 4.3% for the whole year. S & P said that Hungary's GDP growth rate will approach 3.5% for 2018, supported by the "consumer boom", fiscal stimulus and wage increases, better absorption of EU funding, subsidies for the home, more private sector budgets and the ongoing recovery in the euro area. 1


GENERAL SITUATION OF REAL ESTATE MARKET The latest KSH data show that 3,394 new homes were built in the first quarter of 2018, 65% more than the same period of the previous year. Based on the total building permits issued and the simple declarations, the number of potentially constructible buildings grew by 3.4% to 9.850 compared to the same period of the previous year, while the new building permits (declarations) are a total of 2,965 (+ 3.4%) linked to residential buildings. The number of permits issued for nonresidential buildings decreased year-onyear by 16% to 978 units. The engine that has activated the market for new residential homes and continues to support it is certainly the success of the family financing program, "CSOK", which was also mentioned in previous editions of the Real Estate Overview Hungary. The most significant change in the real estate market is the 13.7% increase in the number of transactions, which means that around 13,000 trades were concluded in February alone. The total number of transactions in the first two months of 2018 is the highest since the financial crisis 10 years ago.

According to the Duna House estimate, a record number of sales were made in May 2018 nationwide. Almost 14 thousand transactions resulted in one of the highest turnovers in the decade. This spring, the real estate market has exceeded the level of 13,000 monthly transactions. The "Buda" side of the Hungarian capital has produced an increase of about 8% of the sales of residential properties, while the sales of properties on the "Pest" side have increased "only" by 4% in the category between 100-120 square meters, which shows an average increase in the surface of the required housing. According to the aggregate house price index of the MNB, house prices increased further in the first quarter of 2018, rising by 4.7% nationally in nominal terms (annual growth of 13.8%) and 3, 4% in Budapest (annual growth of 12.1%). In light of the fundamentals of the real estate market, according to our forecasts, the rise in house prices could continue throughout 2018, 11.1% in real terms and 13.9% in nominal terms.

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GENERAL SITUATION OF OFFICE MARKET The latest data published by Cushman & Wakefield show that office rental prices have grown by 0.8% in Europe, the highest four-monthly growth rate in the last six years. Budapest opened the road with a growth of 9.1% during the quarter. Total demand in the first four months amounted to 91,100 sqm, representing a strong start to the year with a 36% growth. 64% of the new office space planned for 2018 has already been rented in advance, however speculative growth has improved compared to last year. 3.45 million square meters Two new developments were delivered during the first quarter 2018, one in the CBD (Central Business District) and another in the special area of the Corridor VĂĄci Ăşt. From an industrial point of view, there has been a 4.8% increase in rental prices for warehouses, with a profitability down by 25 points and a capital increase of 4.6%. Generally, a company must plan, at least 1-2 years in advance, to set up a new building, often engaging in contract before the actual availability of the office. The typical rent for an office building in the area (CBD) was EUR 18 per square meter in the second half of 2017. For buildings used as non-CBD offices, the average rent was EUR 14.5 per square meter and EUR 12.5 per square meter for good quality non-central office buildings.

Fonte dati: Cushman & Wakefield

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GENERAL SITUATION OF RETAIL MARKET The retail market is well reflecting the nation's macroeconomic developments. The abundant employment, combined with increasingly high wage levels, have made the purchasing power of the Hungarians consistently increase, which is therefore keeping the commercial real estate sector thriving. In addition, the abundant flow of tourism in recent years also provides solidity to the activities located in the center of the capital. A survey presented by the National Bank of Hungary (MNB) and the Royal Institution of Chartered Surveyors (RICS) found that over two years to the end of 2017, the cost of commercial real estate rents in Budapest increased by more than the 15%. The offer has remained stable, and is expected to remain almost unchanged until the last months of 2019, when the "Etele City Center" shopping center in the 11th district should be completed, with the addition of over 50,000 to the market. mq of space destined to the commercial activities.

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GENERAL SITUATION OF INDUSTRIAL MARKET Regarding the industrial market, in the first quarter of 2018, two new buildings were delivered with the dimension of 18.020 square meters: a warehouse of 11.020 square meters in the East Gate Business Park and a hall of 7,000 square meters in Budapest Dock Szabadkikötő building C. The total modern industrial stock in Budapest and its surroundings stood at 2,068,900 square meters at the end of the first quarter of 2018. The two largest quarterly transactions were lease renewals. HOPI at Goodman Gyál Logistics Center renewed the contract on 21,700 square meters, while in Prologis Park Budapest Sziget Schneider Electric has signed the renewal of a lease for 19,960 square meters. The largest new lease was the 7,000 sq m agreement and was signed at Budapest Dock Szabadkikötő. Total demand amounted to 103,790 square meters in Q1 2018, marking a 45% increase compared to the figure recorded in the same period last year. Renewal of lease contracts represented 72.7% of the quarterly volume, while the share of new leases was 21.8%. No pre-lease agreement was signed in the first quarter of 2018. The twenty-four leasing transactions were recorded in the first quarter, of which two agreements were signed for over 10,000 square meters. The average size of the transaction was 4,320 square meters during the four-month period. Source (Budapest Research Forum BRF) .

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GENERAL SITUATION OF FARMLAND MARKET Farmland prices are rapidly rising. According to data provided by KSH, the value of arable land has increased by 22% over the past year. Particularly speaking, there is an increase of +25% on the prices of arable land; a +8% for grazing meadows; +17.5% on vineyards; +8% for orchards and +10.5% for forest areas. However, we would like to remind you that the Hungarian legislation makes it difficult to foreign citizens to purchase lands, as we will see in more detail below. The highest value is reached by vineyards which stands at 1.83 million forints per hectare, equivalent to almost 5900 â‚Ź; follow in order: orchards, arable fields, forests and pastures. 232,000 hectares of land were sold in the last year, mainly due to the government's auctioning of many public land. In 42% of the cases landowners decide to rent them to third parties, probably also due to the increase in rent rates between +7% and +15% depending on the type of land.

Land type

â‚Ź/hectare

Annual growth

Arable land

4180

25%

Vineyard

5885

17,5%

Orchard

4630

8%

Grassland

1670

8%

Forestry

1960

10%

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SITUATION OF STUDENTS’ HOUSING MARKET The student rental market continues to be one of the most attractive investment options in Budapest. The Hungarian capital is increasingly establishing itself as a university city and in recent years is attracting a large number of students, not only from Hungary and the rest of Europe but from all over the world. Every year there is a substantial increase in subscribers from abroad, and the trend should continue at least until 2023, when it is estimated that there could be 40,000 foreign students in Hungary. What should be noted is that the average rents for students are higher than those required for families and workers, due to the short residence time. Moreover, most foreign students come from countries richer than Hungary, and for them a room price higher than the national average is usually not a serious problem. The properties easies to lend are those well connected with public transport or located in the central districts of the city, with numerous rooms and low management costs. Anyway, in our analysis we need to take care of the fact that foreign students are often a resource subject to a not surprising three/six months, maximum one year turnover. This fact could be a double edge sword. In fact, if it is true that usually short period rent could generate higher yields, it is also true that the landlord has to put higher effort in looking for tenants and in supervising them during the lease.

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INVESTIMENTS FOR EUROPEAN CITIZENS

During last years local Government has played a crucial role to facilitate foreign citizens investments. Especially for this reason, the Hungarian real estate market is basically open to all foreign citizens. Although there are no particular restrictions, it is important to underline some limits to the buying and selling process of some property categories. Acquisition of properties for residential, commercial or industrial destination is completely free of restrictions and can be done by both natural and legal persons, either Hungarian or foreigners. The acquisition of farmlands was free until the beginning of 1990’, and most of the foreigners having a farmland now in Hungary bought them during those years. However, acquisition of agricultural lands is subject to preemption and authorizations which makes the operation particularly complex. The qualification of professional farmer is necessary and the residency can be maximum 20km far from the land owned. Legal persons are not allowed to buy a farmland.

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INVESTMENTS FOR FOREIGN CITIZENS There is an increasing appreciation of Hungarian real estate market from foreign investors. According to Ingatlan.com, around 6-7% of real estate acquisitions in Hungary is settled by foreigners, but this share increases to 15-20% if we consider Budapest data only and in the most actractive districts this arrives to 27%. The flow of these transactions has been facilitated by the availability of credit among Hungarian institutions. although citizenship is important to request a loan, what matters the most is if they are Hungary’s residents or not. Other factor which needs to be taken in consideration for credit availability is the cash flow origin: there are higher chances to get credit if the wage is perceived in Hungary. In the case of entirely speculative investment, there are less chances to take a loan but it is still possible to obtain a bank loan with an amount around 60-70% of property’s value.

ITL Group has more than twenty years experience in the consulting sector and since 2013 it has found the best solutions in the real estate field assisting its customers thanks to a series of relationships with local companies and institutions that allow to make agreements quickly and without misunderstandings. Approximately 150,000 real estate purchase contracts are signed each year in Hungary. Authorization for non-EU citizens is required. Within this group, purchases from Chinese buyers increased by 20% in 2016; however, the increase was not from a significant basis, as the increase was from 1,213 to 1,573 homes purchased. The second place is the Russians, with properties mainly purchased in Hévíz, known as a spa resort, and in parts of central Budapest, particularly in districts 6 and 7. Foreigners buy mainly apartments for about 200,000 euros in the center of Pest and villas worth 300,000-400,000 euros in Buda

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PROPERTY ACQUISITION PROCEDURE Property acquisition procedure is very simple and consists only few steps. Which are:

1. After the acceptance of the acquisition proposal, reserve the property with a deposit of around 1-2% of the total value.

2. Purchase agreement stipulation through a lawyer who has the role to check in the real estate registry.

3. At the moment of the signature, a 10% of property value deposit is requested, with immediate registration of a tax in the real estate registry.

4. After the agreement upon the final payment, there is the full property registration in the real estate registry.

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GENERAL FISCAL ASPECTS Registration tax It is equal to 4% of the value of the contracted property and is paid after the Hungarian finance inspector's communication. The value falls to 2% if the property is purchased for business purposes and resold within 36 months at the discretion of the tax payer.

Property tax Depending on the municipalities, it can reach up to 1,772 HUF for square meter, to be paid each year in two installments expiring on March 15 and September 15, in most cases, if the property produces income. However, there are exceptions that depend on the free decision of each district.

VAT tax (27% or 5%) Depending on the time of sale and the destination of the property, there are limitations in the recovery of VAT. In the event that you are entitled to recovery, the liquidation by the state is about 60 days (subject to careful checking of the documentation proving the right). The destination and the resale of the building are of particular importance for the purposes of the obligation to pay and / or refund the VAT in the event that the property bought for business purposes (not linked to the sale of real estate) should be resold. Value added tax has been reduced to 5% for the sale of residential buildings under construction or who have received habitability in 2016. It is expected that the legislation will remain in force until 31 December 2019.

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GENERAL FISCAL ASPECTS Income taxes are the followings:

Natural persons

In the case of lease yields the tax rate is 16%. However, if total gain perceived is more than 1,000,000 HUF (around 3,400â‚Ź), there is another health tax of 14% on gain perceived with a maximum of 450,000 HUF. This additional tax will be deleted from January 2018.

If the property is resold within 5 years since the acquisition, the owner must pay 15% of the difference beetween the purchase and sale price. This tax base decreases 20% every year for five years until becoming zero.

Legal persons

Business income tax has been 9% from the beginning of 2017. Therefore, there is still use of fiscal stimulus to incentive entrance and presence of new businesses to sustain economy. This new rate is one of the lowest in Europe.

Furthermore, there is another municipal tax based on economic activities with a rate of 2%.

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Dynamics of restructuring costs In recent years, the prices of residential properties located in Budapest have soared. The salaries of Hungarian workers also recorded significant growth, but not proportionally. If in the last year the price of houses has increased by an average of +18% compared to last year, citizens earn an average wage "only" about +13% higher than the previous year; checking the period of the last two years (2015-2017), we notice that the phenomenon is even more pronounced: salaries at +33% and house prices at +66%, exactly the double. As a result, the chance of the Hungarians to buy a property has been greatly reduced, despite the government's program to help families buy a new home. The payments require an average of 60-120 days and the payment behavior has been rather negative in the last two years, with a difficulty in collecting the same. The demand situation in the Hungarian construction sector remains good, with an increase in value added of 3.4% in 2017 and a 110% annual increase in orders received by the end of 2017. Profit margins for construction companies are low, mainly due to strong competition in the market and low price agreements. Margins increased in 2017, expected to decline in 2018 due to rising raw material prices and labor costs. The dependence on bank financing is high in the Hungarian construction industry. Many small businesses are under-capitalized and need external financing, but only a small part of them are really reliable. Although banks have increased their willingness to provide loans since 2016, lending conditions remain rigid. While interest rates on real estate loans have declined, banks still prefer office projects to residential ones. Non-payment notifications have increased in 2017, and further increases are expected in 2018, as many small businesses show financial weaknesses and struggle with low contract prices and increases in labor costs. The number of insolvencies is very high compared to other Hungarian industries and many small companies active in the construction sector have a very short duration. Smaller players often do not have the ability to make investments to increase the efficiency needed to survive in the market. Building insolvencies are expected to increase by 5% -10% in 2018. In the residential construction segment, property price inflation and the increase in operating expenses represent a risk, while uncertainty remains regarding a potential increase in VAT on housing (from 5% to 27% from 2019). Source: Atradius.it

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ACTIVE REAL ESTATE IN HUNGARY? = OPPORTUNITIES FOR ITALIAN BUILDING COMPANIES? Half of the current residential construction projects are late and in many cases the work has not even begun: we are talking about 2500 development plans that have stopped at the construction concession. The cause of these slowdowns is mainly due to the lack of qualified contractors to carry out all the ambitious construction objectives set in the previous months. The Magyar nation is therefore looking for workers and businesses that can sustain the impetuous economic growth of the last few years. Many foreign companies involved in the construction sector, including some Italian, for this reason are deciding to enter this market. Timing must be the key to taking advantage of such a favorable situation before other international actors are attracted. However, this phenomenon is contributing to the increase in the price of housing. In March 2018, compared to the same month of the previous year: According to the Central Statistics Institute (KSH), the volume of production increased in both the main construction groups, 0.2% in the construction of buildings and 4.1% in civil engineering works. Outside the construction divisions, production increased by 1.5% in building construction, 4.6% in civil engineering, but specialized construction activities decreased by 0.1%. The volume of new contracts decreased by 7.1% year on year, in this the volume of new contracts concluded increased by 32.2% in the construction of buildings and decreased by 22.7% in the construction of civil engineering works. In March, high-value contracts were concluded - in addition to those for offices - for commercial, industrial and educational buildings. In January-March 2018, compared to the same period of the previous year: Construction production increased by 19.0%. Construction producer prices: In the construction divisions in the first quarter, prices increased by 11% in building construction, by 5.9% in civil engineering and by 8.5% by weight, with specialized construction activities compared to at the same time of the previous year. Construction prices increased by 3.3% in the quarter.

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FERMENT REAL ESTATE IN HUNGARY? = INVESTING IN TOURISM: NEW RULES In Budapest, new rules have been introduced for those wishing to start renting short-term tourist apartments, often known as "AirBnB".

DISTRICT REGULATIONS VII •

You can open a new shortterm rental business only if the relevant condominium regulation allows it. Buildings already destined for this function are not bound and may continue to operate. In case of sale of the apartment, the new owner must in any case respect the condominium regulations. The possibility of renting an apartment to tourists should always be explicitly specified in the regulation. If the sale of a property in a condominium takes place, the new owners must comply with the conditions in force at that time, the possible benefits of the previous owner having lapsed.

The new regulations have recently been introduced in District VII, but it is likely that other districts will adapt over time. In the 5th district, other more restrictive regulations had already been passed in the past. In the market there are already companies that manage several apartments for short-term tourist use. Some of these offer the sale of holdings, making it easier to introduce new investors into this business.

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Indicators of the Tourist Market of Budapest and Hungary 1/2 According to the Central Statistical Institute (KSH), March 2018, compared to the same month of the previous year: The number of international tourist arrivals grew by 11% and that of international tourist nights increased by 10% to more than 1 million visitors. Turnover measured on tourist nights has increased significantly in all types of accommodation. In hotels that account for almost nine tenths of tourism nights, the growth rate was 7.5%. The number of foreign tourism nights has increased in all tourist regions, especially in central Transdanubia and northern Hungary. Budapest is the most popular destination, collecting as many as five fifths of tourists arriving in Hungary; to follow the area of Lake Balaton, which lately is being appreciated especially abroad. The total gross turnover of the hospitality establishments increased by 19% to 34 billion HUF; within this, revenues from accommodation taxes increased by 19% (to HUF 19 billion), catering revenues by 29% (to HUF 8 billion) and other revenues by 8.5% ( to 7 billion HUF) at current prices. The amount of lodging taxes by foreign visitors increased by 17% and that for domestic visitors by 23% compared to March of the previous year. .

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Indicators of the Tourist Market of Budapest and Hungary 2/2 The latest statistics on inflows and profitability in this sector are very positive. In September, the number of tourists arrivals exceeding the previous year was 4.6%, coming from abroad and 3.6% from Hungary. In addition to this, the average length of stay has also increased: in 2017 the number of nights spent on holiday increased by 6.8% and the average price per night rose by 10%. In the capital all data record even higher values, such as higher hotel prices by + 14%. Foreign visitors in Hungary, 2017 In 2017, the number of visits to Hungary by foreign nationals was 55 million, of which 39 million on the same day and 16 million visits at night. In 2017, foreign visitors spent HUF 1,832 billion in Hungary, of which tourist expenses amounted to HUF 1,386 billion. One quarter of the expenses, 467 billion florins, came from the same visitor accounting days for almost three quarters (71%) of total visitor traffic. Night visitors spent a total of 1.365 billion florins during the year. Average daily per capita expenditure grew by 5.9% to 14,700 HUF for visitors in Hungary and 7.1% to 16,000 HUF for night visitors

Lake Balaton 14


FINAL REMARKS From what we have indicato above, we can reconstruct a general picture of the Real Estate market this quarter. The market is still growing and the demand is high in all sectors: large industrial buildings, offices, new homes and commercial premises in the center. Banks are also reacting positively to this trend by financing investors and families much more than in the past and extending loan repayment terms. Furthermore, building development continues to be strong throughout Hungary, saturating the necessary supply of labor, and is expected to continue to be shipped for years, as evidenced by the large number of building permits issued recently. On the other hand, such a rapid and impetuous development is presenting challenges that the country faces with some difficulty: The construction of new buildings has completely absorbed the building labor, are following delays in deliveries and increase in labor costs of the companies employed. The demand for real estate in all sectors grows much faster than the new availability of supply, causing an increase in property prices. The great success of the "AirBnB" solutions, combined with the ever-increasing influx of tourists to Budapest, necessitated intervention by the institutions, which could make investor work in this business more complex. The market for ÂŤAirBnBÂť is restricted for this type of apartment because it buys only those who want to make a medium and long-term investment. In the residential construction market there could be downside repercussions. Banks are more likely to finance large residential projects (which are part of the "CSOK" program) or to finance high-quality residential housing projects or to finance companies that have shown value creation, for example , the restoration of the purchased apartment. The tax and financial benefits of the government, such as the "CSOK" program and the reduction of VAT on new properties, as they are short-term, are further fermenting the market as each player tries to take advantage of it in time. In conclusion: we can consider that the Hungarian real estate scene is undoubtedly interesting for new foreign investors, but the rapid changes in the market and the many events that affect it make the strategic choices for entrepreneurs difficult. In these cases it may be useful to be directed by professionals who work in the Hungarian market for some time to seize the opportunities and manage the pitfalls that characterize it.

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ITL Group Kft. is the leader advisor company for Italian firms in Hungary, specialised in Hungarian market since 1995. The studio have taken care of more than 500 Italian capital companies to enter the Hungarian market in more than 20 years of activities. We have helped companies on both production internationalization and productive real estate investment.

Federico Michele Brilli Head of Department at ITL Real Estate (+36 1) 269 5679 f.brilli@itlgroup.hu Szilvia Schenk Senior Consultant at ITL Real Estate (+36 1) 269 5679 s.schenk@itlgroup.hu

www.itlgroup.hu 1056 Budapest - Vรกci utca 81

Real Estate Overview Hungary - 2018 Spring  

The most significant change in the real estate market is the 13.7% increase in the number of transactions, which means that around 13,000 tr...

Real Estate Overview Hungary - 2018 Spring  

The most significant change in the real estate market is the 13.7% increase in the number of transactions, which means that around 13,000 tr...

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