REAL ESTATE OVERVIEW HUNGARY Macroeconomic and financial perspective
INFORM
OBSERVE
INVEST
AUGUST 2017 1
MACROECONOMIC OVERVIEW Macroeconomic situation is still improving, as demonstrated by the source close to government Századvég Research Institute’s last forecasts. In their June publication they estimated GDP growth rate of 3.8% for both 2017 and 2018, instead of 3.6% and 3.4% estimated in March publication. GDP growth rate that can, however, either reach only 3.5% depending on the agricultural sector results, or exceed 4% if investment level goes beyond expectations. GDP will likely grow because of two factors: consumption level increase (according to Századvég, it will grow of 3.7% in 2017 and of 4% in 2018), due to minimum wage policies that will cause an increase in minimum salary of 12% in 2017 and of 8.6% in 2018; investments becoming more intense following European Union funds availability and economic activity tax reduction to 9%.
Fundamental economic indicators. (Source: International Monetary Fund, Trading Economics) 2° Trimester GDP 2017 +3.2%
GDP annual growth rate 2018 2017
MNB refinancing rate: +0.9% Expected 2018 inflation rate: +3.3%
2016 0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
Italia
2016 0,9%
2017 1,1%
2018 1,1%
Ungheria
2,0%
2,9%
3,0%
Italia
Hungarian financial rating. Investment grade: medium-high quality of financial instruments. ➢ Fitch : BBB- (stable outlook) May 2017 ➢ S&P: BBB-/A-3 (positive outlook) August 2017 ➢ Moody’s: Baa3 (stable outlook) March 2017
3,5%
Ungheria
Last Századvég positive news are about public debt. In fact, according to the Institute, it will amout 2,4% of GDP for both this year and the next one, which is perfectly in line with government goals. Finally, according to Hungarian Central Statistical Office (KSH), unemployment rate in second quarter was 4.3%, decreased of 0.9% from the same period last year.
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REAL ESTATE MARKET GENERAL SITUATION Observing KSH data, we can notice how the number of buildings built in the second quarter of the year was 2,913, with an increase of 42.8% compare to the first quarter and of 46.3% compare to the same period last year. This increase was driven mostly by big company’s investments, almost doubled with respect to the previous trimester (854 buildings in Q1, 1,640 in Q2) while private constructions remained stable. This phenomena has been intense especially in Budapest, where the number of buildings built went from 204 in the first trimester to 777 in the second trimester, with an almost exclusive increase in constructions derived from big company’s investment, went from 53 buildings in Q1 to 621 buildings in Q2. These data give a strong signal about real estate investments in the Hungarian capital. Construction permits recorded a record number in second quarter of the year, where they reach 10,298 units, increasing the already high value of 9,525 recorded in the first trimester. Thus, it is reasonable to expect a further increase in the number of buildings built within the year and in 2018. Data shows how the CSOK program, addressed to Hungarian families, keep producing results in the real estate market. Prime Minister office secretary, Csaba Dömötör, has announced that more than 50,000 requests has been made for a total of more than HUF136 millions. 3
OFFICE MARKET OVERVIEW According to Cushman & Wakefield, in second quarter of 2017 rent renewals represent 39% of the entire office market, while new local rents and changed local rents amount 52%. Vacancy has decreased to a historical low of 8.6%. Tenants are intended to stay in the occupied offices for long periods, and the lack of a proper number of new spaces in the near future will cause shortage of availability and a yield increase. The main area in which new constructions are addressed is always the Váci Út corridor, and usually pre-leasing contracts are made during projects implementation. Generally speaking, we can notice a positive situation, and a new offer of 720,000 square meters in Budapest during 2017-2019.
Position
€/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 passageway)
15,25
183
1,7
1,4
Budapest (suburbs)
10,00
120
0,0
-1,9
Cushman & Wakefield
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RETAIL MARKET OVERVIEW In the second quarter of 2017, demand for central streets, such as Váci Útca, Arena Plaza, West End, Mammut e Allee remained high, thus causing a rent increase in the near future, as reported by Cushman & Wakefield. An important rent growth has occurred in Váci Utca (20%) and Andrássy Út (22%), as well as the principal shopping centers (6%).
Principal streets shops
Monthly €/m2
Annual €/m2
Annual growth %
5 year growth %
Budapest (Vaci utca)
120
1.440
20,0
5,9
Budapest (Andrassy ut)
55
660
22,2
6,6
Cushman & Wakefield
Expantion of local and foreign retailers is under way, and the demand for new local offer is growing. Market conditions improvement pushed space suppliers to realize new projects, such as the 53,000 square meters Etele City Centre, which should be delivered in the last quarter of 2019.
Generally, investments in big shopping centers are made by foreign investors, while small transactions are carried out by local investors.
Rendering Etele Plaza
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INDUSTRIAL MARKET OVERVIEW Inside the industrial market, in the second trimester we found demand growth accompanied by an availability reduction, as Cushman & Wakefield data shows. Indeed, the percentage of available buildings reached historical low of 5,5% in Budapest.
The industrial sector records a shortage of offer in relation to the growing demand, driven by both existing companies will expand and new companies will enter the market. As a consequence, renewal rate is very high (around 75%), while offer shortage and increasing construction costs caused a rent increase of 4.3% in the second quarter, which could even raise during the year. After remaining stable during last trimester, yields will probably suffer a slight decrease during the year, due to the strong competition to obtain the few avilable valuable buildings.
Position
Monthly €/m2
Yearly €/m2
Annual growth %
5 year growth %
Budapest
3,65
43,8
4,3
0,8
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
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STUDENT MARKET OVERVIEW Investors have positive expectations on the student market, which is considered the most credible investment alternative to the classic sector in which yields have become stable. Amongst a group of investors involved in a questionnaire carried out by CBRE (one of the most authoritative real estate agencies in Hungary) in spring, 49% of them think that the student market is the most interesting in the near future. According to Tower International, well known Hungarian real estate agency, there will be a rent increase of 5-10% in Budapest, thus reaching an average of 155-160 thousand forints per month. During the first semester rents landed on an average of 135,000 forints, with an increase between 8% and 10% in June. In fact, summer months rents are usually subject to important raise due to the huge demand of new University students. During the first semester of the following year, price tend to stabalize again.
In our analysis, however, 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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EUROPEAN CITIZENS INVESTMENT
During last years local Government has played a crucial role to facilitate foreign citizens investment. Especially due to 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 either natural persons or legal persons, either Hungarian or foreigners. Instead, acquisition of agricultural lands is subject to preemption and authorizations which make the operation particularly complex. This type of acquisition is prohibited for legal persons and companies, while it is allowed only for natural persons.
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FOREIGN CITIZENS INVESTMENT 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 are settled by foreigners, but this share increases to 15-20% if we consider Budapest data only. Furthermore, according to portfolio.hu, in Budapest prime districts, the percentage of foreign buyers is comprised between 22% and 27%. The flow of these transactions has been facilitated by the availability of credit amongst Hungarian institutions. As reported by Krisztian Vincze, director of GDN Real Estate Network’s Credit Center, even though citizenship is important to request a loan, what matters the most is if they are Hungarian residents or not. Finally, chances to receive credit raise if the salary is received in Hungary.
However, credit access ease often collide with methodological and linguistic differences that obviously arise when someone is investing in a foreign market. For this reason it is recommended to address expert advisors who operate farback locally and have handled different types of problems before. ITL Group enjoys more than twenty years experience in the 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, 10% of property value deposit, 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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INVESTMENT FISCAL PERSPECTIVE 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. Property tax Property tax can reach 1,772 HUF per square meter, depending on the district. 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% o 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 shows the right). In the case of properties bought to entrepreneurial purposes which are subjected 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 received habitability during 2016 although they were bought in 2015. 11
INVESTMENT FISCAL PERSPECTIVE Income taxes are the following:
Natural persons If you resale the property before five years, you have to pay 16% on the difference between acquisition and sale. This tax base decrease 20% every year for five years until it becomes zero.
Furthermore, there is the district tax on economic activities which has the same tax base applied in Italy (old IRES), with a rate of 2%.
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 the lowest in Europe.
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
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FOCUS: INVEST IN HUNGARY 5 REASONS WHY TO INVEST IN HUNGARY INSTEAD OF ITALY: HIGHER YIELDS
LESS TAXATION
BETTER RATING
FASTER GDP PER CAPITA GROWTH
INCREASING TRUST OF THE BANKS
Better yields with same risk (based on country rating), less taxation and positive signals about the future such as GDP per capita growth and banking sector trust, prove why in this moment is more convenient an investment in Hungary than in Italy. In the next pages we are going to explain you the details of our analysis: Public debt acquisition risk evaluation S&P AAA
Germany
AA
France Czech Rep. Slovakia Poland
A BBB
Italy
BB
Hungary/ Portugal
B
Greece
CCC CC C 2013
2014
2015
2016
2017
About investments it is always important to consider the credit rating of the country in which we want to invest in order to evaluate the relation risk/yield. In the graph above we can notice how the rating agency Standard and Poor’s (S&P) has evaluated some countries from 2013 since today. In 2013, Hungary and Portugal had the same (negative) rating, BB. Both went hand in hand until 2015, when their rating were updated to BB+. However, in 2016 Hungary’s rating received another upgrade to BBB-, the same as Italy, but with even a positive outlook, instead of the stable outlook of Italy. Ratings assigned to Greece, Italy and Poland, show that not all countries managed to improve their evaluations in the last 5 years. This fact is not surprising when we think about Greece, but the comparison with Italy is for sure significant. In fact, even if Poland registered a worsening in his rating in 2016, it would still have a positive evaluation of BBB+ with a stable outlook. (ITL Real Estate internal processing)
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FOCUS: INVEST IN HUNGARY Germany and France, the two European superpowers, are a good role model, with very good and stable ratings in the last five years (AAA for Germany, AA for France). Czech Republic, Poland and Slovakia, together with Hungary, constitute the VisengrĂĄd Group. These countries have past experiences similar to those of Hungary, and for this reason, plus the positive outlook given by S&P, we expect Hungary to obtain the same results in the near future. GDP per capita US$ (source: OECD) $50.000 $45.000 $40.000 $35.000 $30.000 $25.000 $20.000 $15.000 $10.000 $5.000 $0 Hungary
Italy
Greece
Portugal 2013
2014
Poland 2015
Czech Rep.
Slovakia
Germany
France
2016
Another important data to take into analysis is GDP per capita, starting from 2013 until 2016. It is not surprising the fact that in these four years Greece’s GDP per capita grew only of 2.27%, as the fact that in yet developed countries, such as France and Italy, growth was contained (5% and 6.30% respectively). Germany represents a role model even from this point of view, given the fact that although it had a high GDP per capita yet in 2013, it reached a growth of 7.96%. Hungary and the remaining countries considered in the analysis are the one that either are growing the most or, like Portugal, are trying to recover after years of economic difficulties. For this reason, GDP growth rates in their cases are the highest between the considered countries. In Hungary, there was a growth of 9.53%, in Portugal of 9.72%, in Slovakia of 9.74%. The highest increase was recorded in Czech Republic, specifically of 15.18%, followed by Poland, whose increase was of 12.46%. Thus, even this indicator is positive if we take into consideration that Hungary is keeping the same pace of historically similar countries that have, however, already achieved important economic results and highly trustworthy ratings by the principal rating agencies. (such as Slovakia). (ITL Real Estate internal processing)
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FOCUS: INVEST IN HUNGARY To investigate about future Hungarian real estate market potential, it is important to compare actual data to the one of pre-crisis period: 2008
2013
2014
2015
2016
APPROVING HOUSING CREDITS
145,504
40,663
53,664
68,434
81,184
TRANSFERRED H.C. (MILLION HUF) Of which: Buying old flat Buying new flat Construction
886,976 (64%) (15%) (12%)
168,261 (68%) (9%) (8%)
253,631 (72%) (6%) (6%)
361,282 (69%) (4%) (5%)
455,725 (74%) (5%) (8%)
15.1 15.6 18.9 18.0
13.6 14.1 16.0 16.2
13.3 15.1 14.6 16.2
13.9 14.8 15.2 15.8
14.5 15.8 16.6 16.4
AVERAGE TERM (YEARS) Of which: Buying old flat Buying new flat Construction (Source: KSH)
After the splendor of pre-crisis period (2008), the worst results in real estate market were recorded in the 2013-2014 two-year period, in 2015 there was a comeback to acceptable results, while 2016 presented a decided recover of the market. Values recorded in 2016 mostly represent the highest point in after-crisis period. We can notice that credit distribution changed significantly, with just 5% dedicated to new flats acquisition and 8% dedicated to constructions in 2016, compare to 15% and 12% in 2008. However, compare to 2015, credit dedicated to new flats acquisition and construction is almost doubled, sign of a positive approach toward investments by banking sector, which is slowly bringing data close to pre-crisis level. Term of approved housing loans represent a further positive sign. In fact, we can notice that the average term is almost equal to 2008 level, while new flat acquisition term is even longer. Separate discussion relates new flat acquisition and constructions, but it is important to notice that in just one year their average term went from 15.2 and 15.8 in 2015 to 16.6 and 16.4 in 2016. In 2017, we expect a construction credit increase that will probably exceed 10% of total credit, and an increase in credit dedicated to new flats acquisition due to the CSOK program. The recover optimism and the growing bank’s trust will probably extend the housing credit term, with an average level that will likely exceed 15 years as in pre-crisis level. These data analysis lead to the conclusion that the country is reaching important safety and reliability levels, and consequently, real estate investments will be characterized by long term (typical of mature markets) and smaller yields compare to the short term-high yields projects carried out during last years. (ITL Real Estate internal processing)
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FINAL SUMMARY In the light of data analyzed inside this overview, our opinion is that Hungarian real estate market is strongly influenced by national policies. We thus think that some of this data are, let’s say, ‘inflated’. The two main policies that have influenced the market are: 1. CSOK program, which represents an incentive for Hungarian families to acquire a property with entire or partly guaranteed loans. 2. The increase of minimum wages in 2017 and 2018, 15%+8% for general workers and 25%+12% for skilled workers, respectively. The positive effect of these policies clashes with a market that is actually growing but with some normal difficulties typically associated with a development process. In the first quarter of 2017 buildings buyers spent 8.1% more than the first quarter of 2016, as reported by KSH. Significant increase, but smaller than the double digit one recorded in last years, proving how the market is going toward stability. A further news of the Hungarian real estate market, particularly in regard to Budapest, could be about the short-term turistic rent as cash flow source for small investors. In the major European capital it is present, or soon it will be introduced a specific regulation in this area, due to massive and improper use of AirB&B as an i-economy instrument, and the consequence that this use means for resident (disturbance and frequent tenant turnover) and in the form of hotel lobby’s pressure because of their profit reduction. Prague is the last example, where, according to haszon.hu, AirB&B phenomena grew out of all proportion, resulting in a 20-times increase in the number of apartment rented, reaching 14,000 units, and causing a miss-financial entrance of 120 million Czech crowns. An introduction of a specific regulation is being considered in the Czech capital, and soon the same fate could involve Budapest, where there are increasingly frequent complains from resident and hotels about the way in which i-economy instruments (AirB&B) are used. ITL Real Estate, through a juridical-economic analysis of regulation present all over Europe and thanks to its practical experience in the local market, is working on different strategies to keep the possibility to implement succesfully and without hitch short-term turistic rent investments, in complete respect of new possible regulations. It is also able to implement tailor-made solutions for long-term investments.
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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
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