REAL ESTATE OVERVIEW HUNGARY A macroeconomic and fiscal look
INFORM
OBSERVE
FIRST SEMESTER 2018
INVEST
MACROECONOMIC SITUATION According to economic forecasts published in May by the Szazadveg Research Institute, close to the government, but also to the Hungarian Statistical Institute (KSH), Hungarian GDP has increased by 4.4% based on gross data and 4.7% based on seasonally adjusted and reconciled data in the first quarter of 2018 compared to the corresponding period of the previous year. Analyzing the first half of 2018, in the period January-March 2018, the unemployment rate was 4.3%. In the period April-June 2018, the average number of unemployed was 165 thousand, 31 thousand less than a year before, and the unemployment rate decreased by 0.7 percentage points to 3.6%.
Fundamental economic indicators (sources: Magyar Nemzeti Bank, FMI) GDP first semester 2018 +1,2% MNB refinancing rate: +0,9% Expected 2019 inflation rate: +3,3%
Hungarian financial rating. Investment grade: medium-high quality of financial instruments. ➢ Fitch : BBB- (positive outlook) March 2018 ➢ S&P: BBB-/A-3 (positive outlook) August 2017 ➢ Moody’s: Baa3 (stable outlook) March 2017
The World Bank published its latest top report on global economic prospects in 2018, forecasting GDP growth in Hungary of 4.1% this year and 3.2% in 2019. The average expectation of market participants suggests a growth for the entire year 2018 close to 3.8%. This compares with the goal of the Hungarian government of 4.3% for the whole year. S&P said that Hungary's GDP growth rate will approach 3.5% for 2018, supported by the "consumer boom", fiscal stimulus and wage increases, better absorption of EU funding, subsidies for the home, more private sector budgets and the ongoing recovery in the euro area.
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GENERAL SITUATION OF REAL ESTATE MARKET The KSH data show that in the first half of 2018 6,517 new homes were built, 30% more than a year earlier. In the first half of 2018, compared to the same period of the previous year: 30% more housing was built in Budapest and the villages showed an even greater 1.5-fold increase. 54% of the new buildings were single-family houses, 6.2% in residential parks and 36% in multi-dwelling buildings. The total number of dwellings to be built on the basis of permits and declarations of construction of housing released decreased on average by 8.9% to 18.066. In Budapest, there was a 27% drop while in other Hungarian cities there was a 17% increase in the number of dwellings to be built. Manufacturers have used simple declarations in 42% of cases. This percentage was 7.1% in Budapest and developed higher, moving towards lower level territorial units reaching 84% of the villages. Based on the new building permits (declarations), 1.8% less, it is planned to build a total of 6,717 residential buildings, while the number of permits issued for nonresidential buildings decreased year by year by 16% to 2,033 unit.
The engine that has activated the market of new residential homes and continues to support it is certainly the success of the family financing program, "CSOK", which was also discussed in previous editions of the Observatory. According to an estimate by the Duna House, a record number of sales were made in May 2018 nationwide. Almost 14 thousand transactions resulted in one of the highest turnovers in the decade. This spring, the real estate market has exceeded the level of 13,000 monthly transactions. The "Buda" side of the Hungarian capital has produced an increase of about 8% of the sales of residential properties, while the sales of properties on the "Pest" side have increased "only" by 4% in the category between 100-120 square meters, which shows an average increase in the surface of the required housing. According to ingatlan.com, in mid-July, the average bid price per square meter in Budapest was HUF 594,000. In the larger provincial cities, the slightly lower price is 300,000 HUF, while in the smaller cities 265,000 HUF.
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GENERAL SITUATION OF OFFICE MARKET According to the Budapest Research Forum (hereafter "BRF", which includes CBRE, Colliers International, Cushman & Wakefield, ESTON International, JLL and Robertson Hungary), three new office buildings were delivered to the Budapest office market in the second quarter of 2018, for a total of 57.060 square meters. The GTC White House (21,560 square meters) and the Promenade Gardens (22,500 square meters) have both opened their doors along the Vรกci Corridor, while Graphisoft Park South (13,000 square meters) is the most recent part of the park of the same name. Square meters, consisting of 2,838,720 square meters of category 'A' and speculative office spaces 'B', while 664,450 square meters of ownership remain of the occupying companies. The non-rented surface area stood at 7.6%, with a slight increase of 0.3 percentage points compared to the previous record figures. Total demand in the second quarter of 2018 reached 161,550 square meters, an increase of 64% on an annual basis. The new leases represented 37% of the total leasing assets and the renewal of leases for 34%, while the pre-leases contracts reached a level of 17% relative to high and the expansions the remaining 12%. Sub-market, attracting 36% of total demand. The Vรกci Corridor was followed by the South Buda and Central Pest, with shares of 17% and 15% respectively of total demand. According to the BRF, 196 leases were signed in the second quarter of 2018, with an average size of 824 square meters. According to Cushman & Wakefield, the office in Budapest recorded at 250,000 square meters
Fonte dati: Cushman & Wakefield
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GENERAL SITUATION OF RETAIL MARKET The retail market is well reflecting the nation's macroeconomic developments. The abundant employment, combined with increasingly high wage levels, have made the purchasing power of the Hungarians consistently increase, which is therefore keeping the commercial real estate sector thriving. In addition, the abundant flow of tourism in recent years also provides solidity to the activities located in the center of the capital. A survey presented by the National Bank of Hungary (MNB) and the Royal Institution of Chartered Surveyors (RICS) found that over two years to the end of 2017, the cost of commercial real estate rents in Budapest increased by more than the 15%. The offer has remained stable, and is expected to remain almost unchanged until the last months of 2019, when the "Etele City Center" shopping center in the 11th district should be completed, with the addition of over 50,000 to the market. mq of space destined to the commercial activities.
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GENERAL SITUATION OF INDUSTRIAL MARKET Regarding the industrial market, in the first quarter of 2018, two new buildings were delivered with the dimension of 18.020 square meters: a warehouse of 11.020 square meters in the East Gate Business Park and a hall of 7,000 square meters in Budapest Dock Szabadkikötő building C. The total modern industrial stock in Budapest and its surroundings stood at 2,068,900 square meters at the end of the first quarter of 2018. The two largest quarterly transactions were lease renewals. HOPI at Goodman Gyál Logistics Center renewed the contract on 21,700 square meters, while in Prologis Park Budapest - Sziget Schneider Electric has signed the renewal of a lease for 19,960 square meters. The largest new lease was the 7,000 sq m agreement and was signed at Budapest Dock Szabadkikötő. Total demand amounted to 103,790 square meters in Q1 2018, marking a 45% increase compared to the figure recorded in the same period last year. Renewal of lease contracts represented 72.7% of the quarterly volume, while the share of new leases was 21.8%. No pre-lease agreement was signed in the first quarter of 2018. The twenty-four leasing transactions were recorded in the first quarter, of which two agreements were signed for over 10,000 square meters. The average size of the transaction was 4,320 square meters during the four-month period. .
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GENERAL SITUATION OF FARMLAND MARKET Farmland prices are rapidly rising. According to data provided by KSH, the value of arable land has increased by 22% over the past year. Particularly speaking, there is an increase of +25% on the prices of arable land; a +8% for grazing meadows; +17.5% on vineyards; +8% for orchards and +10.5% for forest areas. However, we would like to remind you that the Hungarian legislation makes it difficult to foreign citizens to purchase lands, as we will see in more detail below. The highest value is reached by vineyards which stands at 1.83 million forints per hectare, equivalent to almost 5900 â‚Ź; follow in order: orchards, arable fields, forests and pastures. 232,000 hectares of land were sold in the last year, mainly due to the government's auctioning of many public land. In 42% of the cases landowners decide to rent them to third parties, probably also due to the increase in rent rates between +7% and +15% depending on the type of land.
Land type
â‚Ź/hectare
Annual growth
Arable land
4180
25%
Vineyard
5885
17,5%
Orchard
4630
8%
Grassland
1670
8%
Forestry
1960
10%
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SITUATION OF STUDENTS’ HOUSING MARKET The student rental market continues to be one of the most attractive investment options in Budapest. The Hungarian capital is increasingly establishing itself as a university city and in recent years is attracting a large number of students, not only from Hungary and the rest of Europe but from all over the world. Every year there is a substantial increase in subscribers from abroad, and the trend should continue at least until 2023, when it is estimated that there could be 40,000 foreign students in Hungary. What should be noted is that the average rents for students are higher than those required for families and workers, due to the short residence time. Moreover, most foreign students come from countries richer than Hungary, and for them a room price higher than the national average is usually not a serious problem. The properties easies to lend are those well connected with public transport or located in the central districts of the city, with numerous rooms and low management costs. Anyway, in our analysis we need to take care of the fact that foreign students are often a resource subject to a not surprising three/six months, maximum one year turnover. This fact could be a double edge sword. In fact, if it is true that usually short period rent could generate higher yields, it is also true that the landlord has to put higher effort in looking for tenants and in supervising them during the lease.
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INVESTIMENTS FOR EUROPEAN CITIZENS

During last years local Government has played a crucial role to facilitate foreign citizens investments. Especially for this reason, the Hungarian real estate market is basically open to all foreign citizens. Although there are no particular restrictions, it is important to underline some limits to the buying and selling process of some property categories. Acquisition of properties for residential, commercial or industrial destination is completely free of restrictions and can be done by both natural and legal persons, either Hungarian or foreigners. The acquisition of farmlands was free until the beginning of 1990’, and most of the foreigners having a farmland now in Hungary bought them during those years. However, acquisition of agricultural lands is subject to preemption and authorizations which makes the operation particularly complex. The qualification of professional farmer is necessary and the residency can be maximum 20km far from the land owned. Legal persons are not allowed to buy a farmland.
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INVESTMENTS FOR FOREIGN CITIZENSโ จ The Hungarian real estate market is increasingly appreciated by foreign investors. According to Vilรกggazdasรกg, foreigners bought 5% of the houses last year. Foreign citizens bought 7,371 homes in Hungary last year, accounting for just under 5% of the total market turnover, according to data released by the central statistical office (KSH). The Germans bought 1,079 houses in Hungary. About 84% of these homes were outside the capital. Chinese citizens have bought 1,058 houses in Hungary, of which 91% in Budapest. They paid, on average, just over 41 million HUF for an apartment, well beyond the 17 million HUF paid by the Germans. The Romanians bought 1,012 houses in Hungary, the Slovaks 695 and the Austrians 424. Foreigners buy mainly apartments for about 200,000 euros in the center of Pest and villas worth 300,000-400,000 euros in Buda. The flow of these transactions was facilitated by the availability of access to credit from the Hungarian institutions. Although citizenship is important to apply for a loan, what matters most is residence. Furthermore, the possibility of receiving credit increases if the salary is received in Hungary. However, the ease of access to credit often clashes with the methodological and linguistic differences that are obviously created when one decides to invest in a foreign market. For this reason it is advisable to consult expert consultants who have been working in the area for some time and have previously managed different types of complications.
ITL Group has more than twenty years experience in the consulting sector and since 2013 it has found the best solutions in the real estate field assisting its customers thanks to a series of relationships with local companies and institutions that allow to make agreements quickly and without misunderstandings. Approximately 150,000 real estate purchase contracts are signed each year in Hungary. Authorization for non-EU citizens is required.
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PROPERTY ACQUISITION PROCEDURE Property acquisition procedure is very simple and consists only few steps. Which are:
1. After the acceptance of the acquisition proposal, reserve the property with a deposit of around 1-2% of the total value.
2. Purchase agreement stipulation through a lawyer who has the role to check in the real estate registry.
3. At the moment of the signature, a 10% of property value deposit is requested, with immediate registration of a tax in the real estate registry.
4. After the agreement upon the final payment, there is the full property registration in the real estate registry.
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GENERAL FISCAL ASPECTS Registration tax It is equal to 4% of the value of the contracted property and is paid after the Hungarian finance inspector's communication. The value falls to 2% if the property is purchased for business purposes and resold within 36 months at the discretion of the tax payer.
Property tax Depending on the municipalities, it can reach up to 1,772 HUF for square meter, to be paid each year in two installments expiring on March 15 and September 15, in most cases, if the property produces income. However, there are exceptions that depend on the free decision of each district.
VAT tax (27% or 5%) Depending on the time of sale and the destination of the property, there are limitations in the recovery of VAT. In the event that you are entitled to recovery, the liquidation by the state is about 60 days (subject to careful checking of the documentation proving the right). The destination and the resale of the building are of particular importance for the purposes of the obligation to pay and / or refund the VAT in the event that the property bought for business purposes (not linked to the sale of real estate) should be resold. Value added tax has been reduced to 5% for the sale of residential buildings under construction or who have received habitability in 2016. It is expected that the legislation will remain in force until 31 December 2019.
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GENERAL FISCAL ASPECTS Income taxes are the followings:
Natural persons
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.
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.
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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US C FO
Dynamics of restructuring costs
In recent years, the prices of residential properties located in Budapest have soared. The salaries of Hungarian workers also recorded significant growth, but not proportionally. If in the last year the price of houses has increased by an average of +18% compared to last year, citizens earn an average wage "only" about +13% higher than the previous year; checking the period of the last two years (2015-2017), we notice that the phenomenon is even more pronounced: salaries at +33% and house prices at +66%, exactly the double. As a result, the chance of the Hungarians to buy a property has been greatly reduced, despite the government's program to help families buy a new home. The payments require an average of 60-120 days and the payment behavior has been rather negative in the last two years, with a difficulty in collecting the same. The demand situation in the Hungarian construction sector remains good, with an increase in value added of 3.4% in 2017 and a 110% annual increase in orders received by the end of 2017. Profit margins for construction companies are low, mainly due to strong competition in the market and low price agreements. Margins increased in 2017, expected to decline in 2018 due to rising raw material prices and labor costs. The dependence on bank financing is high in the Hungarian construction industry. Many small businesses are under-capitalized and need external financing, but only a small part of them are really reliable. Although banks have increased their willingness to provide loans since 2016, lending conditions remain rigid. While interest rates on real estate loans have declined, banks still prefer office projects to residential ones. Non-payment notifications have increased in 2017, and further increases are expected in 2018, as many small businesses show financial weaknesses and struggle with low contract prices and increases in labor costs. The number of insolvencies is very high compared to other Hungarian industries and many small companies active in the construction sector have a very short duration. Smaller players often do not have the ability to make investments to increase the efficiency needed to survive in the market. Building insolvencies are expected to increase by 5% -10% in 2018. In the residential construction segment, property price inflation and the increase in operating expenses represent a risk, while uncertainty remains regarding a potential increase in VAT on housing (from 5% to 27% from 2019).
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S CU O F
FERMENT REAL ESTATE IN HUNGARY? =
 OPPORTUNITIES FOR ITALIAN BUILDING COMPANIES?

Half of the current residential construction projects are late and in many cases the work has not even begun: we are talking about 2500 development plans that have stopped at the construction concession. The cause of these slowdowns is mainly due to the lack of qualified contractors to carry out all the ambitious construction objectives set in the previous months. The Magyar nation is therefore looking for workers and businesses that can sustain the impetuous economic growth of the last few years. Many foreign companies involved in the construction sector, including some Italian, for this reason are deciding to enter this market. Timing must be the key to taking advantage of such a favorable situation before other international actors are attracted. However, this phenomenon is contributing to the increase in the price of housing. In March 2018, compared to the same month of the previous year: According to the Central Statistics Institute (KSH), the volume of production increased in both the main construction groups, 0.2% in the construction of buildings and 4.1% in civil engineering works. Outside the construction divisions, production increased by 1.5% in building construction, 4.6% in civil engineering, but specialized construction activities decreased by 0.1%. The volume of new contracts decreased by 7.1% year on year, in this the volume of new contracts concluded increased by 32.2% in the construction of buildings and decreased by 22.7% in the construction of civil engineering works. In March, high-value contracts were concluded - in addition to those for offices - for commercial, industrial and educational buildings. In January-March 2018, compared to the same period of the previous year: Construction production increased by 19.0%. Construction producer prices: In the construction divisions in the first quarter, prices increased by 11% in building construction, by 5.9% in civil engineering and by 8.5% by weight, with specialized construction activities compared to at the same time of the previous year. Construction prices increased by 3.3% in the quarter.
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S CU O F
FERMENT REAL ESTATE IN HUNGARY? = INVESTING IN TOURISM: NEW RULES
In Budapest, new rules have been introduced for those wishing to start renting short-term tourist apartments, often known as "AirBnB".
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DISTRICT REGULATIONS VII
You can open a new shortterm rental business only if the relevant condominium regulation allows it. Buildings already destined for this function are not bound and may continue to operate. In case of sale of the apartment, the new owner must in any case respect the condominium regulations. The possibility of renting an apartment to tourists should always be explicitly specified in the regulation. If the sale of a property in a condominium takes place, the new owners must comply with the conditions in force at that time, the possible benefits of the previous owner having lapsed.
The new regulations have recently been introduced in District VII, but it is likely that other districts will adapt over time. In the 5th district, other more restrictive regulations had already been passed in the past. In the market there are already companies that manage several apartments for short-term tourist use. Some of these offer the sale of holdings, making it easier to introduce new investors into this business.
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S CU O F
Indicators of the Tourist Market of Budapest and Hungary
According to the Central Statistical Institute (KSH), March 2018, compared to the same month of the previous year: The number of international tourist arrivals grew by 11% and that of international tourist nights increased by 10% to more than 1 million visitors. Turnover measured on tourist nights has increased significantly in all types of accommodation. In hotels that account for almost nine tenths of tourism nights, the growth rate was 7.5%. The number of foreign tourism nights has increased in all tourist regions, especially in central Transdanubia and northern Hungary. Budapest is the most popular destination, collecting as many as five fifths of tourists arriving in Hungary; to follow the area of Lake Balaton, which lately is being appreciated especially abroad. The total gross turnover of the hospitality establishments increased by 19% to 34 billion HUF; within this, revenues from accommodation taxes increased by 19% (to HUF 19 billion), catering revenues by 29% (to HUF 8 billion) and other revenues by 8.5% ( to 7 billion HUF) at current prices. The amount of lodging taxes by foreign visitors increased by 17% and that for domestic visitors by 23% compared to March of the previous year. The latest statistics on inflows and profitability in this sector are very positive. In September, the number of tourists arrivals exceeding the previous year was 4.6%, coming from abroad and 3.6% from Hungary. In addition to this, the average length of stay has also increased: in 2017 the number of nights spent on holiday increased by 6.8% and the average price per night rose by 10%. In the capital all data record even higher values, such as higher hotel prices by + 14%. Budapest è la meta più gettonata, raccogliendo ben tre quinti dei turisti in arrivo in Ungheria; a seguire l’area del lago Balaton, che ultimamente si sta facendo apprezzare soprattutto all’estero.
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S CU O F
Budapest is the most popular destination, collecting as many as five fifths of tourists arriving in Hungary; to follow the area of Lake Balaton, which lately is being appreciated especially abroad. Foreign visitors in Hungary, 2017 In 2017, the number of visits to Hungary by foreign nationals was 55 million, of which 39 million on the same day and 16 million visits at night. In 2017, foreign visitors spent HUF 1,832 billion in Hungary, of which tourist expenses amounted to HUF 1,386 billion. One quarter of the expenses, 467 billion florins, came from the same visitor accounting days for almost three quarters (71%) of total visitor traffic. Night visitors spent a total of 1.365 billion florins during the year. Average daily per capita expenditure grew by 5.9% to 14,700 HUF for visitors in Hungary and 7.1% to 16,000 HUF for night visitors
Lake Balaton 18
FINAL REMARKS From what we have analyzed above, we can reconstruct a general picture of the Real Estate market this quarter. The market is still growing and the demand is high in all sectors: large industrial buildings, offices, new homes and commercial premises in the center. Banks are also reacting positively to this trend by financing investors and families much more than in the past and extending loan repayment terms. Furthermore, building development continues to be strong throughout Hungary, saturating the necessary supply of labor, and is expected to continue to be shipped for years, as evidenced by the large number of building permits issued recently. On the other hand, such a rapid and impetuous development is presenting challenges that the country faces with some difficulty: The construction of new buildings has completely absorbed the building labor, are following delays in deliveries and increase in labor costs of the companies employed. The demand for real estate in all sectors grows much faster than the new availability of supply, causing an increase in property prices. The great success of the "AirBnB" solutions, combined with the ever-increasing influx of tourists to Budapest, necessitated intervention by the institutions, which could make investor work in this business more complex. The market for ÂŤAirBnBÂť is restricted for this type of apartment because it buys only those who want to make a medium and long-term investment. In the residential construction market there could be downside repercussions. Banks are more likely to finance large residential projects (which are part of the "CSOK" program) or to finance high-quality residential housing projects or to finance companies that have shown value creation, for example , the restoration of the purchased apartment. The tax and financial benefits of the government, such as the "CSOK" program and the reduction of VAT on new properties, as they are short-term, are further fermenting the market as each player tries to take advantage of it in time. In conclusion: we can consider that the Hungarian real estate scene is undoubtedly interesting for new foreign investors, but the rapid changes in the market and the many events that affect it make the strategic choices for entrepreneurs difficult. In these cases it may be useful to be directed by professionals who work in the Hungarian market for some time to seize the opportunities and manage the pitfalls that characterize it.
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ITL Group Kft. is the leader advisor company for Italian firms in Hungary, specialised in Hungarian market since 1995. The studio have taken care of more than 500 Italian capital companies to enter the Hungarian market in more than 20 years of activities. We have helped companies on both production internationalization and productive real estate investment.
Federico Michele Brilli Head of Department at ITL Real Estate (+36 1) 269 5679 f.brilli@itlgroup.hu Szilvia Schenk Senior Consultant at ITL Real Estate (+36 1) 269 5679 s.schenk@itlgroup.hu
www.itlgroup.hu 1056 Budapest - Vรกci utca 81