Real Estate Overview Hungary - Winter 2017/18

REAL ESTATE OVERVIEW HUNGARY A macroeconomic and fiscal look

INFORM

OBSERVE

FOURTH QUARTER 2017

INVEST

MACROECONOMIC ENVIRONMENT The last quarter of 2017 was characterised by the continuation of those development phenomena discussed in various editions of the Observatory. The country's GDP is still growing steadily, and once again the results achieved exceed those forecasted. Only considering 2017, the Gross Domestic Product has increased by almost 4%, and similar results are expected for 2018. In the long term, however, growth should fall slightly in line with the achievement of a certain maturity in the economy of the country. Leading this trend we see above all the construction sector, with the development not only of private buildings, but especially of large public works such as highways and railways financed by the Government and by the European Union. On the contrary, agriculture marks negative results, becoming an even less central sector in the Hungarian economy. Furthermore, a series of agreements concluded at the end of the year with the Chinese government will guarantee a series of important infrastructure and development investments in the upcoming years in order to make Hungary one of the main commercial interlocutors in Europe with the Asian giant.

Fundamental economic indicators (sources: Magyar Nemzeti Bank, FMI) GDP fourth quarter 2017 +4,4%

Annual GDP grow rate 2018

MNB refinancing rate: +0,9%

2017 2016

Expected 2018 inflation rate: +2,5%

0,0%

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%

2,0%

3,0%

4,0%

Italy Hungary

The results achieved in the labor market remain some of the greatest successes of the current government. Unemployment shows a new historical low with each new quarter, now reaching 3.8% at the end of 2017, that is 0.7% less than last year.

Wages are steadily increasing, increasing by 13.5% compared to Q4 2016.

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GENERAL SITUATION OF REAL ESTATE MARKET The period of real estate expansion continues in Hungary, particularly in the capital. The last quarter of 2017 recorded an increase in property production of 35% compared to the same period of the previous year. In support of this figure, there is in particular the impetuous drive towards the realisation of various public works throughout the country.
 For the foreseeable future no changes of direction are expected, since contracts for buildings still to be built are also increasing (+4% for private buildings), albeit with decreasing growth rates compared to the past. However, if future growth is almost guaranteed, it is likely to do so with at least slightly reduced rates compared to the past. The rising real estate prices and the probable term of the tax concessions to the purchase (5% VAT) of a new house in 2019 are unknowns with which we must compare.

However, large companies confirm their solid trust in the country as an industrial headquarters, making major investments in factories and warehouses. We mention in particular the country's most important industrial sector, the automotive one, where Audi and Hyundai have announced new research and development centres.

What is still to be underlined is the serious lack of building constructors that is imposing slowed-down growth rates in the country. Some international players are looking at the potential for doing business in the country, but the demand is still very high and it makes us advise the local construction companies again to evaluate the entry into the Hungarian market.

Therefore, in Q4 2017 the cost of construction of private buildings, meaning the compensation for builders, increased by 9.8% compared to the same period of 2016.

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GENERAL SITUATION OF OFFICE MARKET The office market is booming. The positive trend of the Hungarian economy is having immediate repercussions on the choices of companies, which decides to have a seat in Budapest for the Central European region. The demonstration of the success of this market can be contained in only one figure: the properties vacancy rate, fell in this semester to the new historical minimum of 7.5%.

The area preferred by customers is the «Váci corridor», a long road in the area of the thirteenth district.

Location

€/m2 month

€/m2 year

Annual growth %

5 years growth %

Budapest (CBD)

24,00

288

9,1

2,7

Budapest (Central Buda)

16,00

192

0,0

1,3

Budapest (Vaci corridor)

15,25

183

0,0

1,4

Budapest (periphery)

10,00

120

0,0

0,0

In this edition of the Observatory, we have decided to publish data of rent yield: as shown in the table below, rates are slightly down. This is primarily due to the rapid increase in property value due to availability problems and delays in the delivery of new buildings. Even the new buildings under construction, for a total of 253,000 square meters, arriving in 2018, still have a destination customer in 60% of cases.

Location

Yeld (Q4 2017)

Yeld (Q3 2017)

Yeld (2016)

Budapest (CBD)

6,00

6,15

6,50

Budapest (Central Buda)

6,50

6,75

7,00

Budapest (Vaci corridor)

6,50

6,75

6,75

Budapest (periphery)

8,50

8,50

8,75

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.

Main streets shops

â‚Ź/m2 al month

â‚Ź/m2 year

Growth year %

5 years growth %

Budapest (Vaci utca)

120

1.440

9,1

5,9

660

22,2

6,6

Budapest (Andrassy ut) 55 Cushman & Wakefield

In this case, the profitability of the properties also fell from an average of 5.75% last year to the current 5.5% for the main streets of Budapest and reflecting the direction taken by the Magyar economy towards a more general maturity. The very high profitability of recent years were in fact typical of a sudden growth market that perhaps has not yet understood its real potential. It is not excluded that in the near future we will see a further slight downsizing of profitability, which remains in any case positive in the European panorama (center of Rome: about 3%).

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GENERAL SITUATION OF INDUSTRIAL MARKET The industrial market is probably the one that best interprets the success of attractiveness of the country to exceed the available offer. Despite the large number of new buildings, the market remains besieged by the demand of companies. Only 4% of all industrial buildings in the Budapest area are free, a new historical minimum. As for the new offer, 80% of the buildings under construction are already tied to a customer.

Location

€/m2 month

€/m2 year

Year growth %

5 years growth %

Budapest

3,75

45

4,2

1,4

Debrecen

3,50

42

0,0

0,0

Miskolc

3,50

42

0,0

0,0

Győr

3,75

45

7,1

1,4

Székesfehérvár

3,50

42

0,0

0,0

Cushman & Wakefield

To qualify for the phenomenon, we mention some of the biggest investments in the sector in the last quarter of 2017. The supermarket chain Auchan has announced the construction of an 87.200 sqm logistics center in the Budapest airport area, the largest in the whole Hungary in its sector. In addition, Coca-Cola said they wanted to expand their production center and making it their largest infrastructure in Central and Eastern Europe, with the purchase of a land of 52,600 square meters, to be added to the existing property.

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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 authorisations which makes the operation particularly complex. The qualification of professional farmer is necessary and the residency can be maximum 20km far from the land owned.

Legal persons are not allowed to buy a farmland.

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INVESTMENTS FOR FOREIGN CITIZENS There is an increasing appreciation of Hungarian real estate market from foreign investors.

According to Ingatlan.com, around 6-7% of real estate acquisitions in Hungary is settled by foreigners, but this share increases to 15-20% if we consider Budapest data only and in the most attractive 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 recommended 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 organisations and institutions which allow ITL to make deals quickly and without misunderstandings.

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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 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 to 36 months.

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 shows 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 received habitability during 2016.

This law will be current until December, 31st 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 between 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

WILL PERIPHERIES LEAD A NEW TREND?

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.

This tendency is making the suburbs "in vogue" return, reversing the course of the last few years which had the interests largely concentrated in the center.

The significantly lower costs are in fact attracting all those who need a new home but can afford one in a central district.

Even small countries outside the capital are experiencing great success for the same reasons.

In the last year, new housing in Budapest was as high as in 2016, while in small urban centres more than doubled.
 This may be the beginning of an interesting and increasing trend in the future, on which it is necessary to pay due attention to follow the market trend without delay.

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FINAL REMARKS We summarise here for completeness what we have analysed above.

The Hungarian market remains strong and growing. Indeed, it is capable of attracting large amounts of capital from abroad, both in industry and in services, and the real estate sector is certainly positively affected. Real estate expansion has become a constant in recent years and will continue at least in the near future. This, despite the problems of lack of construction companies, which are dictating delays in deliveries and higher real estate prices.

A phenomenon that clearly emerges is the constant increase in property prices of any category, with several consequences: • • •

Increase of profit margin for builders Reduction of rents’ yield New interest in cheaper areas such as suburbs and small urban centres

Just the increase in prices, not proportional to that of rents, has slightly eroded the profitability of leased buildings in all sectors. Moreover, the considerable increase in the salaries of Hungarians over the last two years was not enough to keep up with the rapid rise in property prices. Currently, Hungarians have more difficulties in buying a dwelling than in the past, despite the government's efforts with the "CSOK" program implemented precisely to have the opposite effects. Nevertheless, we continue to trust the aforementioned program with the increasing simplification of the granting of funding.

Furthermore, the National Bank is monitoring the real estate valuation criteria with the publication of related new guidelines. The great expectations placed on the Hungarian market by the various rating agencies will always encourage new investments, especially productive, by institutional and professional investors that are usually followed by smaller entrepreneurs. Even the ever increasing success of tourism in the country will reward those who have decided or are deciding to enter this market with small or large 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