Hungary Property Market 2010 - Hard Talk about Real Estate Budapest

Open talk about Budapest property market where honest point of views are missing due to vampire players’ power and interest.

First we need to look back and see the background of the real property market in Budapest. The key points are, as follows:

1. Between 2000 and 2004: Budapest property market was targeted by investors who expected property price boom when Hungary was joint the EU in May 2004.

2. Unrealistic price increase was based on miscommunication from estate agents and mismanagement of investors that caused promising capital growth by 2005.

- Investor market where prices increased considerably and the higher price the higher capital appreciation model applicable. But it was artificial and unreal capital growth that was going to be stopped. Foreign investors (from Ireland and the UK, for instance) invested through estate agents who mismanaged investors with false market information and miscommunication. Overpriced and over-valuated properties (sometimes properties with unable to resell conditions sold to naive investor who were impressed by downtown of Budapest) purchased by foreigners who were eagerly waiting for nice return and capital growth from Budapest property investments.

- Local market where folks purchased apartments at significantly lower prices (10%-30%) and they did not have high expectations with capital growth and return. Local market was more sensitive with unrealistic prices and dodgy properties. Locals purchased apartments with lower price in all buildings where foreigners were also interested in. New developments (off-plan) under local and foreign (Irish and British agencies) real estate agents’ co-operation marketed in several property shows (in Ireland and the UK) that helped developers using unfair pricing against foreigners. As a matter of fact 30%-90% (extreme figure in a new development where 70% Irish, 20% other nationalities and 10% Hungarian only) foreign ownerships in Budapest new developments happened because developers were interested in selling apartments with extra profit to foreigners.

- Between 2006 and 2008 local market and investor market were emerged and overseas property investments (Buy-to-Let Schemes) became a nightmare for those who were ripped off in first decade of Budapest property investment market. NO CAPITAL APPRECIATION SINCE 2005 IN BUDAPEST BECAUSE LOCAL MARKET PRICED PROPERTIES IN ACCORDANCE WITH INCOME POTENTIALS IN HUNGARY. Local market priced foreign-owned properties as well which prices usually are not based on value

That is why current property prices are at the level of local market in 2005. Global changes in financial markets (credit crunch) made reselling potentials more difficult than ever expected. Because prices like 2005 but buying activities are not at the same level due to lack of financing and trust in Hungary, of course. Dodgy investment strategies and partners (greedy agencies) destroyed Hungarian property market reputation which made Budapest property matters tough. Although stand still market with limited resale potential and loss minimisation aspect is very quite at the minute, it shows us some interesting opportunities.

Burned and desperate investors under financial and emotional pressure are leaving Budapest but market must go on. Everything has changed dramatically but the new property world in Budapest needs to be understood to show us investment opportunities. With respect, it is not a good time to sell, definitely, but it is not a good time to buy either unless you know what to buy, where to you and what price in Budapest.

What are Budapest resell potentials in 2010? Will 2010 hurt resale potentials in Budapest?

Please mind that Budapest properties with BELOW MARKET VALUE (at fire sale prices) are most likely to be sold in a certain period of time but realistic market value is almost impossible to be achieved unless the property is strongly demanded on the local market. Resale potential of Budapest apartments may vary in each district but marketed apartments to local demand are ready to be sold only. Demanded apartments are available in all districts of Budapest by locals who are looking for apartments in all price range. Predator investors, of course, are also watching the market to find desperate owners who are willing to make a deal below market value as low as possible in Budapest.

To set resale potential for a particular Budapest apartment, it is to be evaluated as complex as possible. Average development price (new build) or average district price (classic home) can mislead you and they are not recommended to be used at all. Purchasing price, for instance, could be a good starting point unless you paid over the odds. Professional property valuation with selling strategy, eventually, is the key to successful resale in a reasonable timeframe. Overpriced / Over-valuated Budapest properties might be unsold for months/years that would be a disappointment to whom is concerned with.

Solid profit on property sale is still available in Budapest if property with good resale value was purchased before 2005 at local price level. Loss minimisation on property investment will be the goal, otherwise.

Selling Budapest properties in 2010 is strongly recommended only who is desperate and stretched by serious financial pressure. Who is able to finance Budapest property investment in 2010, those investor needs to await and keep cashflow from rental well-maintained.

From September 2010 mortgage rules are restricted by Financial Law in Hungary, as follows:

Banks are not allowed to provide mortgage in other FX because it is regulated by the Law! The amount of mortgage you qualify for is to be based on three factors:

•Your monthly payments as a percentage of income
•Your credit history
•Value of Property

Property mortgage based on value of property only is not allowed by the Law from 11 June 2010

Captial gain tax (CGT) in Hungary is 25 % but 0% if property is hold for 5 years at least:

- Year 1 CGT = (purchasing price less selling price and deductable charges) x 25%

- Year 2 CGT = [90% x (purchasing price less selling price and deductable charges)] x 25%

- Year 3 CGT = [60% x (purchasing price less selling price and deductable charges)] x 25%

- Year 4 CGT = [30% x (purchasing price less selling price and deductable charges)] x 25%

- Year 5 CGT = 0% applicable for all apartment purchased earlier than 2006

- Deductable charges: Stamp duty, renovation and re-decoration, legal and marketing charges (invoices/receipts required)

- Residentail property purchasing price over HUF4 millions: 4 % (applicable the partial price only, 2% below HUF4 millions added up)

- Commercial property purchasing price over HUF1 billion 2% but stamp duty is maximised at the level of HUF200 millions

In general, achievable rent has been decreasing and rental potentials restricted. It is not rare when apartments are standing empty for months even if rent is continuously decreasing month by month. Average vacancy period is 3 months approx. but we also have empty apartments for over 6 months. Keep the apartment rented with making tenant happy is a critical point in the current market environment. To introduce a tenant, more time and extra efforts (more flexibility with organising tours to tenants in the evening/in the morning and at the weekend/holiday) with price negotiation needed.

Thanks to oversupply with furnished apartments in inner districts (5,6,7,8,9), tenants intend to move as close as possible to the heart of City just nearby a metro station. The more well-located property the more chance of having a tenant in a specific time. Well located does not mean only that you have an apartment in those districts but street, street number (building condition), floor, view are in focus.

Decrease in rental prices had led to more interest for one bedroom apartments compared to studio ones. Studio apartment owners are suffering from long vacancy period and low rent level if rented.

New build one bedroom apartments’ rent in district 6 and 7 has also gone down, they are good alternative rental option compared to classical one bedroom properties, accordingly. Also, huge 1 bedroom (over 70 sq. m) and 2 bedroom (over 90 sq. m) apartments are less desired as well as 3 bedroom by tenants. Tenants are looking for cost effective (reasonable rent with as low utilities as possible) liveable one bedroom apartments in a tidy and well-organised building.

Tenants are spoiled with massive oversupply and low rent for nicely furnished apartments because number of tenants (tenants from abroad, indeed) in Budapest is considerably lower like a couple of years earlier.

When is Euro going to be introduced in Hungary? How are the Hungarian Economy Prospects?

Euro introduction is expected to be done within five years but uncertainty in Hungarian economy performance might have impact on the action. We do not have a crystal ball to see what happens next but changes will be taken place through slow social and economic procedure in long time aspect. Disappointed society with anti-globalism attitude and black economy with political and corporate corruption as well as low income (Average monthly net salary in Hungary = 500 Euro) make the Hungarian Economy prospects questionable in short term.

2010 is the year of new election in April which does not let current and new government time to work on critical issues. All in all, 2010 will not bring any positive outlook of Hungary. 2011 can be the first year when we can see the economic perspectives. In the meantime, making expectations is just simple way of wasting time. Let us hope the best!

General government balance (monthly, bn HUF)	10-07	36.1
Current account balance (m EUR)	09Q3	697.9
Interest rate on forint-based consumer credit (APR)	09-11	25.5 %
GDP growth (yr/yr, adjusted for calendar impact)	10Q2	0.8 %
Inflation (annual consumer price index)	10-07	4 %
Inflation (medium-term target)	08-08	3.0 %
Industrial production (working day adjusted, yr/yr)	10-06	12.6 %
Benchmark interest rate	10-06	5.25 %
Retail sales (yr/yr, adjusted for calendar impact)	10-05	-4.7 %
Foreign trade balance (m EUR)	10-06	563.9
Interest rate on fixed HUF deposits (within 12 months, annualised)	09-11	7.2 %
Unemployment rate (average of 3 months before publication)	10-07	11 %
Corporate HUF lending rate - short term	09-11	10.33 %

If you had further specified questions with Hungarian economy and Budapest residential property market, we are pleased to place questions with answers in public.