REAL ESTATE OVERVIEW HUNGARY Macroeconomic and financial perspective
INFORM
OBSERVE
INVEST
MAY 2017 1
MACROECONOMIC SITUATION According to the economic forecast published in March by Szazadveg Research Institute, Hungary’s GDP will continuously grow in the next two years with an increase of 3.6% and 3.4%, respectively. According to analysts, this growth will be sustained by consumption and investment increase. The structural reforms – suggested in the OCSE report – have brought an income increase, which have caused an increase in family consumption. The fundamental economic indicators show a general positive trend, with a stable 4.4% unemployment rate and a forecast of 4.2% in 2018. There is an expectation to economic rise, coherent with last government goals to encourage productivity, increase high value job and improve Hungarian economy competitiveness
Fundamental Economic Indicators. (source : International Monetary Fund) 1° trimester 2017 GDP: +3,8%
GDP annual growth rate 2018 2017
MNB refinancing rate: +0,9%
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
3,5%
Expected 2018 inflation rate: +3,0%
Ungheria
Hungarian Financial Rating. Investment grade: medium-high quality of financial instruments. ➢ Fitch : BBB- (stable outlook) May 2017 ➢ S&P: BBB-/A-3 (stable outlook) February 2017 ➢ Moody’s: Baa3 (stable outlook) November 2016
Based on the International Monetary Fund forecast, Hungarian total demand will grow 2.7% on average in 2018. The demand increase will cause an economic growth also next year, with the adjustment of the offer to market requests.
2
REAL ESTATE MARKET GENERAL SITUATION According to the Hungarian Central Statistical office KSH, in the first quarter of 2017, 2,061 new buildings were built, 46.7% more than the same period last year. Moreover, during the first five months of 2017, 5,563 new construction permits were issued for residential destination, 9% more than the same period in 2016, for 1,755,535 m2 in total. 4,270 of them refers to residential buildings with one dwelling, for 649,651 m2 in total. We can thus imagine an important increase in the number of buildings during 2017. On the other hand, the pace of construction permits for residential destination is still positive but it has strongly slowed down if compared to 2016. In fact, the increase of construction permits for residential destination last year was 87%.
However, such a huge increase was probably due to the introduction of the CSOK Program, an incentive in the acquisition of a new house pointed towards Hungarian families with children. Finally, according to KSH, there is a decrease in construction permits for both non residential destination and holiday houses of 24% and 16%, respectively
3
OFFICE MARKET GENERAL SITUATION Hungarian office market, especially in Budapest, kept enjoying a positive period in the first quarter of 2017. Although only 5,500 m2 have been delivered during the first trimester, a new 100,000 square meters offer is expected during the present year.
One of the most well known real estate consultancy agencies, CBRE, has conducted a survey in 2017 through a questionnaire amongst Hungary real estate investors. According to the investors involved in the questionnaire, the office market is for sure the most attractive one with a suprising preference rate of 69%, followed by hotels investments (14%), and retail and industrial sector (both with 8%).
Position
â‚Ź/m2 Month
â‚Ź/m2 Year
Annual growth %
5 Year growth %
Budapest (CBD)
22,00
264
4,8
0,9
Budapest (Central Buda)
16,00
192
3,2
1,3
Budapest (Vaci passageway)
15,25
183
1,7
1,4
Budapest (suburbs)
10,00
120
0,0
-1,9
Cushman & Wakefield
4
RETAIL MARKET GENERAL SITUATION The first quarter of 2017 showed a situation in which the rent demand in principal streets and principal shopping centers was still very strong. Retail market is intended to exhibit a price increase due to investors’ strong interest. This interest is originated from a stable economic growth and the family’s consumption increase. The Hungarian market is considered suitable fot investments by every rating agency. In the first trimester of 2017 yields were an average of 5.5% and shop sales increased by 11.6% compared to the same period last year.
We can explain family’s increase in consumption observing the growth in the net monthly earnings in the first four months of 2017. This growth amounts to 12% compared to the net monthly earnings of the same period last year. However, it was caused mostly by a change in the minimum wage legislation, which had brought increase in the minimum wage in 2017 and it will continue in 2018 (15%+8% per general workers, 25%+12% per skilled workers).
Principal streets shops
Monthly €/m2
Annual €/m2
Annual growth %
5 year growth %
Budapest (Vaci utca)
110
1,320
10,0
4,1
Budapest (Andrassy ut)
45
540
0,0
2,4
Cushman & Wakefield
5
INDUSTRIAL MARKET GENERAL SITUATION According to the first quarter data published by Cushman & Wakefield, a record decrease of vacancy rate has been recorded in the Hungarian Capital Budapest (5.9%). This data, summed to the strong increase in construction costs, put pressure towards a rise in lease prices. Principal investors in this sector are automobile companies, followed by firms operating in the logistic sector, and also by e-commerce industry, which is constantly growing. Industrial space demand recorded a transaction volume of 71,600 m2 in the first trimester, which is in line with the average of the last five years considering the same period.
Considering future predictions, there are 80,000 square meters expected to enter in the market in the end of 2017. Construction areas regarding the logistic sector development are mostly focused in Budapest, while manufacturing companies prefer rural regions, In fact, according to KSH, in the first four months of 2017 the volume of industrial production is increased by 4.7% compared to the same period of last year, but in this sector the lowest growth is recorded in Budapest (0.8%). Exactly the opposite of what we can observe in other sectors such as office and retail.
6
STUDENT MARKET SITUATION The sector of Hungarian real estate market which has more growth potentiality is probably the student one. In this sense, the results from a questionnaire amongst real estate Hungarian market investors about their future expectations carried out by CBRE in 2017 spring are significant. According to them, it is necessary to look for alternatives to classic markets in which yields are going to stabilize. They also think that the most attractive markets in the near future will be student housing (49%), house loans (27%), buildings dedicated to either private education or private health structures (20%).
Furthermore, foreign students in Hungarian universities are increasing. The Hungarian daily newspaper Magyar Idők reports that the number of foreign students is going to increase from the current 28,000 to 40,000 probably before 2023. 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.
7
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.
8
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. 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. Other factor which needs to be taken into 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 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 onlyfew 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.
10
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 followings:
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.
12
AVERAGE MARKET PROFITABILITY Average profitability will be stable on 2016 levels. Price increase is contained compared to last year and a half growth, but is still constant on national average. Two-three years ago Hungarian real estate market was experiencing over-supply, but after government incentives and economic recovery, the market was positively pushed, changing in a demand-drive market. Average profitability is facilitated by private companies which allows to gain yieds on rents, that could have different amount depending on location. The average lease yield is around a gross 5.5-6%.
In the ‘Prime’ residential areas, such as Andrássy út and Váci utca, property yields turn out to be lower because of the square meter price that has become too high, while lease value has stayed more or less the same because of the economic crisis. However, in 2017 we expect an increase (not in double digit as it happened last year but around 4-6%) in districts where foreigners invest the most (VII, VI, V, IX and part of VIII), also because there will be lots of residential projects delivered to young Hungarian families. A slow down will sharpen in 2018, when 3,000 units of residential development will be avilable in districts IX, XI and XIII. (Internal ITL Group elaboration on Haszon.hu data)
13
OUR POINT OF VIEW 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. For example, according to vg.hu, raw material price increase can potentially stop many construction projects in the next six months, especially the ones carried out by small businesses, which usually work with short-term contracts. Consequently, Hungary, and especially Budapest, present itself as a mature market with investment opportunities that need to be carefully evaluated and taking into consideration according to local conditions. It is a market suited for aware investors, which have previous experience in both real estate market and Hungarian market. As we know, generally higher yields go hand in hand with risk, higher the former, higher the latter. Hungary still displays real estate potential earnings but the investments are not risk free. These risks, however, could be deeply reduced addressing skilled professionals. Doing investments without correct information and resting on potentially misleading data could represent a leap of faith for many foreign investors. Hence, we suggest you to address expert professionals in real estate who can make investment risks as small as possible.
14
DO YOU NEED MORE INFORMATION? ITL GROUP REAL ESTATE Are you interested in deepen the topics covered and exploit our professionals in order to decide about an investment? Contact us by completing the form presented in the next web page! We commit ourselves to assist you in the best possible way: Click here
You can schedule an appointment here: Click here For further information, please find our contacts below: E-mail: itlrealestate@itlgroup.hu Call : +361 269 5679
15
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
16