REAL ESTATE OVERVIEW HUNGARY A macroeconomic and fiscal look
INFORM
OBSERVE
THIRD QUARTER 2017
INVEST
MACROECONOMIC SITUATION The hungarian macroeconomic outlook remains optimistic, exceeding the forecasts of the last months. In the last issue of his world economic outlook, the International monetary fund rose his forecast about the Hungarian GDP growth for 2017 to +3,2% and for 2018 to +3,4% while old forecasts were +2,9% e +3,0%, rispectively. However, the GDP growth could be even higher: the government target is to reach +4,1% of the GDP in 2017 and +4,3% in 2018. These are ambitious targets but is still possible to reach them considering the high industrial investments that some foreign firms made in the country, especially in mechanical assets. It’s also important to mention a remarkable growth of wages, 13,2% higher than the last year. The reasons are the lack of labour offer, but mostly the rise of minimum wages decided by the Government, with rates set from 15% to 25% depending on labour category. This trend is going to continue in 2018 due to further governative measures about the rise of the minimum wage.
Fundamental economic indicators (sources : Magyar Nemzeti Bank, FMI) GDP third quarter 2017 +3,8%
Annual GDP growth rate 2018
MNB refinancing rate: +0,9%
2017 2016 0,0%
Expected 2018 inflation rate: +2,5%
2,0%
3,0%
4,0%
Italy
2016 0,9%
2017 1,4%
2018 1,2%
Italy
Hungary
2,0%
3,6%
3,7%
Hungary
Hungarian financial rating. Investment grade: medium-high quality of financial instruments. ➢ Fitch : BBB- (positive outlook) November 2017 ➢ S&P: BBB-/A-3 (positive outlook) August 2017 ➢ Moody’s: Baa3 (stable outlook) March 2017
1,0%
The rating agency «Fitch» updated the country financial rating raising it from «stable» to «positive», due to low foreign debts and to steady growing GDP. At last, good news arrived also from the Hungarian Central Statistical Office (KSH), that reports a new drop of the unemployment rate reaching 4,1%, the lower rate of the last 20 years. It represents a reduction of -0,8% comparing with the same data of the last year and a stable trend of the country from 5 years. 1
GENERAL SITUATION OF REAL ESTATE MARKET Latest data from KSH highlighted a fast expansion of the Real Estate market. The number of new constructions built in the third quarter was 50% higher than the one in the previous year, in the same period. The growth is referred to both private buildings and civil engineering works. Enterpreises are main actors of this market, buildings, factories and large warehouses. Construction of residential homes is mostly due of the success gained by the family financing program «CSOK», mentioned also in previous issues of our Real Estate Overview. There were released 11% more contruction permits than last year. Building firms are probably main beneficiaries of this situation: there was a gain of +89,7% in construction orders just considering the period from august 2016 to august 2017.
In the last quarter of this year the volume of Real Estate investments reached 505 milions of euro, in whole 2017 there were sales and purchases for 1,3 bilions of euro. This year’s forecasts are similiar to the ones in 2016, charactirized by a lot of foreign investments, especially from Germany. The biggest transaction of this quarter was definitely the purchase of the Shopping Mall «Arena Plaza» by a Sudafrican buyer for €275 millions.
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GENERAL SITUATION OF OFFICE MARKET Last data from Cushman & Wakefield shows a quite stable situation regarding the rent prices in the office market. Again, Budapest is the main city to have deals in. Most of the enterprises involved in this market are from public sector, financial, and Social Service Centres. The most positive news is about the lowest ever registered vacation rate, drop to 7,7%. In fact, low availability of construction firms and the rise of their work’s costs is limiting the production of building while the demand remains elevated. This type of market is largely characterized by firm’s investments. In fact, in this quarter the biggest purchases were made by the petrolchimical Hungarian enterprise MOL and by the german investment fund Corpus Sireo RE, since the latter acquired the famous Eiffel Palace in Budapest. Generally, a company has to plan 1 or 2 years ahead to move in a new office, mostly via precommitment
Location
€/m2 /month
€/m2 /year
Annual growth %
5 years growth %
Budapest (CBD)
22,00
264
4,8
0,9
Budapest (Central Buda)
16,00
192
1,6
1,3
Budapest (Vaci corridor)
15,25
183
1,7
1,4
Budapest (periphery)
10,00
120
0,0
-1,9
Cushman & Wakefield
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GENERAL SITUATION OF RETAIL MARKET In the third quarter of 2017 the demand of commercial real estate properties remained high, particularly in main streets and in shopping malls. The supply kept itself stable, and it’s expected it will remain almost unchanged till the end of 2019, when it should be finished the construction of the «Etele City Center» in the XI° district, meaning the input in the market of more than 50 thousand sqm of space intended for commercial activities.
Shops in main streets
€/m2 /month
€/m2 year
Annual growth %
5 years growth %
Budapest (Vaci utca)
120
1.440
20,0
5,9
Budapest (Andrassy ut)
55
660
22,2
6,6
Cushman & Wakefield
Also prices did not change significantly compared to the previous quarter, altough is foreseen a moderate growth in first half of 2018. Many real estate’s owners are trying to extend the average location period. Therefore, many of them prefer to hold a «Food and beverage» shop or restaurant in their property, maybe considering it a successfull business.
In short and medium term is expected a stable situation with no important changes: in fact, despite a growth in profits is expected in almost all segments of the retail market and also a growing interest of investors, this will be accompanied by an increase in available supply.
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GENERAL SITUATION OF INDUSTRIAL MARKET The industrial market continues to face the problems of the last quarters: a constantly high demand combined with an insufficient supply, which does not show signs of increasing. In fact, although there are several development projects in progress, they are all already bound by an early lease. The lack of industrial areas is expressed mostly in large settlements: in Q3 2017, there is not even a property available with a surface larger than 10,000 square meters, according to Cushman & Wakefield.
Location
€/m2 /month
€/m2 /year
Annual growth %
5 years growth %
Budapest
3,70
44,4
2,8
1,1
Debrecen
3,50
42
0,0
0,0
Miskolc
3,50
42
0,0
0,0
Győr
3,50
42
0,0
0,0
Székesfehérvár
3,50
42
0,0
0,0
Cushman & Wakefield
The main symptom of the scarcity of supply is that almost all transactions are taking place on used buildings, almost always undergoing renovation. Another sign of the current situation is the rate of vacant properties, which remains at the historical minimum level of 5.5%. The profitability of well-located logistics sites remains very high, around 9% across Hungary, and it is undoubtedly the sector with the widest profit margin.
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GENERAL SITUATION OF FARMLAND MARKET Farmland prices are rapidly rising. According to data provided by KSH, the value of arable land has increased by 22% over the past year. Particularly speaking, there is an increase of +25% on the prices of arable land; a +8% for grazing meadows; +17.5% on vineyards; +8% for orchards and +10.5% for forest areas. However, we would like to remind you that the Hungarian legislation makes it difficult to foreign citizens to purchase lands, as we will see in more detail below. The highest value is reached by vineyards which stands at 1.83 million forints per hectare, equivalent to almost 5900 â‚Ź; follow in order: orchards, arable fields, forests and pastures. 232,000 hectares of land were sold in the last year, mainly due to the government's auctioning of many public land. In 42% of the cases landowners decide to rent them to third parties, probably also due to the increase in rent rates between +7% and +15% depending on the type of land.
Land type
â‚Ź/hectare
Annual growth
Arable land
4180
25%
Vineyard
5885
17,5%
Orchard
4630
8%
Grassland
1670
8%
Forestry
1960
10%
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SITUATION OF STUDENTS’ HOUSING MARKET The student rental market continues to be one of the most attractive investment options in Budapest. The Hungarian capital is increasingly establishing itself as a university city and in recent years is attracting a large number of students, not only from Hungary and the rest of Europe but from all over the world. Every year there is a substantial increase in subscribers from abroad, and the trend should continue at least until 2023, when it is estimated that there could be 40,000 foreign students in Hungary. What should be noted is that the average rents for students are higher than those required for families and workers, due to the short residence time. Moreover, most foreign students come from countries richer than Hungary, and for them a room price higher than the national average is usually not a serious problem. The properties easies to lend are those well connected with public transport or located in the central districts of the city, with numerous rooms and low management costs.
Anyway, in our analysis we need to take care of the fact that foreign students are often a resource subject to a not surprising three/six months, maximum one year turnover. This fact could be a double edge sword. In fact, if it is true that usually short period rent could generate higher yields, it is also true that the landlord has to put higher effort in looking for tenants and in supervising them during the lease.
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INVESTIMENTS FOR EUROPEAN CITIZENS
During last years local Government has played a crucial role to facilitate foreign citizens investments. Especially for this reason, the Hungarian real estate market is basically open to all foreign citizens. Although there are no particular restrictions, it is important to underline some limits to the buying and selling process of some property categories. Acquisition of properties for residential, commercial or industrial destination is completely free of restrictions and can be done by both natural and legal persons, either Hungarian or foreigners. The acquisition of farmlands was free until the beginning of 1990’, and most of the foreigners having a farmland now in Hungary, bought them in those years. However, acquisition of agricultural lands is subject to preemption and authorizations which make the operation particularly complex. The qualification of professional farmer is necessary and the residency can be maximum 20km far from the land owned. Legal persons are not allowed to buy a farmland. 8
INVESTMENTS FOR FOREIGN CITIZENS There is an increasing appreciation of Hungarian real estate market from foreign investors. According to Ingatlan.com, around 6-7% of real estate acquisitions in Hungary is settled by foreigners, but this share increase to 15-20% if we consider Budapest data only and in the most actractive districts this arrives to 27%. The flow of these transactions has been facilitated by the availability of credit among Hungarian institutions. As reported by Krisztian Vincze, director of GDN Real Estate Network’s Credit Center, although citizenship is important to request a loan, what matters the most is if they are Hungary’s residents or not. Other factor which needs to be taken in consideration for credit availability is the cash flow origin: there are higher chances to get credit if the wage is perceived in Hungary. In the case of entirely speculative investment, there are less chances to take a loan but it is still possible to obtain a bank loan with an amount around 60-70% of property’s value.
However, credit access ease often collides with methodological and linguistic differences that obviously arise when someone is investing in a foreign market. For this reason it is recomended to address expert advisors which operate far-back locally and have handled different types of problems before. ITL Group enjoys more than twenty years experience in consultancy sector and has found the best solutions for his clients in the real estate field since 2013. It does so through a series of relations with local organizations and institutions which allow ITL to make deals quickly and without misunderstandings. 9
PROPERTY ACQUISITION PROCEDURE Property acquisition procedure is very simple and consists only few steps. Which are:
1. After the acceptance of the acquisition proposal, reserve the property with a deposit of around 1-2% of the total value.
2. Purchase agreement stipulation through a lawyer who has the role to check in the real estate registry.
3. At the moment of the signature, a 10% of property value deposit is requested, with immediate registration of a tax in the real estate registry.
4. After the agreement upon the final payment, there is the full property registration in the real estate registry.
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FISCAL ASPECTS OF INVESTMENTS Registry tax Registry tax amounts to 4% of the property value registered in the contract and it must be paid after the communication of the Hungarian Inspector-General of Finances. This amount drops to 2% when the property is bought for entrepreneurial destination and with resale within twelve months. A new law is under discussion to raise the resale deadline from 12 months to 36. Property tax Property tax can reach 1,772 HUF per square meter, depending on the city. Generally, if the property produce yields, it has to be paid every year in two payments, with deadlines on March 15 and September 15, respectively. However, exception may exist, depending on the free will of each district.
VAT tax (27% or 5%) Depending on the sale moment and on the property destination, there are some limits in VAT recover. In the case of recover right, Government payment is issued in approximately sixty days (after the accurate check on the documents that show the right). In the instance of properties bought to entrepreneurial purposes which are subject to resale, it is particularly important the destination and the resale of the property for the obligation to VAT payment or recovery. VAT has been reduced to 5% for properties with residential destination sales, if these properties are new or they receive habitability during 2016. This law will be current until December, 31th 2019.
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FISCAL ASPECTS OF INVESTMENTS Income taxes are the followings:
Natural persons
In the case of lease yields the tax rate is 16%. However, if total gain perceived is more than 1,000,000 HUF (around 3,400â‚Ź), there is another health tax of 14% on gain perceived with a maximum of 450,000 HUF. This additional tax will be deleted from January 2018.
If the property is resold within 5 years since the acquisition, the owner must pay 15% of the difference beetween the purchase and sale price. This tax base decreases 20% every year for five years until becoming zero.
Legal persons
Business income tax has been 9% from the beginning of 2017. Therefore, there is still use of fiscal stimulus to incentive entrance and presence of new businesses to sustain economy. This new rate is one of the lowest in Europe.
Furthermore, there is another municipal tax based on economic activities with a rate of 2%.
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FERMENTO IMMOBILIARE IN UNGHERIA = NEW OPPORTUNITIES FOR ITALIAN FIRMS? The real estate “boom� of recent years has come to a halt in the third quarter of the year. Half of the residential construction projects currently underway are delayed and in many cases the works have not even started: we are talking about 2500 development plans that have stopped just after obtaining the construction permit. The cause of these slowdowns is mainly due to the lack of qualified contractors to carry out all the ambitious construction objectives set in the previous months. Hungary is therefore looking for workers and businesses that can sustain the impetuous economic growth of the last few years. Many foreign companies involved in the construction sector, including some Italian, for this reason are deciding to enter this market. Timing must be the key to taking advantage of such a favorable situation before other international actors are attracted. Moreover, the remuneration for construction companies grew by 9.3% compared to last year for the construction of new buildings. However, this phenomenon is contributing to the increase in the price of housing. Only in the last quarter the value of residential properties increased by 5.3% compared to the previous quarter, thus recording a +15.1% on last year's prices, as reported by KSH. The increase concerns in particular the medium and small towns, the capital is the place that has seen the smaller revaluations. In fact, construction delays have reduced the offer available on the market, making the buildings already available re-evaluated 13
TOURISTIC INVESTMENTS: NEW RULES In Budapest, new rules have been introduced for those wishing to start renting shortterm tourist apartments, often known as "AirBnB".
REGULATIONS OF DISTRICT VII •
•
•
•
•
You can open a new shortterm rental business only if the relevant condominium regulation allows it. Buildings already destined for this function are not bound and may continue to operate. In case of apartment’s sale, the new owner must in any case respect the condominium regulations. The possibility of renting an apartment to tourists should always be explicitly specified in the regulation. If the sale of a property in a condominium takes place, the new owners must comply with the conditions in force at that time, the possible benefits of the previous owner having lapsed.
The new regulations have recently been introduced in District VII, but it is likely that other districts will adapt over time. In the 5th district, other more permissive regulations had already been passed in the past. In the market there are already companies that control several apartments for tourist use. Some of these offer the sale of holdings, making it easier to introduce new investors into this business.
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TOURISM IS GROWING On the one hand, as we have seen, legislation is still being defined in the tourism sector, on the other, the latest statistical data on inflows and profitability in this sector are very positive. In September, the number of tourists arrivals exceeding the previous year was 4.6%, coming from abroad and 3.6% from Hungary. In addition to this, the average length of stay has also increased: in 2017 the number of nights spent on holiday increased by 6.8% and the average price per night rose by 10%. In the capital all data records even higher values, such as higher hotel prices by +14%. The combination of these three factors, each growing at the same time - inflows, time spent and prices - led revenues to grow by an important +16.5%. In the first 9 months of the year â‚Ź1.13 billion was spent only in hotels and other accommodation. The growth trend is likely to continue, with domestic tourism strengthened by the increase in salaries of Hungarians, and from abroad with the growing popularity Christmas market - Budapest that is reaching the country over the years. Budapest is the most popular destination, collecting as many as five fifths of tourists arriving in Hungary; follows in the second position the area of Lake Balaton, which lately is being appreciated especially from foreigners.
Balaton lake 15
FINAL REMARKS Considering what we have analyzed previously, we can reconstruct a general picture of the Real Estate market of this year’s third quarter. The market is still growing and the demand is high in all sectors: large industrial buildings, offices, new homes and retail properties in the center. Banks are also reacting positively to this trend by financing investors and families much more than in the past and extending loan repayment terms. Furthermore, building development continues to be strong throughout Hungary, saturating the necessary supply of labor, and is expected to continue to be shipped for years, as evidenced by the large number of building permits issued recently. On the other hand, such a rapid and impetuous development is presenting challenges that the country faces with some difficulty: • • • •
The construction of new buildings has completely absorbed the building labor, are following delays in deliveries and increase in labor costs of the companies employed. The demand for real estate in all sectors grows much faster than the new availability of supply, causing an increase in property prices. The great success of the "AirBnB" solutions, together with the ever-increasing influx of tourists to Budapest, necessitated intervention by the institutions, which could make investor work in this business more complex. The tax and financial benefits of the government, such as the "CSOK" program and the reduction of VAT on new buildings, as they are short-term, are further fermenting the market as each player tries to take advantage of it in time.
In conclusion: we can consider that the Hungarian real estate scene is undoubtedly interesting for new foreign investors, but the rapid changes in the market and the many events that affect it make the strategic choices for entrepreneurs difficult. In these cases it may be useful to be directed by professionals who work in the Hungarian market since long time to catch the opportunities and manage the difficulties that characterize it.
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INCOME INVESTMENT PROPOSALS
Commercial building for sale near the ramp to the M1 highway
2 office buildings near the Elisabeth Bridge in the first district
- SHARE DEAL -
- ASSET DEAL-
➢ Place: Budapest, Budaörs near M1 highway ➢ Surface area: 22016 sqm ➢ Warehouse surface: 549 sqm
➢ Place: Near Hegyalja ùt ➢ Office A surface area: 3400 sqm
➢ Office B surface area: 4300 sqm
➢ Workshop surface: 2213 sqm
➢ Other facilities: 112 parking places 220 sqm warehouse
➢ Total office surface: 1504 sqm
➢ Actual situation: 100% Rented
➢ Actual situation: 100% Rented
➢ Net lease: €1 million per year (approximately)
➢ Approximate yield rate: 7%
➢ Price: € 15 millions (NO VAT)
➢ Price: € 3,95 millions In order to mantain the actual EBITDA is necessary to constitute a management society to take all the actual debentures from the society of the group that manages also other offices.
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INCOME INVESTMENT PROPOSALS
Full building to be renovated, Budapest
Investment portfolio of 4 touristic apartments in downtown, Budapest
- SHARE OR ASSET DEAL -
- SHARE OR ASSET DEAL -
➢ Place: Budapest, District V, close to Vaci utca and to the Great Market Hall ➢ Building area: 3500 sqm
➢ Place: V district, near to Opera ➢ Total surface area: 259 sqm
➢ Plot area: 1800 sqm
➢ Type of location: Long term lease to a company specialized in short term touristic rent
➢ Maximum area for construction: 8000 sqm
➢ Actual situation: 100% Rented
➢ Type of property: Office, residential or commercial
➢ Lease yield: 5% per year (approximately)
➢ Price: € 5,5 millions Actual owner is asking the permit to enlarge the building, adding a new floor, in order to open a 126 room 4 stars hotel. Eventually, the total surface area of the building will be raised to 5000sqm
➢ Price: € 780.000
All contracts and authorizations are compliant with the actual regulations. The share sale keeps everything unchanged. On the contrary, the asset sale makes it necessary to renew authorizations and the rental contract.
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ITL Group Kft. is the leader advisor company for Italian firms in Hungary, specialised in Hungarian market since 1995. The studio have taken care of more than 500 Italian capital companies to enter the Hungarian market in more than 20 years of activities. We have helped companies on both production internationalization and productive real estate investment.
Federico Michele Brilli Head of Department at ITL Real Estate (+36 1) 269 5679 f.brilli@itlgroup.hu
Szilvia Schenk Senior Consultant at ITL Real Estate (+36 1) 269 5679 s.schenk@itlgroup.hu
www.itlgroup.hu 1056 Budapest - Vรกci utca 81