Investing in Hungary 2017

INVESTING P ri c e: H U F 9 9 0

BENEFITS • CASE STUDIES • EU FUNDS • COMMERCIAL PROPERTY INVESTMENT • HOW TO MAKE IT BETTER

2017

IN HUNGARY B publication

BONARKA 4 BUSINESS BUILDING H

SILESIA TOWERS  KATOWICE, POLAND

 KRAKOW, POLAND

MILLENNIUM GARDENS

LAKESIDE PARK II.

 BUDAPEST, HUNGARY

 BRATISLAVA, SLOVAKIA

THE REAL ESTATE WWW.TRIGRANIT.COM

INVESTING IN HUNGARY

CONTENTS INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 How to Distinguish a Market Panic From a Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Quality Education Among Hungary’s Key Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Rebuilding, Rebranding and Becoming the Best (Workplace) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 The Benefits of Investing in Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Smart Meter Maker Chooses Budapest for Smarter Talent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 EU funds boost local economy, attract FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 How Could Hungary Attract More Investments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 For Real Estate Investment Funds, Most Hungarian Roads Lead to Budapest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Prinzhorn Holding Leads Paper Chase in Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Data protection and competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Improving Investor Sentiment Towards Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Two special prizes for TriGranit at the prestigious FIABCI Awards in Budapest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Attracting investors with new arbitration rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 15 years in the Hungarian real estate market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Standing out From the Crowd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

INVESTING IN HUNGARY 2017

| A BUDAPEST BUSINESS JOURNAL PUBLICATION

BBJ Editor-in-chief: Robin Marshall • Editorial: Sonja Bence, Kester Eddy, Levente Hörömpöli-Tóth, Christian Keszthelyi, Robin Marshall, Gary J. Morrell, Ágnes Vinkovits • Sales: Csilla Lengyel, Bernadette Oláh, Erika Törsök • Layout: Zsolt Pataki • Publisher: Business Publishing Services Kft. • Media representation: AMS Services Kft. • Address: Madách Trade Center, 1075 Budapest, Madách Imre út 13-14., Building A, 8th floor • Telephone: +36 (1) 398-0344 • Fax: +36 (1) 398-0345 • ISSN 2560-1490

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INTRODUCTION

Adding Jobs, Creating Value, Drawing Investment When Hungary was first able to draw breath again following the shock of the deep economic crisis that hit the Western world in 2008, it tried to lay down some plans to prevent it being hit so dramatically a second time around.

A country with an economy as open as Hungary’s was always going to be vulnerable. There is little hope that it will ever get to the stage where it is unbuffeted by the winds of change elsewhere. But Germany, for example, although also hit by that same storm, was better able to weather it. For Germany, the effects were felt less deeply, and for a shorter period of time.

At one of their first meetings, then U.K. Prime Minister Tony Blair is supposed to have asked German Chancellor Angela Merkel where the secret of Germany’s robust economy lay. “My dear Mr. Blair,” she is said to have replied, “we still make things.”

The current Hungarian government of Viktor Orbán may not agree with the German Chancellor about very much politically,

these days, but it could understand the logic of making things.

The Hungarian economy was service-heavy, jobs that were easy to move. It needed, as the Hungarians say, to stand on “more than one foot”. Hence a drive to attract manufacturing investments, under the slogan “Made in Hungary”.

There is a crucial caveat to Chancellor Merkel’s advice to Prime Minister Blair; you need to make things the world wants. There is still precious little use for a chocolate fireguard, and even less demand. So, Hungary targeted the world’s automakers (Suzuki and Opel were already long established here), along with their Tier One suppliers, and did it well enough that Mercedes built a brand-new plant here, and then a second.

But the problem with manufacturing jobs is that they will increasingly disappear, replaced by digitalization and automation. Having secured economic recovery, Hungary’s government turned its attention to attracting the type of investments that bring value-added jobs; jobs that are much

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less likely to be replaced by machines. “Made in Hungary” became “Invented in Hungary”.

Funnily enough, while it speaks to the sort of cutting edge R&D work that automakers excel at (Audi will soon start producing electric engines at its plant in Győr, 121 km west of Budapest), it also brings the service sector firmly back into view. Not that it ever went away; the government just seemed to speak about it less. Not now.

In November, at the third Hungarian Shared Services Gala, Minister of Foreign Affairs and Trade Péter Szijjártó declared: “The shared services sector will be the most important sector in the transition of Hungary’s economy to a new dimension.” He added: “The shared services center sector is a young sector of the Hungarian economy, but has developed ‘by leaps and bounds’ in recent years and plays a determining role among foreign investments in Hungary”.

Szijjártó noted out that the sector is in second place when it comes to the number of newly created jobs, with almost 2,500 positions created in 2016 through 12 projects. There are (at the time of writing) 110 shared service centers operating in Hungary, employing some 46,000 people, primarily young and with university degrees. “The SSC sector is a sector that represents high added value, and a host of projects that

involve a high level of technological and intellectual value have arrived in the country in recent years within this field,” Szijjártó acknowledged. “If the SSC projects planned for this year are all realized it will mean the creation of over 1,600 new jobs requiring a high level of training.”

Hungary has much to offer, not least location, a well-educated work force and high-level engineers and programmers. It also faces challenges, including an increasingly tight labor market, the pressures of which will inevitably lead to rising wages and a decreasing cost benefit over more mature Western markets. It is also incredibly capital-centric, with very little development of secondary cities in terms of international investment levels. The picture above is not just pretty, it is apt. For many, investing in this country means investing in Budapest.

This first volume of what we intend to be an annual publication looks at the opportunities and pitfalls that lie ahead. We detail successful case studies, and talk to international analysts about the market trends, and the levels of government support. We hope you will find it a useful guide to “Investing in Hungar y”.

Robin Marshall Editor-in-Chief Budapest Business Journal

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PRESENTED CONTENT

HOW TO DISTINGUISH A MARKET PANIC FROM A CRISIS Three leaders at a Hungarian major asset management company say they are committed to adding value to the managed portfolio, resulting in record return levels and strong performance. Gergely Biró, CEO, Miklós Borbély and Balázs Czifra, investment department heads, talk about market trends, company performances and future expectations.

We have experienced an outstanding 2017 so far in Hungary, especially looking at the investment climate.

How does Diófa Asset Management see the year?

Gergely Biró: We may close 2017 with record results at Diófa Asset Management; our committed department leaders on the real estate and equity markets built an investment strategy based on strong fundamentals. Although it is easier to achieve positive returns on an upward market, I say this is the perfect time to trust a professional asset manager, because mitigating risk factors are crucial for a successful long-term investment strategy.

Balázs Czifra: 2017 will surely be referred to later on, as the property market characteristics have changed notably. The market in general is at its peak, with strong tenant interest in all sectors, balanced supply, hence positive net absorption, and record low vacancy levels. Investment market activity is strong; both international and local players are fueling demand for quality products, resulting in a likely transaction volume of around EUR 1.8 billion by year end.

Miklós Borbély: Another excellent year for equity markets, both developed and emerging markets are flying high; despite the many forecasts which were expecting a 20% market drop after Trump’s election victory, instead the reality is another 20% bull rally. Many questions have been raised about what 2018 will bring and we can’t wait to see that.

Speaking of the future, what are your expectations for 2018?

Miklós Borbély: As portfolio managers, there are three questions we are asked daily by our investors, journalists and the general public: “When will the stock market collapse?”; “When will bond yields head north again to ‘normal levels’?”; and, most importantly, “Is it too late to buy bitcoins?”. The

honest reaction is we do not know the answer to any of these questions, nor does anyone else. However, we have some assumptions which might guide you forward: the stock markets in general are not extremely overvalued – some sectors, some countries and some markets certainly offer good values for investing long-term. Trust your investment fund managers. Of course, a 10% price correction might happen any week; that is the nature of stock markets. For us, it will be another opportunity to buy selectively picked shares of good companies.

Balázs Czifra: The real estate investment market faces challenges imposed by primarily employment and construction market conditions, typically resulting in increasing cost levels and development risk. Timing and development plans often need revision to incorporate the above. In line with a strong investment focus, several individual properties in the Diófa managed funds are also going through a repositioning phase due to above mentioned changed market trends and the natural life-cycle of the properties. The current managed portfolio of Diófa Asset Management is more than EUR 600 million worth of asset value, which is to be increased via highly efficient asset management and value-add activities.

Gergely Biró: The smell of change is definitely in the air, and the market is sensing it; when tension rises on the markets, it is essential that an investment professional distinguishes a small panic from a crisis. Our aim is to deliver the best solutions to our clients and, as Miklós mentioned earlier, it will be another opportunity for us to buy selectively picked shares of good companies or properties. Regarding company performance, we are positively looking at 2018, and aim to set a new milestone at Diófa Asset Management. We have the benefit of having real estate investment and equity market

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professionals under one roof, working together to maximize the performance of our portfolios.

Yields still drive significant attention to Hungary.

Are you expecting some kind of “normalization” in terms of yields?

Balázs Czifra: Market sentiment is very positive with a firm shortterm outlook. Justification of the optimistic forecasts is expected next year, but it is hard to see beyond 2018. Our strategy is hence based on subtle analysis and forecasting in order to clearly match the longterm expectations of our institutional investor clients parallel to the shorter-term considerations of individual retail clients.

Miklós Borbély: As for yields on the equity market, I suggest you do not expect the Reagan era to return too soon with 16% treasury yields; that is very unlikely to happen. Instead a very slow and limited normalization will probably take place in the United States, and that normalization is expected to be really slow in the Eurozone – probably not too much will happen while President of the European Central Bank Mario Draghi is in office, and that is until the end of 2019.

Let’s not forget about bitcoins, a popular topic on the market.

Miklós Borbély: Many years ago, when bitcoins were around five dollars each, some of my ex-colleagues had spent half of their salary to buy those “geek toys”. At USD 50 a coin, I

Balázs Czifra, Gergely Biró, Miklós Borbély.

“The smell of change is definitely in the air, and the market is sensing it; when tension rises on the markets, it is essential that an investment professional distinguishes a small panic from a crisis. Our aim is to deliver the best solutions to our clients.” thought they were completely nuts. When it reached 500, I was still skeptical and to be honest a bit disappointed that I had never believed in the story. Today, the bitcoin is trading at USD 8,250 per coin. I am still happy to comment on the markets for you as a chief investment manager, while one of my excolleagues has just invited me to his newly-bought house at Lake Geneva. End of story: you have to believe in what you are investing in – bitcoin is certainly one of those “buy and forget” stories! Just don’t forget to pass on the USB stick with your bitcoin wallet to your grandchildren!

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QUALITY EDUCATION AMONG HUNGARY’S KEY ASSETS The Site Selectors Guild (SSG), the only association for the world’s foremost professional site selection consultants, has just held its first Advisory Forum outside of North America in Budapest at the invitation of the Hungarian Investment Promotion Agency (HIPA). But what did they find?

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DIDI CALDWELL Principal of Global Location Strategies, Site Selection Guild

MINI C.V. Now in her second decade of consulting in the site selection, incentive negotiations and capital financing arenas, Caldwell has led consulting projects in North and South America, Canada, Europe and Asia in industries including energy, automotive, pulp and paper, chemicals, mining, textiles, logistics, consumer products and biotech.

She has assisted numerous companies with site selection, incentive negotiations and capital finance with a total investment value of more than USD 15 billion.

Education: B.A., Architecture; Clemson University; M.B.A., Moore School of Business; University of South Carolina.

(Source: http://siteselectorsguild.com/)

The presence of American firms in the Hungarian economy is already significant, with more than 1,700 enterprises employing well over 100,000 people. But there are lot more business opportunities to tap into, especially in the wake of the shift from the “Made in Hungary” philosophy to “Invented in Hungary”, which looks to incentivize the creation of high added value jobs.

SSG board member and principal of Global Location Strategies Didi Caldwell gave the Budapest Business Journal a detailed overview about where Hungary is located on the map of global investments. While she expects that the country should pop up on the radar of professional site selectors ever more often, there is still homework to do.

What brought you here to Hungary? After all, the guild had never held a meeting abroad before.

The guild itself was established not so long ago; in fact, before 2010 nothing like it had existed. I would describe the relationship between our members as so-called “coompetition”, meaning that whilst we are competitors, we are also bound to cooperate. It’s a highly fragmented market, and our biggest competition is corporations making decisions without engaging a strategic site advisor. We are really working together to raise awareness of the industry.

HIPA seems to be leaving no stone unturned to attract FDI. Its efforts are clearly bearing fruit, as shown by the H1 2017 data according to which a record-breaking 47 investments were brokered by HIPA in the first six months of this year.

Did you sense this solid professionalism during your visit?

HIPA did a truly amazing job when it came to our trip, and they are a very professional organization in general. You can have the best product in the world, but if you don’t have a way to communicate it to the world, you can’t sell it and you can’t get the deal done, you’re not going to be successful. It seems HIPA is very much connected at the right places in the government, they’ve got excellent support. If I’m interested in investing somewhere, I need to meet somebody on the other side that helps me gather all the relevant information and gives enough data and access so that I can do my analysis. Having a strong economic development organization like HIPA is absolutely critical for success.

Part of HIPA’s duty is to shed light on cities in the countryside so that investors also take account of them. There is potential out there for sure: Debrecen, for instance, was awarded the title “Emerging City of the Year 2016” at the CEE Shared Services and Outsourcing Awards earlier this year.

“It seems HIPA is very much connected at the right places in the government, they’ve got excellent support. If I’m interested in investing somewhere, I need to meet somebody on the other side that helps me gather all the relevant information and gives enough data and access so that I can do my analysis. Having a strong economic development organization like HIPA is absolutely critical for success.”

Our visit was an opportunity for us to learn about the business environment, but also to find out what it would be like to live and work in Hungary. We had several presentations of different Hungarian cities and the Hungarian mobility center, where they have set up a track to test autonomous vehicles. We saw some of that tech in action. It gave us a really great overview.

What was your overall impression of the country? Is there much to be cheerful about 27 years after the fall of the Iron Curtain and 13 years after EU accession?

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One of the things that struck me was how much it has changed since 1994, when I was here last. It also amazed me how quickly Eastern Europe has adopted capitalism and come up to speed in terms of the quality of restaurants and shops. Apart from a couple of buildings here and there, everything looks like it’s in Western Europe, with one exception, namely it’s generally less expensive.

Now it seems that not introducing the euro helped these countries keep costs down. Another very positive phenomenon I observed was how advanced skills are, and the quality of education was also spectacular. It is definitely among the key assets the country can bank on. This is of enormous potential as it even draws many multinationals to Hungary to be educated.

Speaking of skills, graduates around here may be getting a great education but press headlines keep heralding the labor shortage. Apart from skilled labor, what other competitive edge can Hungary pride herself on?

Competition for talent in the world is extremely fierce. The workforce situation, particularly in Budapest, is extremely

tight, but we’re experiencing it just about every where we go. Demand is huge, especially for specialized skills, be they manufacturing-related, maintenance or repair, but the same applies to many other professions as well. To find one software engineer, for instance, might not be a problem, but when you need two hundred people with that background, you’re going to have a really hard time. From the logistic standpoint, Hungary has an excellent location with easy access to Western Europe, the Mediterranean and the Commonwealth of Independent States. The current competitive corporate tax rate of 9% can help attract investments. But in the case of tax cuts, you always wonder how permanent they are going to be, and whether the political climate will remain supportive of that.

So, if you were to give a recommendation about selecting a particular site, who is Hungary competing with on the global and regional scale, and what would tip the balance towards here?

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“HIPA did a truly amazing job when it came to our trip, and they are a very professional organization in general. You can have the best product in the world, but if you don’t have a way to communicate it to the world, you can’t sell it and you can’t get the deal done, you’re not going to be successful.”

We have seen some cost escalation in Poland or in Czech Republic.

The availability of labor in Hungary is better still, even though it’s getting very tight. Places like Pécs, Miskolc, Szeged and Debrecen have a lower wage structure than Budapest. This puts secondary cities in Hungary on par with other such cities in the region like Brno, Lodz, Cluj, whereas their global competitors would be India, China and the Philippines. As far as Budapest is concerned, it directly competes with Prague, Warsaw, Vienna, even with London and Amsterdam, but I would put Bucharest and Tallinn in the same pot. The Hungarian capital still has a significant cost-advantage. The most important factor is the concentration of talent. Take Tallinn, Estonia where IT talent is very much concentrated. What we always tell clients is that they have to make a choice. Do they want high availability but less of the skills they need, or the other way around? It’s a trade-off. If you go to a place where everybody’s employed, you would have to pay more at the end of the day.

Based on this competitor list you have just drawn up, what measures do you think the country should take to improve its position on the global investment map?

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“We actually prepared a set of recommendations for HIPA on potential areas of improvement.

First of all, you need to get the word out, particularly about your competitive corporate tax and labor costs. More labor should be also attracted from the region. You know, in the U.S. some states like Georgia or Louisiana have developed very advanced training programs that they customized, and they use it as an incentive for companies who are considering investing in their location. Establishing one of these customized training programs is a big commitment, but it would surely help address the issue of workforce skills.”

We actually prepared a set of recommendations for HIPA on potential areas of improvement. First of all, you need to get the word out, particularly about your competitive corporate tax and labor costs. More labor should also be attracted from the region. You know, in the U.S. some states like Georgia or Louisiana have developed very advanced training programs that they customized, and they use as an incentive for companies who are considering investing in their location.

Establishing one of these customized training programs is a big commitment, but it would surely help address the issue of workforce skills.

What about infrastructure-related matters?

You need to consider developing more “shovel-ready” construction sites because you can have the best location in the world, but if you don’t have a site or a building an investor can go to or into, you can’t be successful. These sites and buildings need to be made in accordance with your industry profiles and the specific types of projects you’re going after.

Students stroll through the campus at ELTE. Hungarian education is listed as a key factor for the country by the Site Selectors Guild.

We got a little bit of an oversight of the sites in Hungary, but I didn’t get a really good sense of to what extent those sites are “shovel-ready”. They also might need to set up more shell buildings where companies can come in and move out really quickly.

Total trade volume between the United States and Hungary is at USD 5.5 million, so economic relations are thriving. More FDI is to come as a result of a recent economic cooperation agreement with the State of Indiana. Could more American states follow suit with such agreements?

I have just attended the South-East U.S.-Japan annual conference that has been going for 40 years. Having that platform and developing those relationships over time can be extremely powerful. Indiana is an interesting example, but if I think of Central and Eastern Europe, I think of it like the South-East of the United States. In the late 1980s and the early ’90s, just exactly when CEE opened up, manufacturing started

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migrating to the South-East because of lower costs. Mercedes came to Alabama and BMW came to South Carolina, and they changed people’s perception of the region. It’s a very similar story with Central and Eastern Europe, because it started as a low-cost location, but it has evolved over time, and now they are competing with regions that have been traditionally considered more advanced. There could be more opportunity to exchange ideas and form relationships, especially in the automotive sector.

Lastly, do you believe the current economic and political climate in Europe paints a rosy picture for the future?

What we can see is that population is declining, labor markets are tight and there is pressure on wages. The political environment in Europe is a bit unstable right now.

If we’re going to start pulling back into a bit more nativism and restricting trade, it would be detrimental to foreign trade not just in Hungar y, but lots of other places and the economy overall as well.

NUMBERS DON’T LIE SSG was invited by HIPA with the purpose to give yet another boost to FDI, which has been flowing into the country in record volumes. As HIPA statistics suggests, in H1 2017 the number of successfully completed projects grew by 24% compared to the same period last year, while the investment volume of EUR 1.37 billion registered a 3% hike. The 8,502 jobs to be created as a result of the projects of the first six months of 2017 is another sign of solid investor confidence towards Hungary. The most projects came from Germany, 15 out of 47, followed by the USA (four).

Germany ranks first in terms of investment value as well. In the latter regard, Japan is the foreign country that is bringing in most capital after Germany, totaling EUR 60 million, according to H1 2017 data.

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PRESENTED CONTENT

REBUILDING, REBRANDING AND BECOMING THE BEST (WORKPLACE) Nóra Szabó has been the human resources director at Granit Polus Group since September 2016. Responsible for HR strategy, organizational development, staffing, employee development, and performance management, among other things, here she talks about what it takes to build an award-winning workplace.

What does it take to earn the Best Workplace Award?

In one word: commitment.

AON Hewitt’s methodology also lies in commitment. To run a program that fulfills this, the CEO needs also to be committed. I firmly believe that unless the upper management pays attention to the metrics of the Aon Hewitt Survey, including human-centered leadership, communication with colleagues, and a result- and performanceoriented working environment, this program cannot be completed.

What we have done to make our colleagues committed to this program is a different story.

Terms such as commitment are overly used in human resources and it sometimes feels that they have ceased to be meaningful. What is behind the above achievement?

It is important to mention where we started from. Last summer, TPG bought a considerable part of the owners’ assets. The period leading to the transaction was an exhausting, stressful one-anda-half years for our colleagues, and resulted in both physical and mental fatigue. Into this environment arrived our new CEO, a person who, fortunately, was sensitive to this and was the driver behind the change. The organization may have worked as a business, there were projects and a vision, but it lacked a team that could support them at a mental level.

What did you do exactly?

The CEO gave us the mandate to create a plan that deals with the staff from all angles – from the professional and personal development viewpoint. We were also asked to come up with

ideas that help bring the team closer. For the former we modified fringe benefits: we eliminated the cafeteria system and added its gross equivalent to our colleagues’ salary. This pays out in the short-term as well, but in the long run too – we tried to think with employers’ heads and found this would be appreciated. We improved the language learning opportunities.

We were aware that the atmosphere could only improve with the creation of a real community. Yet, rather than suggesting what to do, we wanted to support what our colleagues come up with. There are a lot of creative people among the staff, many do sports and, despite the sector, half of our staff are women, who are interested in DIY. So, we announced we would support any grass-root ideas they initiate.

As a result, they created a sports team, a social responsibility team, and we discussed what they wanted to achieve. I had hardly anything to do with this; it was they who suggested the groups and elaborated the plans. Among the programs were a bike tour around Lake Velence and a canoe-trip; they took care of everything from stops to restaurants to having lunch. This was unprecedented in the previous organization.

What was the overall aim of the program; employee retention?

In part, it was. But the root of this problem is always something else: according to studies, workforce migration is the result of conflicts with the direct supervisor. They are the main culprit for that – supervisors may expect too much, and don’t appreciate employees or overlook the need of work-life balance, etc. In our case, the reason was not supervisors but the shock the transaction created. Our colleagues did not really intend to leave the firm – they wanted more to escape the bad atmosphere. That is why we had to deal with the general atmosphere, which, to a great extent, is defined by the direct supervisors. They paid extra attention to their staff – it was interesting to see the changes that took place as a result.

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Were they given training on how to deal with their colleagues?

It wasn’t necessary. If the organization has transparent communication and the CEO is committed to provide extra dedication to the colleagues, all leaders will “line up” for that. Due to the size of the firm, information circulates easily, and we received similar feedback on people. Leaders were aware what was at stake. I obviously had a few discussions with leaders on certain people – if they need more attention or leeway – but nothing extraordinary.

There has been growing emphasis on employee’s needs lately. Is this a new phenomenon – the result of the current labor market conditions?

It takes a certain type of leader: nothing works unless they recognize the problem and are willing to change. The change of leadership at the firm last year brought along a CEO who is just like that. The labor market affects us – we unconsciously sense that, due to tight demand, we may have a more difficult time finding qualified workforce. Fluctuation has never really been a problem, though the young may be more likely to leave.

Companies are said to be forced to somewhat adjust to the new generation of workers. Is it more difficult to retain the young?

More than 50% of young people taken on have found their place here and have been with us for more than a year. We should aim for that: if a young employee, aged 25-28, remains at a place for a year, they won’t leave. If the youngsters are going to leave a firm, they do so within the first two to three months. They go and try new firms; why not? The market now allows them to do so.

These are the people whose parents worked a lot but they do not want to live the same life. They are more reckless – but a larger number of them love their work and feel accomplished at our firm.

in the future. Their competence is something the CEO counts on.

So overall, more responsibility equals more trust.

Some large companies, such as Google, are not only recognized by their product; they are also famous for their working environment. Were HR aspects taken into consideration when rebuilding the brand?

The brand itself is more linked to the buildings the company has developed and these are the ones the colleagues are proud of.

Employer branding was part of the 2017 vision – we gave equal emphasis to improving corporate ecosystem to the rest of the projects we dealt with.

I am also proud to say to a future employee that we have been on a canoe trip, that we prepare Christmas wreaths or chocolate at Szamos, or we have a corporate party, GöbölFeszt, which employees look forward to. A company should grasp what, beyond strictly professional tasks, makes colleagues feel they are given more, which eventually makes them committed. It was when it was looking for the drivers behind sustainable business performance at companies that Aon Hewitt found employees’ commitment is a key element.

Being proud of the brand, being appreciated and respected by fellow colleagues are ways that help commitment become stronger, and those employees who feel that will eventually become committed. This, however, is never without a purpose.

The aim is that the business runs well and, to achieve that, we have to work together.

In the new company, new posts have been created and some people were given more responsibility. What effect does this have on the organization?

The head of international relations and the head of finances are two new posts – both taken by women.

Although it is the CEO who makes the final decision, he would ask them what they think of a certain move.

Many CEOs believe they have to tell exactly what to do rather than asking for information. Asking questions is often regarded by CEOs as a weakness, even though a colleague may have more in-depth knowledge in a certain field. Colleagues feel more appreciated this way and their professional opinion may prove right Photo: AtteKovacs Photography.

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THE BENEFITS OF INVESTING IN HUNGARY For investors looking to start a business in Hungary, the government offers a range of incentives from direct subsidies to tax breaks to education grants. Many of these can be combined and, depending on the type of business and the region in which the company is about to establish, incentives can reach up to 50% of the investment.

INVESTING IN HUNGARY

MINI C.V. Barbara Koncz (38) joined PwC Hungary’s tax advisory team in 2008. Her major area of expertise is value-added tax advisory, but she also has extensive experience in research and developmentrelated benefits and in R&D qualification procedures. Before joining PwC, she worked at the Ministry for Economy and Transport and at ITDH Zrt., where she was responsible for investment promotion and state subsidies. Her main clients at PwC are important players in the automotive, information technology and pharmaceutical industries whom she assists with both taxation and state aid-related issues.

Koncz graduated from Eötvös Loránd University’s Faculty of Law, and she earned an undergraduate degree in economics from Széchenyi István University. She is a certified tax advisor, and was appointed to her director’s role on October 1, 2017.

By Sonja Bencze Direct subsidies or VIP cash incentives are granted on a caseby-case basis. The amount is decided on by the state and is the result of negotiations between large international firms and the government. The intensity of support of these non-refundable cash incentives ranges between 0-50% depending on how developed the region where the investment takes place is. In Budapest, for example, it is 0%, while in certain parts of southern Hungary, it can reach as much as 50%.

The VIP cash incentive is paid during the realization of the investment and in general can be accessed quarterly, in line with the completion of the project. “Because of the individual nature of the decision-making process, the average amount granted to companies is impossible to define,” Barbara Koncz, director of tax and legal services at PwC told the Budapest Business Journal .

The maximum subsidy available depends on the regional intensity ratio set by the European Union, but receiving a 50% incentive is rare, she added. To be eligible, depending on the region, a company has to invest at least EUR 10 million-20 million and create between 50 and 100 new jobs. Under certain conditions technology intensive investments may avoid this latter condition. One major advantage of the system is that, with some modifications, it has been in place since 2003, and is, therefore, regarded as an incentive system an investor can rely on.

‘INVENTED IN HUNGARY’ As part of a drive to move from a policy of “Made in Hungary” to one of “Invented in Hungary”, and to draw more value-added jobs to the country, the system was expanded in January to include R&D activities as well, with different conditions. Any firm who wishes to undertake research at an existing facility in Hungary is eligible to a similar cash subsidy. However, this is related to activity, the amount is linked to the investment value and is not bounded by any regional obligations from the

EU. The amount is aimed at covering costs such as wages, rental, amortization, etc.

Another, quite popular direct incentive are education grants. The amount is dependent on the type of training and the number of employees involved, but is capped at EUR 1 mln. “Although

As part of a drive to move from a policy of “Made in Hungary” to one of “Invented in Hungary”, and to draw more value-added jobs to the country, the system was expanded in January to include R&D activities as well, with different conditions. it involves a lot of red tape, education grants are quite popular among companies, and those who have dealt with it before are likely to apply for it again,” Koncz said. This is especially true in Budapest, because in the capital this is the only type of direct non-refundable incentive available for new investments, for example at a shared service center, which can reach up to 50% of the training costs.

It is fairly rare for a company to receive the maximum available incentive as a direct subsidy; they often receive the difference in the form of tax credit. The development tax incentive allows firms to cut their corporate tax rate, depending on the region in which they are established.

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Since companies can be eligible for both non-refundable cash and development tax incentives, they often make up the difference of the cash with the tax credit up to the regional aid ceiling, Koncz said. The tax incentive can be used for up to 80% of the tax base up to 13 years after the investment is completed.

Since companies can be eligible for both non-refundable cash and development tax incentives, they often make up the difference of the cash with the tax credit up to the regional aid ceiling, Koncz said. The tax incentive can be used for up to 80% of the tax base up to 13 years after the investment is completed.

LONG-TERM IMPACT Corporate tax constitutes a fraction of the overall tax revenues, of which VAT and employment-related taxes contribute the most to the budget. Whenever a subsidy is granted, the state authorities look at its long-term impact on the economy. The amount of incentive remains lower than the future benefits and revenues the state receives, Koncz explains.

Depending on the sector, the ‘profit’ may vary; if several countries compete for an investor, the state may make allowances and be willing to agree on a lower rate of return, she added.

If competition is not that tight, the benefits to the state can be significantly higher than the grants provided. For five years after the investment is completed, companies need to achieve a certain level of revenues and employ a certain number of employees, otherwise they are required to pay the incentives fully or partially back, Koncz said. Even when this monitoring period is over, the rate of expansion and reinvestment is high – companies settled here, especially those that are less mobile, are unlikely to move to another location, the expert said.

One problem in the way of further expansion is labor shortage.

Manufacturing companies usually recruit labor within a 50km radius of the factory, and many now have difficulty finding workforce within or outside, Koncz said. The dual education system may help companies to recruit in the future, but it takes at least four or five years until the next generation of engineers will

graduate through this system. Simply put, there are not enough people in the labor market – able or willing to work – that could ease the shortage.

In the long run, automation will solve some of the problem by replacing people whose jobs requires few skills. It will also support the evolution of investments where Hungary is becoming a location for value-added investments, Koncz said. The incentive scheme is also expected to support this process. Grants in the future will likely be tied to job maintenance rather than job creation and higher salary rates, she added.

THE HUNGARIAN MATCHMAKER Although the government makes individual decisions on investment grants and incentives on a case-by-case basis, the system is overseen by the Hungarian Investment Promotion Agency (HIPA), which falls under the control of the Ministry of Foreign Affairs and Trade.

According to its website (hipa.hu), HIPA promises potential investors “one-stop-shop management consultancy services to address your business needs”. These services aim to deliver “tailormade incentive offers and information packages on the business environment, labor market, tax regulations, etc., location search and evaluation and site visits, meetings with HR and real estate agencies, law firms and other consultants based on your needs, reference visits at companies that are already established in Hungary, and assistance with your incentive application.”

But the help does not end there. “After you have chosen Hungary, we are open to your feedback and mediate between government and business based on your inputs. We support your further expansion and plans,” the website adds.

Attracting new companies to invest in Hungary may generate large numbers of headlines, but existing companies who reinvest are of at least equal significance to the economy.

INVESTING IN HUNGARY

SMART METER MAKER CHOOSES BUDAPEST FOR SMARTER TALENT “Success breeds success” – it’s an old adage, but often a true one: it certainly applies to the story of Itron in Hungary.

Greg Richards, vice-president for global development operations at Itron (far left) and Bruce Douglas, senior vice-president at Itron and general manager for software and services (left).

By Kester Eddy Itron? “We’re the largest IoT [Internet of Things] company you’ve never heard of,” Greg Richards, vice-president for global development operations at Itron, tells the Budapest Business Journal in late October, adding, perhaps not to cause offence: “When I joined, my wife also said; who?”

In more prosaic language, Itron Inc., headquartered in Washington State, USA, is a technology and service company specializing in measuring and managing energy and water usage – specifically using “smart-metering” systems.

With annual sales in the USD 2 billion range and a market capitalization of some USD 2.5 bln, it is certainly big – and

“I must say the government interaction has been phenomenal, wanting to help, linking us to universities. We saw a lot more collaboration, early on, with the government here, than we did with the others.”

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TER N E C OF NCE E L EL C X E

Richards was in Budapest to make it just a bit bigger, part of a team celebrating the inauguration of its latest operation.

Planned to employ a total of 100, Itron’s so-called Center of Excellence will provide software, services and research & development functions worldwide, though primarily for Itron’s European customers and its own operations.

R&D BREAKTHROUGH Emphasizing the project as part of a breakthrough in propelling Hungary from a production base to an R&D location, Péter Szijjártó, Hungary’s Minister for Foreign Affairs and Trade, put the total investment of the new center at HUF 2 bln, of which the

state provided HUF 412 million as part of an incentive package.

Why, though, choose Budapest, and swish District V, to locate this unit?

“We not only looked at Budapest, we did a whole tour of different cities in central Europe… We were really impressed by the talent pool, and the cost-effectiveness was higher here. So, per dollar, we could get more here than in [competing] cities,” says Bruce Douglas, senior vice-president at Itron and general manager for software and services.

Among those passed by on the way were Prague and Brno, in Czech Republic. Despite a fast-growing reputation

INVESTING IN HUNGARY

FINDING THE RIGHT TALENT IN BUDAPEST With unemployment levels a mere touch above 4% across Hungary, it’s one thing to create the company strategy and find the right office location, and quite another to staff it, especially with numerous competing companies scouring the landscape for anyone with half-decent IT skills.

But Gaurav Swarup, director of Itron’s European center of excellence in Budapest, says the U.S. company’s leading position in the IoT sector, especially its green-social role in terms of energy and water saving, is itself an attraction for job seekers.

“Many of the candidates find the work very inspiring.

We’ve managed to build a good team so far, with 30 people in two-to-three months. These are early days, of course, but I’m quite confident.”

That confidence seems well grounded; the head count had jumped to 47 by late November.

for affordable IT skills in the latter, Budapest won out on accessibility. “As a location, it’s easier for us to get here from Paris and Frankfurt direct [than Brno],” Douglas says. As for the expensive offices – for Douglas that is just par for the caliber employees needed.

UNIQUE SPACE “We were looking for a unique space, because the [people] that we’re looking to attract are really high-focused technology talent,” he says.

But two other factors played crucial roles in the decision to opt for Budapest. For one, the enthusiasm of government officials selling the country made a big impression on the team.

Swarup, originally from India, has been working in Paris and across the United Kingdom for 17 years, and says most jobs will be filled by “Hungarian talent”, but the need for multi-lingual people, such as Spanish and French speakers, for specialist jobs means he has also been hiring selected non-Hungarian recruits.

And so far, even finding these people has not been overly difficult.

“Some were already here, in the market. I think that the ecosystem that exists here probably enables that.

It [Budapest] has been attracting international people for some time now,” Swarup tells the BBJ.

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“I must say the government interaction has been phenomenal, wanting to help, linking us to universities,” says Douglas. “We saw a lot more collaboration, early on, with the government here, than we did with the others.”

Last, but clearly not least, has been the experience over the past decade with its manufacturing unit, GANZ Mérőgyár Kft. (GANZ Meter Factory Ltd.), located in Gödöllő, 25 km east of Budapest.

With annual sales of USD 50 mln, the bulk for export, Itron has watched the tricky transition from manufacturing traditional electricity meters to more complex, high-tech smart meters – both for residential and industrial users.

Clearly impressed with that success, Itron plans to expand production to include gas meters in the future.

“We not only looked at Budapest, we did a whole tour of different cities in central Europe… We were really impressed by the talent pool, and the cost-effectiveness was higher here. So, per dollar, we could get more here than in [competing] cities.”

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INVESTING IN HUNGARY

EU FUNDS BOOST LOCAL ECONOMY, ATTRACT FDI Hungary has unquestionably been a beneficiary of membership of the European Union in many ways. Beyond enabling its citizens to move freely in the EU28 — as well as to work and live there — the country has called down a spectacular amount of funding. This has not only boosted the local economy, but also helped attract other foreign direct investment (FDI), experts tell the Budapest Business Journal.

By Christian Keszthelyi The current 2014-2020 EU funding cycle is expected to be much stronger than the previous one was. Up to 2020, Hungary has development funds worth HUF 12 trillion at its disposal, Nándor Csepreghy, Parliamentary State Secretary of the Prime Minister’s Office told the Business Development Committee of Parliament in June.

Per capita, that breaks down to approximately HUF 712,000 forints for every Hungarian citizen by the end of the cycle, compared to HUF 650,000 in the 2007-13 program, he added. Csepreghy noted that the government aims to use 60% of the allocation for developing the economy in order to establish a development policy that serves the interests of the players in the local economy.

The state secretary, using what could hardly be termed as unexpected rhetoric, criticized the earlier socialist government for its low usage of grants in the initial period of the previous cycle.

Csepreghy pointed out that while in the previous period initially HUF 7.1 tln-worth of proposals were launched, after Fidesz came to power in 2010, the current government had boosted that to HUF 9.312 tln during the same cycle. In terms of actual awards, the socialists had disbursed HUF 2.943 tln, a figure the current government raised to HUF 5.689 tln during the same fiscal cycle.

Compared to other Visegrad Four countries, Hungary did outstandingly well in terms of grant usage. In the previous funding cycle, Poland used 72.2% of the total allocation placed at its disposal, Slovakia was only marginally better at 73.6%, while Czech Republic scored better still at 82%. Hungary used 104% of the available grants.

MANIFOLD BENEFIT “Being part of the EU obviously results in favorable effects on Hungarian growth via many channels, including enhanced trade-integration and higher FDI. However, the exact impact on the latter cannot be precisely estimated,” the European Commission’s Representation in Hungary said in answer to a Budapest Business Journal question.

Still, funds allocated to Hungary by the European Union are seen as contributing to the FDI of the country as well. “Hungary benefits from the EU membership in multiple levels,” Barbara Koncz, director at PwC Hungary’s Tax and Legal Services, tells the BBJ. “Foreign direct investments improve the general standards of technology as investors implement the same (or a similar) type of business operation as it operates in a foreign country.

Therefore, the EU also supports these projects by providing direct funds to subsidize regional convergence,” Koncz says, highlighting that the competitiveness of the country increased dramatically throughout the past ten years.

Additionally, in the 2014-20 funding cycle, Hungary has been doing well, once again. “In the implementation progress Hungary Continued on page 26. ► ► ►

TOTAL BUDGET BY FUND: HUNGARY, EUR

my hive A N EW OFFICE CONCE PT BY I M MOFI NAN Z Steel, glass, concrete and marble. The design of most modern office buildings – while elegant and sophisticated – can feel cold and impersonal.

Receptionists hide behind large desks and people don’t talk to each other.

TO DAY ’ S WO R K E N V I RO N M E NT N E E D S TO B E D I F F E R E NT. A study by futurologist Winston Brill shows that 98% of innovations happen through social interaction, outside of meetings. Distance is also an important factor in encouraging communication. If someone is over 30 meters away, you’re less likely to interact with them. In 2016, Immofinanz developed a new office concept tailored to the needs of young businesses and entrepreneurs, bringing the Silicon Valley approach to designing modern workspaces to Vienna, Warsaw, Cologne, Prague and Bucharest. myhive’s design revolves around four core elements: A D E S I G N I N S PI R E D BY H OTE L S myhive features hotel-like lobbies with a warm, stylish design, encouraging relaxed social interaction. Reception areas are open, inviting colleagues to exchange information in one central spot.

AT TE NTI V E S E RV I CE Every myhive building features a wide range of services, supporting today’s flexible work style. Whether you’re recruiting, negotiating, seeking new partners or more space, tenants get quick support, suiting their specific needs.

V E R SATI LE I N F R A STR U C TU R E From restaurants, to shops the building has it all. A concierge service takes care of laundry, shoe repairs, tailoring, mail and flower delivery to support your staff and make more time for the important tasks at hand. myhive has seamless Wifi, conference rooms, event spaces, parking spaces and fully equipped bathing facilities. All of this means you waste no time and can concentrate on what really counts.

A N AC TI V E CO M M U N IT Y Everyone who works here is a part of the community and can enjoy the benefits of the myhive network, even beyond regular office hours. myhive has its own community manager who identifies and supports potential cooperation opportunities. There are regular afterwork events and business breakfasts, making it easy to exchange ideas in a casual setting. The myhive app even allows members to communicate between myhive locations, allowing for an even bigger network.

“This concept fills a market gap in international business real estate. myhive is the office brand that meets the needs of modern companies and their workforce. It’s expanding to more and more locations around the world.”

BERNHARD KLEIN, Chief Marketing Executive of Immofinanz

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Continued from page 24. ► ► ► performs outstandingly, as 67,2% of the budget has been allocated to the selected projects (EUR 19.9 billion) and 7.2% has been already spent (EUR 2.1 bln),” she says, citing statistics made public by the European Commission.

Hungary will benefit from EUR 25 bln of European structural and investment funds (ESIF) over the 2014-20 period, the EC’s Hungarian representation says. In the previous cycle, total support from the European Regional Development Fund (ERDF) and the Cohesion Fund amounted to EUR 21 bln, the EC adds.

“For the sake of clarity, we note that this latter amount (i.e. EUR 21 bln) only includes ERDF and Cohesion funding, whereas the EUR 25 billion for the 2014-2020 period includes also financing from the ESF (European Social Fund), Youth Employment Guarantee Fund, EAFRD (Agricultural Fund) and EMFF (European Maritime and Fisheries Fund) in addition to ERDF and the Cohesion Fund,” the EC’s Representation in Hungary told the BBJ via email.

UNCERTAIN NEXT CYCLE Hungary, like all the EU states in the region, should certainly make the most of the funds available in this cycle, as nobody knows with any great certainty what the future will bring.

“Being part of the EU obviously results in favorable effects on Hungarian growth via many channels, including enhanced trade-integration and higher FDI. However, the exact impact on the latter cannot be precisely estimated.”

“After 2020, a new programming period will begin in 2021 with a new budget and new regulations. Various news comes out regarding the new framework, but actually it is not decided yet what is going to happen. It is not predictable how Brexit and advancing regional development will influence the budget,” Koncz notes.

IMPLEMENTATION BY MEMBER STATE FOR EU OVERVIEW, (TOTAL COST) % OF PLANNED

However, it seems unlikely the money tap will be turned off altogether. Koncz tells the BBJ that “as far as subsidies are concerned, we have to distinguish between EU — or partially EU — funded and government funded subsidies.” She adds that with the next cycle starting 2021, it is probable that high added value projects (R&D) will still be subsidized, so EU funds could still boost the Hungarian economy further in the future.

Koncz sees a probability of cash subsidies being replaced by other financing tools such as interest-free loans or venture capital funds that large enterprises would tap to fuel FDI. “The majority of large enterprises investing in Hungary are requesting VIP cash subsidies decided and funded by the Hungarian government,” Koncz says.

“The conditions applicable to these subsidies depend on the regional aid map reflecting the volume of the underdevelopment in each region. The conditions, and maximum thresholds are going to change, but there is limited risk that it will be 0% in Hungary everywhere.

Thus, large enterprises will still be attracted to invest in Hungary, but will probably have to count with stronger commitments and lower intensity rates,” she concludes.

INVESTING IN HUNGARY

HOW COULD HUNGARY ATTRACT MORE INVESTMENTS? With much of the recovering investment picture still fueled by state and particularly EU investments, it is worth exploring what Hungary could do in order to attract more international capital.

By Ágnes Vinkovits After a drop last year in international terms, Hungary is doing better with investments in 2017. According to the data of Hungarian Investment Promotion Agency (HIPA), there had been 78 closed deals by the end of November, which is already a 10% increase compared to the 71 successful negotiations last year. However, since the average project size became smaller and, as mentioned, last year’s base was not very high either, even the most optimistic predictions estimate that the level of investments will be around 20% of Hungary’s GDP in 2017.

According to K&H chief analyst Dávid Németh, even the best possible scenario is not a great result. “An investment ratio below 20% is considered weak, as it means that not even amortization is covered,” he points out. In addition, the state is still more active in this field than the corporate sector, Németh says.

NEED FOR LABOR The deepening labor shortage has various effects: as it limits an essential resource, on the one hand it is the main reason behind the drop in the average project volume, while on the other hand it boosts investments in high-tech machinery, as human workforce has to be substituted by robots more and more often.

HIPA’s data seem to support this fact: while there were 12 ICT investments and SSC expansions made in 2016, this year has already seen 18 such projects, six of them with a very strong R&D content.

“Investments in Hungary are more and more high added value,” Róbert Ésik, the president of HIPA says.

However, there is still room for improvement in the activity rate. At the moment 4.4 million people pay taxes in Hungary while there are about 200,000 unemployed people and a similar

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number of people in public work schemes, the sc-called fostered workers. Among other steps, the government wants to cut back the public work scheme to support the main aim of having 300,000 more taxpayers.

Investments might also be a tool to encourage Hungarians currently working abroad to return back home. According to Ésik, the newly established Budapest office of investment management giant BlackRock brought home at least 20 young Hungarians from the City in London, while heating and refrigerator system manufacturer Viessmann’s new SSC in the southern Hungarian city of Pécs offers an attractive alternative to those who could establish themselves in Germany.

ALL BORDERS ON HIGHWAY “We are competitors and a community of interest at one time,” Ésik says about Hungary and the CEE region. While countries obviously compete for investments, cooperation is essential. “The bigger cake the region shares, the bigger slices the different countries can get.”

The trade between Germany and the V4 countries is already 55% bigger than the trade between Germany and France. Also, recalling the recent visit of the Chinese Prime Minister to Budapest at the China-CEE Countries forum, Ésik says that “if we want to become relevant for China, we have to think in regional strategies.”

Undoubtedly, Hungary does its best to get on well with China.

For example, the long-awaited renovation and development of the railway between Belgrade and Budapest got a boost in 2015 when prime ministers Li Keqiang and Viktor Orbán agreed that

work on the 152 kilometer-long Hungarian part of the line will be financed from Chinese loans. The investment is estimated to be about HUF 750 billion. Given the high technological demands of the project, is very likely that much of it will be constructed by Chinese companies.

Minister for National Economy Mihály Varga expects the project to feed Hungary’s budget by making the country China’s regional center for customs duty. However, experts warn that the speed and costs of railway transport still cannot compete with maritime transport, so the investment is not expected to make a return on investment quicker than 130 years, even if calculated optimistically.

Of course, there are plans for other infrastructural developments, too. “We must admit that Hungary still has some regions where, in the case of German deliveries, just-in-time or just-in-sequence shipments could not be guaranteed,” Ésik admits, saying that several “dark spots” are still not connected by 2+2 dual carriageways or at least clearways. However, the government promises that all of Hungary’s borders will be accessible via highways by the end of 2018.

Also, companies’ decision-making processes, which are usually complex and long, create room for Hungary for strategic infrastructural development. When it comes to long-term investments, it might take more than one or two years for a company to choose where to place its capital. As such, HIPA often recommends regions which are not sufficiently developed at the moment but could be ready by the time the investment materializes.

INVESTING IN HUNGARY

LAWS OF ATTRACTION Still, when it comes to attracting international money for big and long-term investments, there is one further aspect no less important than the state of infrastructure or the availability of workforce, and this is long term predictability.

“Even financial heads and tax managers, who are otherwise first and foremost interested in reducing the effective tax rate, unanimously say that the reliability of the tax system and the predictability of the tax policy are more important than the tax rate itself,” Zoltán Lambert, managing partner at tax advisory company W TS Klient tells the Budapest Business Journal.

Such opinions make the advantages of the 9% corporate tax rate relative, too, Lambert notes. Moreover, even the best tax rate in the region (indeed, in the EU) would not be enough if past experiences are about permanent changes, as such things might put off large long-term investments, he says, adding that due to the numerous tax changes in the past years, “Hungary is in a disadvantage that cannot be considered insignificant.” In the early 2000s, two-year tax laws were passed, a routine that investors would warmly welcome nowadays, too.

There is good news, here, however; “The Ministry for National Economy (NGM) is ready to make its tax system more effective,” Lambert says. Based on client feedback, WTS Klient has presented its suggestions to NGM since 2013 and several of them were well-received, he adds.

V4 INVESTMENT PROMOTION AGENCY RESULTS, HI 2017 In the first half of 2017, HIPA managed 47 projects that were completed with positive decisions, accounting for a total FDI amount of EUR 1 373.74 million and 8 502 new jobs. As of 3 August 2017, 41 of PAIiIZ’s investment projects ended with positive decisions, bringing a total FDI amount of EUR 644.2 million for the Polish economy. In the first half of 2017, the Slovak agency (SARIO) managed 17 projects that were completed with positive decisions, totalling an FDI amount of EUR 278 million.

Number of positive projects

FDI (EUR million)

Number of jobs

HIPA

47

1 373.74

8 502

PaIiIZ (Poland)

41

644.2

10 700

n.d.

n.d.

n.d.

17

278

4 650

Agency

CzechInvest (Czech Republic) SARIO (Slovakia)

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PRESENTED CONTENT

FOR REAL ESTATE INVESTMENT FUNDS, MOST HUNGARIAN ROADS LEAD TO BUDAPEST Hungary looks set to better last year’s total investment in the property market, according to a leading analyst. The figures are inching closer to the record amount set in 2007, although that was a truly remarkable year. than in previous years. Year-to-date we have seen EUR 600 million, which is 40% of the current activity.”

BENCE VÉCSEY, Director and Head of Investment in Hungary for Colliers International

“We think total activity by yearend will be EUR 1.8 billion, and we have been pretty accurate with our forecasts,” says Bence Vécsey, Director and Head of Investment Services in Hungary for Colliers International. “Year-to-date, we have recorded EUR 1.6 bln. Given that we have three more weeks to go, and considering the deals in the pipeline, 1.8 is easily achievable.”

Last year’s total was slightly below that, at EUR 1.7 bln, and it had been the best to date since that stand-out year of 2007, which closed at EUR 2 bln. “We have not seen anything this close until 2016 and now 2017. There is no doubt that 2007 was an extraordinary year – 2006 and 2005 saw around EUR 1 bln of activity on average – and this was the time when Hungary really became a core CEE market.”

The trend is, therefore, positive, and is likely to continue into next year, Vécsey believes. “If all goes well, 2018 should be another very solid year for Hungarian property investment; however, I would expect it to be slightly below 2017’s level. That is partly due to the lack of supply of large-size assets that could be acquired by international capital.”

Modern, class “A” offices in Budapest continue to be the focus of attention for international investment funds, although retail has been growing slowly year-by-year, Vécsey says. “For 2017, retail will have a significant market share, considerably higher

FLAVOR OF THE MONTH While hotels have very much been the “flavor of the month”, the analyst notes, buildings tend not to change hands often, are frequently owner-managed, and international money concentrates on four- and five-star properties in the capital. That said, he puts activity this year at EUR 200 mln, or 12% of the overall market. The usual range of activity hovers between 2.5% and 6%.

One thing that has not changed, and won’t anytime soon, is just how capital centric Hungary is, and how focused on Budapest international investment funds are.

“The Hungarian capital market has always been very much Budapest-focused,” Vécsey agrees.

“The countryside does not provide those buildings for investors to target, and the size of the cities does not justify development on a large scale, though the shared service center (SCC) sector has changed things slightly. There is one office currently being built in Debrecen, and in Szeged one property has recently been handed over. Some of the SSCs here already have additional units in secondary cities, and there is a requirement from them for the coming years to place more of their employees in the countryside. But such developments are ad hoc, and the scale of activity is so small that it is not going to change the investment market landscape.”

What activity there is in the countryside tends to be limited to retail, logistics (to a limited degree), and manufacturing, this latter often around a single-let, long-term lease property.

“The logistics market is almost purely – about 95% – Budapestbased, focused on the M0 motorway around the capital. Hungary has fantastic infrastructure, and it is very easy for manufacturers to move products quickly to their central logistics point outside Budapest for eventual forwarding to the end market.”

INVESTING IN HUNGARY

Nordic Light was a very successful transaction where Colliers represented Skanska as a sales advisor, says Vécsey.

BRIGHT LIGHTS OF BUDAPEST Another driver forcing investors to focus on Budapest is access to employees. “This has become extremely critical; there is huge demand for qualified, well-educated labor. It is becoming a prohibitive restriction for employee-intense businesses, and outside of Budapest is a real problem,” the Colliers director explains. “If you just look at the salary gap, the achievable salary is so much higher in the capital than in the countryside, and that is a real draw. It is no wonder that Budapest is where young graduates want to relocate to start their career.”

Vécsey does acknowledge that steps are being taken to try and keep graduates in their home cities by providing interesting career opportunities there. It is notable that both of the previously mentioned cities, Debrecen and Szeged, have good universities, and provide a pool of well-educated potential talents to employers. But the draw of the bright lights of Budapest reams strong.

There is one other important limiting factor when it comes to the Hungarian countryside: liquidity. Developers and investors alike need reassurance that there is a viable exit strategy; put crudely, that there is someone to buy the property from them if their plans change. In a chicken-and-egg scenario that is hard to break anytime soon, limited product means there is limited capital drawn to it.

But where does that money come from? There was a great deal of excitement in the market when South Africa real estate investment firm NEPI-Rockcastle bought the second biggest shopping mall

in Budapest, Aréna Plaza, for EUR 275 mln this fall. “The South African capital had been around for 18 months trying to step forward into the Hungarian market. The problem has always been to find opportunities of the scale that interests these investors,” says Vécsey.

That may be a key determining factor in the overall market activity next year. Investors now have trust in the Budapest markets, and there is liquidity to secure an exit if needed, backed up by stable Hungarian investment funds, but there is also more money chasing a finite number of suitable products. “The pool of potential investors is extremely wide: from the U.S., the U.K., new German entries, even in some cases regional players. Some Czech investors have been following transactions here very closely. 2018 is going to see a large number of new market investors.”

And if it has been a good year for Hungary’s investment markets, what about Colliers? “We are expecting 2017 to be one of our strongest years ever. We have a fantastically performing logistics and industrial team, the same for offices and for investments. But if someone is not making money in a year like this, there must be something wrong!”

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PRINZHORN HOLDING LEADS PAPER CHASE IN HUNGARY Present in Hungary for 27 years, Austria’s Prinzhorn group has invested some EUR 600 million in three operations and is credited with revitalizing the Hungarian paper industry.

INVESTING IN HUNGARY

Attila Bencs, CEO of Hamburger Hungária (far left) and Cord Prinzhorn CEO and CFO, Prinzhorn Group (left).

By Kester Eddy Anyone who meets Cord Prinzhorn sees paper in a new light: certainly, few revere the cellulose fiber matting like this Austrian businessman, who turns 45 this December.

“I have a country house where sometimes, to start the fire, I have to burn paper. I feel bad. For us, it’s like torture,” he told the Budapest Business Journal in 2015.

Prinzhorn is the chief executive of the eponymous, familyowned paper and packaging group headquartered in Vienna.

Prinzhorn Holding employs 6,100 people at plants in 15 countries from Germany to Turkey. Of these, 1,300 work in three Hungarian subsidiaries, which last year were responsible for generating some EUR 445 million in revenues, 30% of the group’s total income.

“The results do not depend [solely] on technology investment, this depends on the organization and Hungarian knowledge [in the industry]. It’s like a winemaker: he can have the latest equipment, but that doesn’t make him the best winemaker.”

In truth, while few Magyars will recognize the name, most households in Hungary will have group products on their shelves, albeit unwittingly: Dunapack, its highest profile operation, supplies state-of-the-art packaging from its plant on Budapest’s Csepel Island for brands such as Mars and Henkel and retailers like Tesco and Lidl.

Dunaújváros, Hamburger Hungária – the country’s sole remaining paper mill – produces almost 700,000 tonnes of paper annually, all from recycled waste. “We’re strongly integrated in Hungary along the value chain, doing a lot of exports. It’s a massively important export country for us, around 50% of revenues,” says Prinzhorn.

MANUFACTURING AND RECYCLING Cheek-by-jowl with the packaging operation is the headquarters of Duparec, a recycling company that separates paper, metals and plastic from municipal waste at several locations across the country. Meanwhile, 60 kilometers to the south, in the town of

Investment in Hungary to date totals some EUR 600 million. This includes a bespoke EUR 150 mln power plant, inaugurated last year, to provide heat and electricity to the Hamburger Hungária paper mill, and fueled by industrial waste, biomass, coal and gas according to availability.

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EUROPEAN UNION DIRECTIVE BOOSTS RECYCLING INDUSTRY, CREATES JOBS When in Budapest in 2015 to celebrate his company’s 25th anniversary in Hungary, Cord Prinzhorn voiced one major complaint: landfill – the practice of burying waste, unsorted.

“If there is anything I wish for in Hungary, it is that landfill becomes more expensive, to make sure that no paper is buried... Today, we have to import waste paper [for our production],” he told a press conference, before hinting at where the trouble lay. “Keep in mind the possibility to improve and stay close to the market reality of waste, and make sure this is not a game of politics, a game of local interests.”

Two years on, and the Austrian CEO has had his wish fulfilled – through European Union insistence. “It was part of EU legislation that was postponed and postponed… but finally, in 2016, the Hungarian government took measures to increase the cost of landfill, and [ban] unsorted waste from being buried,” Prinzhorn told the Budapest Business Journal.

The result is a near doubling of landfill prices, and a boost to recycling; Duparec opened a semiautomatic separation unit at its Csepel Island plant following the move.

“That’s a EUR 4 mln investment and 45 new jobs,” Prinzhorn said. Plus, of course, a reduction in imported waste paper.

As he puts it: “Waste is not to be played with. It is a valuable resource: it should be managed in a conscious way.”

These developments have not only made Hungary the biggest national operation within the Prinzhorn Group, they have effectively rescued the country’s paper industry from oblivion.

ALL BUT WIPED OUT Built upon inefficient, labor-intensive technology, the sector was otherwise all but wiped out after the fall of communism, according to Attila Bencs, chief executive of Hamburger Hungária.

“Take electricity: today, to produce one tonne of recycled paper, we use 350 kilowatt-hours. In the ’90s, this number was 700 or even 800 kWh. Given the price of energy, left as it was, there is no way you could produce paper [competitively]. Without the Prinzhorn investment,

The Hamburger Hungária power plant at the country’s sole remaining paper mill. It produces almost 700,000 tonnes of paper annually, all from recycled waste.

there would be no Hungarian paper industry,” he says. In addition to such savings in utilities, “time efficiency” – the term for utilization rates within the paper fraternity – at Hamburger Hungaria stands at 93%, some five percentage points above the sector average.

“One percentage point of this indicator means millions of euros in revenue in our case,” says Bencs, emphasizing that the performance of the paper mill makes it “a world leader” in its class.

Yet, for all the modern wizardry, the human element has been equally vital for such success he argues. “The results do not depend [solely] on technology investment, this depends on the organization and Hungarian knowledge [in the industry],” he says. “It’s like a

INVESTING IN HUNGARY

“We’re strongly integrated in Hungary along the value chain, doing a lot of exports.

It’s a massively important export country for us, around 50% of revenues.”

winemaker: he can have the latest equipment, but that doesn’t make him the best winemaker.” Cord Prinzhorn, reviewing his company’s 27-year history in Hungary, admits that there have been “issues” in Hungary [see box], but he, too, is keen to praise the skill-sets from shop floor to management levels. This is underpinned by what he terms the country’s “well founded” education system, which enables leaders to analyze the challenges and enforce change.

It’s also an ethos he appears to embrace: asked for this article if he still abhors using paper to light fires in his Austrian country home he replied: “Actually, I’ve managed to get around it. My solution to saving paper is using pine cones: my children collect them. [...] The youngest one is eight, and he’s not [even] getting paid for it.”

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Data protection and competitiveness The forthcoming application of the EU’s General Data Protection Regulation (“GDPR”) in May 2018 will have significant effects on the competitiveness of the EU markets and online investments. Whilst safeguarding customer data, the GDPR may give rise to a vast number of regulatory ambiguities, which could cause significant costs for companies.

DEVELOPMENT COSTS For the first time in the EU, the GDPR requires companies to consider the principles of “Privacy by Design” and “Privacy by Default” when developing a product, service or project and throughout its lifecycle. The compliance demands the most appropriate technical background suitable for the safe storage and transfer of data. According to a global study by Veritas Technologies, an information management company, companies are expected to spend an average of EUR 1.36 mln on GDPR readiness initiatives worldwide.

Tamás Tercsák, Counsel CMS Budapest

Márton Domokos, Counsel CMS Budapest

An analysis published by the European Center for International Political Economy (ECIPE) estimates that disruptions to crossborder data flows could result in negative impact on the EU of up to 1.3% of the GDP. On the other hand, a higher level of data protection can also induce competition in many sectors, which is often not guaranteed by third country privacy laws.

According to NASSCOM, an Indian-based not-for-profit industry association, and the Data Security Council of India (DSCI), there is already an opportunity loss of USD 2-2.5 billion in India’s economy owing to data transfer related concerns from the European perspective. All-in-all, companies will spend more money on data protection compliance under the GDPR than ever.

than 350,000 credit card numbers in 2015.

The investigation of the U.S. regulator found that the hotel did not provide consumers affected by the breach with immediate notice, did not maintain a comprehensive information security program, and did not conduct data security assessments.

To better understand the costs of data breaches, IBM Security and Ponemon Institute released a global study this year, which covers 419 companies, as well as 13 countries and regions. According to the study, in 2017 the average cost of data breach in the United States was significantly higher than that taking place in the EU. For example: the average cost of data breach in the States was USD 7.35 million, whereas in Germany it was “only” USD 3.68 mln.

To further assess the indirect costs of the data breaches, IT consultant CGI and Oxford Economics analyzed Gemalto’s Breach Level Index and found that two-thirds of firms breached had their share price negatively impacted. Of the 65 companies evaluated, the breach cost shareholders more than USD 52.40 bln. Currently, only 5% of the breaches were reported from Europe. This is likely to change, once the GDPR becomes mandatory as of May 25, 2018 and new data breach reporting obligations will apply to European companies as well.

PRICING THE TRUST According to a study by Gemalto, a digital security firm based in the EU, in the first half of 2017 there were 918 data breaches, resulting in 1.9 billion data records being exposed. This is a 164% (!) increase over the last six months of 2016. Some 86% of the breaches were disclosed in North America.

A recent example from the United States: the New York attorney general announced a USD 700,000 settlement with a major hotel chain after a data breach exposed more

HR COSTS Costs associated by complying with the provision of the GDPR may range from appointing an internal data protection officer (DPO) to the general operation of a safe data management system. According to a study by the International Association of Privacy Professionals (IAPP), as many as 75,000 DPO positions will be created in response to the GDPR worldwide. A significant number of DPO positions will be established by the top EU trading partners: approximately 9,000 by the USA, 7,600 by China and 3,000 by Russia.

A GDPR MENTALITY Despite the additional costs that may arise for companies, GDPR should not serve as any form of impediment for e-commerce or cross-border investments. The new and strict rules (including fines up to EUR 20 mln) can also help companies to mitigate the data protection risks, like data breaches and data security problems.

Companies should consider the GDPR as the price of consumer trust, rather than a barrier, and by developing solutions and acting in line with the new rules, companies can preserve their market shares or even become frontrunners in EU markets.

Our guide “Greenfield investments in CEE” can be downloaded from our website: cms.law

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INVESTING IN HUNGARY

REAL ESTATE 2017

IMPROVING INVESTOR SENTIMENT TOWARDS REAL ESTATE Investors and financial lenders are showing an increasingly favorable attitude to the development, investment and redevelopment of buildings in the office, industrial, retail and hotel market sectors in Budapest.

By Gary J. Morrell This provides employment for staff in the various market sectors, along with work opportunities for property management, facility management and building maintenance professionals and workers in the construction industry. One brake on further, or faster, market development is the shortage of skilled labor in all market sectors.

The volume of investment into income-producing real estate is rising after a prolonged downturn, with a significant proportion of transactions being undertaken by local investors that provide additional liquidity and security for the market.

The region as a whole is attracting more investment, with Czech Republic and Poland currently the leading Central European investment destinations, although the gap with Hungary is narrowing.

Aréna Plaza

Arguably the most immediate competitor for Hungary is the Czech market, where yearend volume is expected to exceed EUR 3 billion, compared to an anticipated 2017 figure of circa EUR 1.7 bln locally.

Continued on page 38. ► ► ►

“I would argue that the market is split 50/50 between core and opportunistic investors, so there is a healthy mix between the two types of buyers.”

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REAL ESTATE 2017

Skypark in Budapest, purchased by OTP RE Fund.

Continued from page 37. ► ► ► YIELD COMPRESSION Although investor sentiment towards Hungary is getting better in a market with improving economic indicators, yield compression is anticipated. Czech Republic has the lowest regional yield levels at 4.85% for office, compared to 6% for Hungary, and this represents a significant yield premium on the Czech, Polish and Western European markets. The cost of debt is seen as one of the main reasons for the yield gap, although lending conditions for Hungary are also becoming more favorable.

“I would argue that the market is split 50/50 between core and opportunistic investors, so there is a healthy mix between the two types of buyers,” says Tim O’Sullivan, head of investment properties for Hungary & SEE at CBRE. South Africa’s NEPI Rockcastle has recently invested EUR 275 million in the purchase of the 68,000 sqm Aréna Plaza shopping center in addition to an adjacent development plot.

The Hungarian investor OTP RE Fund has purchased the 27,000 sqm West End Business Center, the 25,000 sqm Nokia Skypark and the 25,000 sqm Váci Greens B, all class “A”

Budapest office centers. “The market this year is very much dominated by Hungarian domestic equity. This is really related to the three big funds: Diófa, Erste and OTP. However, there will be competition next year as new funds join this group.

These tend to be the most active buyers for core, well-let, income producing assets. For the more opportunistic assets this tends to be European funds such as Austrian, U.K. and Israeli equity which tend to go for the more value-add/ opportunistic assets,” added O’Sullivan.

LIMITED SUPPLY The international investment climate can be summarized as a growing weight of money chasing a limited supply of real estate assets, as cities and regions compete for the attention of international investors and financial institutions.

At MIPIM in Cannes and Expo Real in Munich, the two major European commercial property investment forums, Hungary, Czech Republic and Poland all have stands organized by governmental promotion agencies, developers, consultancies and city municipalities to promote the countries as investment and development destinations.

Continued on page 40. ► ► ►

PRESENTED CONTENT

INVESTING IN HUNGARY

TWO SPECIAL PRIZES FOR TRIGRANIT AT THE PRESTIGIOUS FIABCI AWARDS IN BUDAPEST FIABCI AWARD HUNGARY Two TriGranit projects – Millennium City Center in Budapest and Bonarka City Center together with Bonarka for Business in Krakow – have won special prizes at the 19th Hungarian Real Estate Development Award organized by the Hungarian Real Estate Association which is a Principal Member of FIABCI Hungary lately. Millennium City Center in Budapest received the special prize of The National Federation of Hungarian Building Contractors, while Bonarka City Center together with Bonarka for Business in Krakow has been awarded with the FIABCI Hungary special prize at the prestigious Hungarian FIABCI Awards in Budapest. TriGranit has an outstanding track record at the FIABCI Awards, as previously two developments had won the FIABCI World Prix d’Excellence International Awards, the Palace of Arts, Budapest in 2006 and WestEnd City Center, Budapest in 2001.

Millennium Gardens, Budapest.

COLOURFUL OFFICE PIPELINE TriGranit’s present office pipeline exceeds 120.000 sqm GLA spread over the cities of Budapest, Bratislava, Krakow and Katowice. In Poland, TriGranit is proceeding with the development of the next phase of buildings in the B4B Class-A office complex in Krakow.

Building H is currently under construction with 10.000 sqm GLA and will be ready in 2019. Building I and J will be launched in the upcoming years, with 10 000 GLA each. Millennium Gardens office building will have 37.300 sqm GLA in Budapest, while Lakeside Park II. office building will have 13.700 sqm GLA in Bratislava. Silesia Offices, an office development that will be constructed in two phases is also under preparation in Katowice, Poland with 40.000 sqm GLA. MILLENNIUM GARDENS IN BUDAPEST TriGranit’s newest Hungarian development, the Millennium Gardens with its 37,300 sqm GLA will be the final element of Millennium

Millennium City Center by night, Budapest.

City Center. The uniquely designed 10-storey building will provide for tenants over 600 parking spaces, e-car chargers and bicycle storage, as well as lots of green area and restaurants around the office building. As part of the Millennium City Centre, the office building will be constructed next to MÜPA, the National Theatre and the prospective Congress Centre on the banks of the Danube.

The Millennium City Center project itself, carried out by TriGranit, has been a huge regeneration project in Budapest. Over the past decade, TriGranit has developed a total area of 360,000 sqm on Millennium City Center’s 3-hectare plot: the Duna-Pest Residences, consisting of more than 310 luxury apartments; the world-famous Palace of Arts; MÜPA; four Millennium Tower class “A” office buildings; and the K&H Headquarters. This area is a well-known, dynamically improving business, residential and cultural area and a strong submarket preferred by several multinational companies.

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Cushman & Wakefield Portfolio Services Center in Budapest.

Continued from page 38. ► ► ► (Hungary was a relative latecomer to this coordinated national approach to selling the country, and it was a move that was much welcomed by the market when it did come.)

At MIPIM 2017, HB Reavis showcased its latest Budapest office project, the phased 138,000 sqm Agora Budapest. (The company also presented the 140,000 sqm Varso Place in Warsaw, including the 230 meter Varso Tower, which will be one of the tallest buildings in Europe.)

“Increasing construction costs are slowing down speculative development in the industrial market, hence Budapest stock is unable to keep up with demand.”

The office markets in the four core Central European capitals of Budapest, Prague, Warsaw and Bratislava – the countries are collectively known as the Visegrad Group or the Visegrad 4 – are all seen as benefiting from strong demand with the resulting development opportunities.

projects. It is fair to say that the market for well-located sites in Budapest is under-supplied, with almost no availability thereof,” commented Bence Vecsey, director of investment services at Colliers International.

DEVELOPMENT PROJECTS “Development projects and land deals are usually excluded from transaction data given transparency concerns, although Colliers estimate that in the last three years more than EUR 300 mln was invested in development projects and land in Budapest.

The number only refers to larger, 400 plus units of residential

The choice of Budapest as the location for its global Portfolio Services Center (PSC) by Cushman & Wakefield is seen as a significant success for Hungary in that it is by attracting companies from a high-quality service industry that the country can offer exciting employment possibilities to its workers.

Continued on page 42. ► ► ►

INVESTING IN HUNGARY INSIDE VIEW

Proposed Screening of FDI to Hungary Earlier this fall, the Hungarian Ministry for Internal Affairs launched a public consultation on its proposal for adoption of rules to enable screening of foreign acquisitions of certain Hungarian strategic companies handling critical infrastructure or technologies by investors from outside the European Union (EU) and the European Economic Area (EEA).

János Tóth, Partner Wolf Theiss Budapest The key justification for this proposal is that some of these acquisitions by non-EU investors could be detrimental to national security or public policy in Hungary and that currently there is a limited and unsophisticated mechanism available for the Hungarian government to screen and potentially prohibit acquisitions by foreign investors in such strategic companies. Accordingly, the proposal would make the acquisition of a stake in excess of 25% in a Hungarian company operating in the selected strategic businesses subject to the prior review and approval by the Hungarian Minister of Interior.

The Hungarian initiative came just ahead of a very similar proposal the European Commission issued in September 2017 for a regulation establishing a framework for screening FDI in the European Union, which was highlighted by European Commission President Jean-Claude Juncker in his speech on the State of the European Union as a top priority for the European Commission.

Unlike the United States or China, which pursue aggressive trade policies and where FDI transactions have long been subject to certain screening and restrictions, the EU currently does not have any legislation in place on the review of foreign investments. Instead, about half of the EU’s Member States, such as

Germany or Poland, have their own national screening mechanisms, which vary widely but generally can lead to the modification or prohibition of certain investments on grounds of public policy and national security.

As mentioned, no such rules exist in Hungary either, let alone certain sectorial reviews available in selected regulated industries, such as energy or banking, in which the acquisition of certain controlling stakes have long been subject to prior approval of the competent national regulator.

The apparent turbulence around this topic results from a series of recent takeovers of leading European companies by statecontrolled foreign investors. Chinese investors, in particular, have been actively pursuing European companies that develop technologies or maintain infrastructures that are viewed as essential to critical functions in the European economy.

The Commission’s proposal is expected to enable EU members states to follow companies and investors with interests in the EU, as well as foreign governments. The European Commission has also pointed out, however, that rather than allowing similar restrictions on FDI to become politically uncoordinated at national level, it is desirable to create a regulatory framework and provide well-designed and uniform investment review mechanisms for the EU to protect strategic companies, which could also help increase legal certainty and provide a more transparent and fairer process to foreign investors. Eventually, however, the devil will be in the details, as these screening mechanisms can differ in scope and procedure, e.g. general cross-sectoral coverage vs. specific coverage of the selected sectors; ex-ante vs. ex-post review mechanisms; voluntary vs. mandatory notifications, etc.

The proposed regulation would create a framework for information sharing between member states and the European Commission, ensure that screening mechanisms meet common basic criteria concerning transparency, non-discrimination and judicial review, and establish common

criteria that member states should consider in any screening process they operate, including whether a foreign investor is controlled by the government of a third country.

A member state that currently does not have an FDI screening mechanism in place is not required to establish one, but it would be obliged to consider the views of another member state or the European Commission on an FDI in its jurisdiction, and to provide information in that respect to other member states and the Commission.

The final decision on whether to restrict a given investment would remain with the country in which the investment is planned, leaving member states with a fair amount of discretion to determine what their essential public policy concerns are, provided that they are not discriminatory.

The proposed regulation would specifically authorize member states to adopt provisions that prevent circumvention of the screening mechanisms, to capture situations, for example, where an investment is structured with a company already established and operating in a member state, but owned or controlled by a non-EU foreign investor.

Apparently, the Hungarian proposal does not stand at this level of sophistication, however. Its succinct wording leaves important questions open such as: (i) how indirect control by non-EU investors should be construed; would staggered acquisitions also be captured?; (ii) what exact criteria the minister would apply when rendering its decision; (iii) would a prohibition by the minister (subsequently confirmed by the Hungarian government) still remain subject to court review? It is to be seen during the few weeks remaining from the fall session of the Hungarian Parliament if and how the Hungarian proposal will progress its way against the European Commission’s proposal.

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Váci Greens by Atenor.

Continued from page 40. ► ► ► “Hungary now has the opportunity to retain a well-trained workforce and there is also the opportunity for Hungarians to return home. This is a paradigm shift, in that Hungary is no longer just a destination for companies setting up assembly facilities. In this sense, it has developed into a venue for the provision of high level services,” said Hungary’s Minister of Foreign Affairs and Trade Péter Szijjártó, at the opening of the office.

A shortage of skilled workers is regarded as a barrier to growth in all sectors of the real estate and related industries, with a perceived need for training or the creation of conditions that would attract Hungarians working abroad back home.

The labor shortage tends to lengthen the development process and is also making it more expensive. “Increasing construction costs are slowing down speculative development in the industrial market, hence Budapest stock is unable to keep up with demand,” said Gabor Halasz-Csatar, head of industrial at Cushman & Wakefield Hungary.

One handicap Hungary does have compared to its Central European neighbors is that there is still limited office, industrial and retail development that could provide investment and employment opportunities outside of Budapest in secondary provincial cities. Despite some limited progress, particularly in the area of shared service centers, Hungary is markedly more capital-centric than its Visegrad Group peers.

INVESTING IN HUNGARY INSIDE VIEW

Attracting investors with new arbitration rules The Hungarian Parliament passed a new Act on Arbitration (No. LX of 2017), effective as of January 1, 2018, replacing the previous one. According to the codifier, the new regulation aims to make the Hungarian investment environment more attractive by reforming the current arbitration to set up a quicker and higher level of dispute resolution in comparison to the state jurisdiction, which can be a real alternative of the foreign arbitrations.

Like the previous regulation, the new Act also follows the UNCITRAL Model Law on International Commercial Arbitration, but as amended in 2006. The new Act creates a new institutional framework for the courts of arbitration, and introduces new features compared to the previous act.

The Permanent Arbitration Court for Energy Matters and the Permanent Arbitration Court for Money and Capital Markets will cease to exist as of December 31, 2017. If contracting parties stipulated the competence of either of these two arbitration courts, it will automatically mean the competence of the Commercial Arbitration Court in proceedings commencing after January 1. Proceedings already commenced in front of the soonto-cease arbitration courts will, from January 1, be handled by the Commercial Arbitration Court.

The members of the Presidium of the new Commercial Arbitration Court will be delegated beside the Hungarian Chamber of Commerce and Industry, by the Hungarian Energy and Public Utility Regulatory Authority, the Budapest Stock Exchange, the Hungarian Banking Association, and the Hungarian Bar Association. The president will be delegated by the Hungarian Chamber of Commerce and Industry. The delegating organizations will have withdrawal rights without justification.

RESTRUCTURING OF HUNGARIAN PERMANENT ARBITRATION – THE NEW COMMERCIAL ARBITRATION COURT The Act refers to the jurisdiction of the Court of Arbitration attached to the Hungarian Chamber of Commerce and Industry for all commercial matters to be handled in Hungary by any permanent arbitration court, except sport and agricultural matters, which will retain their special arbitration courts.

The Act merges accordingly into the Court of Arbitration attached to the Hungarian Chamber of Commerce and Industry the jurisdictions of the – up to now independent – two arbitration courts: the Permanent Arbitration Court for Energy Matters and the Permanent Arbitration Court for Money and Capital Markets, and forms the so called Commercial Arbitration Court. The new arbitration court will be the legal successor of these arbitration courts in every respect.

INNOVATIONS FOR FLEXIBILITY According to the new Act, as in the case of its predecessor, arbitration can be chosen for commercial matters, but the definition of a commercial matter will not be approached from the subjective side, but rather from the objective. “Commercial” shall include in the future all commercial or business matters, whether contractual or not. Presumably the range of arbitrable matters will broaden as a consequence of this new approach.

The new Act provides the possibility for retrial, if any fact or evidence emerges within one year after the decision of the arbitration court and which was unknown during the arbitration, and this would have resulted in a favorable decision for the relying party. The reason for this new concept is the relatively short deadline for provision of facts and evidence in the

Dr. Ágnes Szent-Ivány Managing Partner Sándor Szegedi Szent-Ivány Komáromi Eversheds Sutherland Attorneys at Law

arbitration procedure. A retrial is only allowed if the facts and evidences could not be taken into account originally for any reason not attributable to the party relying on them. The parties have the opportunity to exclude the possibility of retrial.

The new Act contains provisions for the situation after an award has been annulled.

In such a case, the parties can appoint new arbitrators to continue the arbitration procedure, but can, of course, also keep the original arbitrators, whose award has been annulled. The repeated procedure, after setting aside the award, is free-of-charge.

External parties, interveners, who have a legal interest in the outcome of the procedures, can join the arbitration to support one of the parties, even by provision of evidence. Third parties, who are not part of the arbitration agreement, are allowed to participate in the procedure as a party as well, in case the claim of it or against it can only be decided together with the dispute subject of the arbitration agreement.

In compliance with the modification of the UNCITRAL Model Law in 2006, the new Act regulates in more detail the preliminary orders and interim measures. A party may be obliged via interim measures to maintain or restore the status quo, to take actions preventing harm or prejudice to the arbitral process, or to preserve evidence relevant to the case. The purpose of preliminary orders is the protection of the aim of interim measures.

The regulators expect that, along with the above new institutions, all the other innovations of the new Act will support the effective operation of arbitration, the appointment of independent arbitrators with a high level of experience and expertise, and the quick flow of procedures.

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15 years in the Hungarian real estate market Dome Facility Services Group which has been awarded the facility management company of the year both in 2013 and in 2016 has been providing wide range of real estate services, full range of facility management, energy management and fit-out services as well as complex real estate management consultancy to its clients nearly one and a half decades in the Hungarian real estate market. needs.” said Mr. Gábor Décsi MRICS, managing partner of Dome Group. „The key of successful cooperation is understanding our clients’ business goals and priorities, as our work starts with defining the services and service levels taking into account efficiency, good practices, the specificities of the given sector or industry, and the location of the facility.” – He added.

Gábor Décsi MRICS Managing partner „In the last 15 years, we have carried out real estate management tasks in approximately 200 real estates, including category A, A+ office buildings and shopping centres, strategically important industrial and logistics facilities. As a result of strategic co-thinking with our clients we are creating integrated facility management solutions that best meet their business

Dome which was a pioneer at the beginning of this decade in offering energetics services to its clients provides an integrated approach, from energy procurement through the preparation, conclusion and monitoring of service contracts, to the optimization of energy use. “Within the framework of our service we undertake to continuously monitor the energy costs incurred during the operations, their proportionate allocation and control even at equipment level. In the past years we have elaborated a mandatory contractual structure, the private network usage system of several commercial properties.”

Besides energy management Dome also offers real estate consultancy

Dome Facility Services Group H-1023 Budapest, Bécsi Corner, Lajos utca 28-32. www.domefsg.com

for investors and corporate clients. To make a successful business decision, proper preparation and substantiated information are needed, paying particular attention to the risks related to the given business opportunity.

“In the property investment market, besides the new developments premium category and older commercial buildings are also sought. Investors need to have a clear picture of the property before the transaction so Dome’s experts offer real estate management consulting service, undertaking to prepare cost-optimization reviews, develop and implement different CAPEX technical solutions, perform technical surveys, due diligence reports or investment management tasks.”

From the beginning of 2017 Dome has been operating the world’s biggest vehicle engine factory which represents one of the largest interlaced facility management commissions in Hungary, on an area more than 500,000 sqm and also entered the international market in 2016, as a founding member of the European regional federation 21stFM that offers integrated, united and tailor-made services for global companies in seven countries in Central, Eastern and Southern Europe.

FACILITY MANAGEMENT ENERGY MANAGEMENT FIT-OUT REAL ESTATE CONSULTANCY

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INVESTING IN HUNGARY

STANDING OUT FROM THE CROWD

On what basis are investment decisions made, and how does Hungary distinguish itself from its regional peers?

UNCERTAINTY UNWELCOME “Investors always look at a country as a whole. Anything that adds to uncertainty, will make the investment location look less attractive,” Dirk Wölfer, head of communication at the German-Hungarian Chamber of Industry and Commerce told the Budapest Business Journal.

“Investors always look at a country as a whole. Anything that adds to uncertainty, will make the investment location look less attractive.”

Dirk Wölfer, head of communication at the German-Hungarian Chamber of Industry and Commerce.

By Sonja Bencze In terms of investment environment, there is hardly any difference between Hungary and its Visegrad Four peers. Prospective investors therefore tend to select the location of their business based on the type of activity, industry and their previous experience with the countries.

When it comes to attracting foreign investment, one major draw of Hungary, compared to its regional peers, is the one-digit corporate tax, Péter Szijjártó, Minister of Foreign Affairs and Trade said in a recent newspaper interview.

Indeed, the 9% rate is not just more favorable than the standard corporate tax rate in Czech Republic and Poland (19%) or Slovakia (20%); it is the lowest in the whole of the EU. Yet the tax rate is just one criteria, the stability of the taxation system also counts, experts agree.

Uncertainty is always seen as a disadvantage, be it political, economic or labor market-related.

A predictable economy and taxation system are an asset; a low corporate tax rate can be one too, provided it does not change often. The availability of skilled workforce, the level of wages – all of these count. Any factor that makes it hard for companies to plan ahead or plan long-term can result in a lower ranking in a comparison.

While politics may have less bearing on daily business, a stable political system is always appreciated. In this respect, it is Poland that has been highlighted lately on international investment guides as a country with potential risks.

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Some have gone as far as to warn that the current situation might turn into a political crisis next year. (The ruling party has taken control of the constitutional court and public broadcasters, which has made many countries in the European Union question the constitutionality of the state. The European Union is closely following the situation and running a number of investigations).

THE BIG THREE Although European Union members and the United States remain the main investors of the region, China and other countries from the Far East also want to get closer to European markets. Since Hungary is a gateway to Western Europe, Far Eastern companies often chose it as a headquarters or a production hub.

Last year, following Germany and the States, South Korea was Hungary’s third largest investor on an investment value basis, according to the Hungarian Investment Promotion Agency.

“There are still some challenging issues regarding the economic policy of the [Hungarian] government, but this is not causing as much tension as it did earlier.”

CHALLENGING ISSUES Hungary has been down this route as well. Questions are still raised, especially at the European Parliament level, but businesses, at least, seem less concerned.

“There are still some challenging issues regarding the economic policy of the [Hungarian] government, but this is not causing as much tension as it did earlier,” Wölfer said.

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INVESTING IN HUNGARY

When selecting a future business location, investors use a long checklist with hundreds of criteria on it. But when it comes to choosing between the Central European states, it still isn’t particularly easy; three of the Visegrad Four countries are quite similar in structure. Only Poland, by far the largest of the three, stands out as potentially having an internal market large enough to support a business.

“Recently, I and the representatives of the German Chambers of the other V4 member states, made a presentation for prospective German investors on the respective countries. Basically, they listened to four similar presentations,” Wölfer said. Since there are not many differences, the type of industry or activity may be given more weight in deciding where to go.

GOOD EXPERIENCES Good experiences also count; if a firm already has operations in a country, and is satisfied with the results, it is likely to expand there. In fact, the main source of foreign direct investment for Hungary in the past few years has been reinvestment. This means that the bulk of the new capital arriving in the country,

“But at the end of the day, it is business performance and balance sheets that matter the most.

Anything that decreases costs can be an asset.”

HUF 2-3 billion per year according to the data of the National Bank of Hungary, has been the result of the expansion of businesses already settled here.

Wölfer confirms that German chamber members have been expanding significantly; this also involves investments of suppliers and service providers, he said. V4 countries provide the most competitive investment environment in Europe now,

INVESTING IN HUNGARY

HELPING HAND If all other factors are evenly matched, the help you get from the state can become a deal maker. The Hungarian Investment Promotion Agency is charged with bringing FDI to Hungary and is consistently praised by commercial organizations like the U.S.-Hungary Business Council for its work. “Our one-stopshop management consultancy services ensure tailor-made offers and information packages for companies interested to invest in Hungary,” says Róbert Ésik, the president, in his welcome note on the HIPA website. “You will get access to necessary information about available investment sites, incentives, labor market, business environment, local suppliers and more. We help your company to deliver strategic investment decisions by providing accurate information and relevant advice as well as mediate between government and business based on your inputs to ensure our common success.”

Szijjártó has said. Trade between German and the V4 countries last year was 50% more than that between Germany and France, the minister added.

With so few distinctions among these countries’ economies and macroeconomic data, companies look at other factors. Labor market conditions are often decisive, for manufacturers or service providers especially.

DUAL EDUCATION Thanks to the fairly early introduction of dual-education system, Hungary is a slightly ahead of its peers. If, for example, Mercedes wants to expand its manufacturing facilities and it needs a workforce of 3,000, it needs to know it can count on the supply this type of cooperation provides.

The infrastructure, road and energy networks of Hungary are also regarded as good. Security of energy supply is of paramount importance for a manufacturer, where a minute-long blackout can cause a factory to stall and thus millions in damages. As a cost element, distance from markets is also a factor; Czech Republic

is closer to Germany, which may be considered an advantage over Hungary. “But at the end of the day, it is business performance and balance sheets that matter the most. Anything that decreases costs can be an asset,” Wölfer points out.

On the list of weaknesses, language skills still appear to be something of a Hungarian thorn. These may have improved somewhat, but Hungarians continue to be behind the Czechs or the Poles, and score poorly on European comparisons. And that is despite the large numbers of shared service centers that choose Budapest (and increasingly other cities in Hungary), based on the large numbers of young foreign language speakers the universities turn out.

Labor shortages are an issue elsewhere in the region as well, but it does seem to be more severe in Hungary than in some of its regional peers, Wölfer noted. And in today’s increasingly interconnected world, Hungary is not just competing with its neighbors in the region for foreign direct investment; European countries farther afield, such as Portugal, are also known to join the race for potential investors.

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