A guide to real estate investment in Hungary

A guide to real estate
investment in Hungary
2014/2015
The time is now!
Contents
3
Introduction
5
Why Hungary now?
8
Office Market
11
Industrial Market
14
Retail Market
16
Submarket focus: Váci Corridor
19
Submarket focus: CBD
22
Understanding capital markets in Hungary
25
Trends and projects to keep an eye on
27
About Hungary
30
Leading industries
31
Subsidies for investment projects in Hungary
32
Legal environment of real estate investments
36
Tax environment of real estate investments
40
About JLL Hungary
42
Contacts
Introduction
The time is now!
Hungary is experiencing a revival of its economic
performance and real estate investment activity which
follows several years of poor performance amid the
wider European and global financial climate.
Since 2013, all major macro-economic indicators
have improved and this has started to translate into
real estate investment activity. We have registered as
much volume in the first half of 2014 as we recorded
for the entire 2013. The substantial pipeline of deals
set to close in Q4 and early 2015 is a testament to
the changing landscape. We are experiencing larger
investments by local real estate funds associated to
an inflow of foreign capital which should help the
volumes to reach €600m in 2014.
Benjamin Perez-Ellischewitz
Director, Head of Capital Markets Hungary
So far the CBD and the Váci Corridor submarkets
account for the bulk of the investment volume. While
we are not witnessing large development activity
similar in size to the development of the Millennium
City Centre or, the booming Váci Corridor from the
pre-financial crisis times, we should however mention
some high profile projects related to listed historical
properties in the city centre and the expected
development of the mixed-use retail and office project
in Buda South.
JLL has been a leader on the CEE and Hungarian
market since the region gained momentum in the
early 2000’s and our Capital Markets team has
an unbeatable track record and access to the best
opportunities, both on and off-market, for real
estate transactions, JV structuring, debt issuance or
trading. Moreover, our team offers a complete service
from advisory for market entry, valuation, asset
and property management, to leasing and project
management services.
We hope that this paper will help investors gain a
better understanding of our real estate market and its
recent development, including a general tax and legal
overview prepared by DLA Piper.
3
Why Hungary now?
1 3
2
The economy has recovered
and Hungary shows some
of the best macro-economic
indicators in the region
GDP growth peaked at 3.7% in Q2 2014 (strongest among
the EU 28) and is forecast to finish at 3% for full year 2014.
Inflation is around 0-0.5% and the central bank sharply
reduced the main interest rate to 2.1%. After several
years of adjustment of state finances, by 2013 the fiscal
deficit became one of the lowest in Europe at 2.7% and
the general government gross debt came back under the
80% level of GDP. In the meantime unemployment rate
fell to 8% in Q2 2014. Hungary has one of the highest
Economic Sentiment Indicator of the EU 28 and remains
on a positive trend.
Local demand is
complemented by
recovering exports
Hungary is one of the most open economies in Europe
with an average of total exports and imports representing
75% of GDP (only Ireland scores higher in the OECD with
80%). As such, the country is highly dependent on the
economic performance of its export markets. The positive
economic signs in Germany, the main export market for
Hungary with a share of 24% of total exports, come at a
good time to amplify the recovery of the local demand.
Retail consumption is
showing a positive trend
Retails sales are growing with the strongest pace of the
past few years. The positive trend echoes the reduction
in unemployment and the increase of real wages. Such
evolution comes at a good time for retailers, who,
after several years of negative trends see a recovery of
turnovers.
5
7
4
8
5
Budapest is a competitive
near-shoring centre
Hungary offers investors attractive
tax structuring
Budapest has asserted itself as a major location for Business
Process Outsourcing (BPO) companies and multinationals
to set up Shared Service Centres (SSC). BPO/SSC occupiers,
along with the Information and Communication Technology
(ICT) sector are driving demand for office space in
the capital city. Similarly to Paris, Budapest
is the capital city of a very centralized
country. The city represented 35% of
the national GDP in 2007 and its share
will reach 40% by 2020. The economic
power of the city is reinforced
by its role as the centre
for administration,
university education
and culture.
Efficient tax structuring can allow investors to avoid capital
gains and limit the tax impact on income derived from
real estate assets. A 10% corporate income tax rate applies
for net taxable income up to HUF 500m (approximately
€1.6m). The excess is taxed at 19% but,
taking into account tax deductions
available in respect of interest payments
on debt and shareholder loans and
tax relief for depreciation of the
asset, the effective tax rate can be
very low.
Development pipeline
remains limited
The development pipeline in Budapest came
under significant downward pressure since 2010
due to the restrictive financing situation and the
increase of the vacancy rate in both office and logistic
schemes. There has been a very limited supply of new
developments to the market and, in the CBD, significant
office developments are few and far between. 2014 saw
the delivery of the 14,500 m2 Eiffel Palace in the CBD and
the 21,070 m2 Váci Corner Offices in the Váci Corridor.
The two wings of Vision Towers on the Váci Corridor and
the third phase of Corvin Offices in the Pest Central South
submarket, are due to be delivered in the second half of
this year.
TAX
Market standards and ease of business
The real estate market in Hungary is standardized and
supported by a robust and reliable land registry system.
Lease agreements are of an international standard, €
based with annual rent uplifts in line with inflation. In
retail, lease contracts with turnover rent provisions and
turnover reporting are the norm. In the 2014 JLL Global
Transparency Index, Hungary ranked 25th among the
“Transparent” group (between the Czech Republic and
Japan).
6 9
Foreign investors remain the dominant force
Despite the increasing share of national investors in the
past years, the real estate investment market in Hungary
remains highly international with foreign investors
typically representing more than 80% of investment
volumes. For assets above a €30m value, demand is
almost exclusively international. Some of the largest
tickets in the past few years have been related to the
acquisition of 5-star hotels by Middle Eastern investors
(Intercontinental, Le Méridien, The Four Seasons).
Hotel performance improving
Hotel performance figures for the last 3 years have
been improving, showing significant growth in both
occupancy and room rates. In 2013, occupancy was up
by 1 percentage point and the ARR by 2.5%, contributing
to a 3.9% rise in RevPAR. International demand, which
represents almost 85% of bed nights is strong, particularly
the tourism component of it. The general occupancy
among Budapest hotels has returned above the 65% level
for 4* and 5* hotels.
1
0 9 7
8
It’s all
about
timing!
Contrary to markets such as London, Paris and even Warsaw where there is very high
competition among investors on prime assets and therefore bidding frustration and
fatigue, today Budapest offers a window of opportunity as the market depth remains
limited. Even for the best assets, proactive investors can conclude deals which would
be difficult to secure in a more competitive environment. With the increasingly positive
outlook for the country, the easing of financing and the increasing interest of foreign
and national investors in the real estate segment, we expect the market to show a sharp
recovery of activity in the coming months. As recently witnessed in Spain and Italy, the
repricing materialised in a 6 to 9 month time frame and the current Hungarian market
configuration therefore offers a rare acquisition window.
7
Office market
Bullish occupier market - record take-up
in H1 2014 with almost 250,000 m2 of
office space leased
Decreasing vacancy rate – standing at its
lowest level in the past 5 years
Stabilised rents - with reduced tenant
incentives in some successful buildings
and submarkets
The quality of the Budapest office stock is in line with
Western-European standards and the modern Class
A office buildings meet the technical requirements of
large, international tenants. The latest handovers of new
developments are certified under the LEED or BREEAM
rating systems in the planning and construction phase,
while older buildings have started to apply for the
operations and maintenance certifications.
MATURE SUBMARKETS WITH EXCELLENT INFRASTRUCTURE
Weak development pipeline – shortage
of prime category office space could
push rents up
High quality standards
The development of Budapest’s modern office market
began at the beginning of the 1990’s. Both international
and local real estate developers have progressively
developed a modern stock of Class A and Class B
buildings, which currently totals 2.57m m2 of speculatively
built office space and a further 640,000 m2 of owner
occupied premises. With this volume, Budapest has the
second largest office market in CEE behind Warsaw.
MODERN OFFICE STOCK IN CEE AND SEE CAPITALS
The city of Budapest is divided into two easily identifiable
parts by the Danube river, namely: Buda and Pest.
While Buda is the wealthier residential area, Pest is
the administrative and cultural centre of the city with
governmental buildings, ministries and headquarters.
Budapest has a well developed, efficient and dense public
transportation network. It has 4 metro lines and numerous
bus, tram and suburban railway lines, which provide
excellent access to every part of the city.
The infrastructure network of Budapest has been
continuously developed. Most recently, a new metro
line was completed (M4) connecting Buda and Pest and
several busy and strategically important tram lines are
also being upgraded and extended (tram line 1, 3, the
merging tram network of Buda including line 17, 19, 47
and the reconstruction of Széll Kálmán Square). No doubt
that once these developments are realized, they will add
a significant boost to the commercial property market of
Buda.
The Budapest office market is divided into 9 submarkets,
which all have different characteristics in terms of stock
quality, availability, rental levels and development
pipelines. The majority of the office stock (63%) is located
on the Pest side, owing to Pest’s administrative role and
favourable public transport network.
Belgrade
Zagreb
Bratislava
Bucharest
Prague
Budapest
Record breaking occupier activity
Warsaw
0
1,000,000
2,000,000
3,000,000
Office stock (m2)
Source: JLL Research, September 2014
4,000,000
5,000,000
The largest occupiers of the Budapest office market are
well-known, international tenants, who entered the
Photo: Millennium City Center
Hungarian market in the early 2000’s. Almost all of them
have expanded in the past 10 years and their
long-term plans in the country are reflected by the
recurrent renegotiations and extensions of leases.
Although the composition of demand changed after the
crisis, occupier activity hasn’t collapsed as gross take-up
amounted to approximately 370,000 m2 on average over
the past 5 years.
Leading occupier groups include:
What is even more noteworthy is the record breaking
take-up in H1 2014 with almost 250,000 m2 of gross and
130,000 m2 of net take-up.
•
•
•
•
•
•
•
Banking, financial services, insurance
FMCGs
SSCs/BPOs
ICT
Media and telecommunication
Business services
Public sector
There is a significant requirement from small and micro
enterprises as well, mainly from local companies who
make up almost 20-25% of the total leasing activity. Most
recently, we have seen a rise of successful Hungarian ICT
firms (Prezi, LogmeIn, Ustream) occupying prime office
space.
Most significant transactions in 2014 included:
• The pre-lease and expansion of various GE
subsidiaries totalling more than 9,000 m2
• Vodafone’s expansion of more than 5,000 m2
• The opening of Emirates’ new SSC of more than
3,000 m2
9
Lowest vacancy rate of the past 5 years
After the global economic downturn, the volume of
vacant office space increased rapidly in Budapest due to
the backlog of the development pipeline. Nevertheless,
strategically located, modern, properly managed office
buildings did not suffer as much as could have been
expected. Several buildings, delivered after the crisis,
succeeded in securing 90-100% occupancy within a
reasonable period of time. The likes of Eiffel Square, Green
House, Office Garden II, Infopark E and Corvin Offices are
good examples of successful projects.
By mid-2014, availability shrank to 17.6%, the lowest
rate of the past 5 years. In other words, vacancy is back
to its pre-crisis level and based on our forecasts the
decline will continue. Considering the bullish occupier
activity paralleled with a very limited, partially pre-let
development pipeline, it’s easy to see that the only way is
down for the vacancy rate.
The biggest winners in the present market conditions will
be the high quality, Class A buildings, which will continue
to attract tenants from older, lower category buildings.
Promising prospects – the only way is up
A limited number of properties are scheduled for delivery
by the end of 2016, totalling some 80,000 m2. As these
are already 40% pre-let, there should be a shortage of
high quality office supply in the near future.
While development activity should recover, we foresee
market conditions to be more favourable to landlords and
a progressive easening of the rental pressure which has
been characteristic of Budapest in the last few years. In
addition, the fierce price competition, which was observed
during the past few years, will slowly diminish and tenant
incentives and rental levels should return closer to the
pre-crisis levels.
Due to the
financial crisis
and recession
following,
there has been stagnation in the past 5-6
years on the real estate market in Hungary,
with low take up figures, high vacancy
and limited number of transactions on
unattractive yield levels for developers and
sellers. However, in comparison to WesternEurope, the office space per capita still
shows significant room for improvement in
Hungary. As for the future, I am optimistic,
in H1 2014 there has been increased interest
for capital investment by international
real estate funds in addition to growing
interest from local investors. Capital
investments are starting to flow into the
region, and hopefully, Hungary will be one
of the target countries. The environment is
positive for the investments, as the prices
are down and the perspectives on returns
seem promising as well. Increased activity
in all fields underlines my expectations,
since the net take up in office leasing shows
a 28% increase in the first half of 2014
in comparison to H1 2013. Furthermore,
investment volume is expected to be
around €600m with an increasing share
of institutional products in comparison to
the 2013 annual volume of €320m. The
spirit of investments can be raised, since the
recent Eurostat data forecasts an increase
in the Hungarian economy, according to the
numbers the Q2 2014 domestic GDP has
grown by 3.7%.
Árpád Török
Chief Executive Officer
TriGranit Development Corporation
Industrial market
Occupier market showing strong
momentum: 3PLs are back
Vacancy is falling
Rental pressure is over
A market where 6 highways meet
The centre of the Hungarian highway system is centred
in Budapest where 6 highways meet, connected by the
city ring road (M0). This provides quick and easy access
to any part of the city, meaning that there is almost no
substantial difference in terms of the accessibility of the
submarkets.
Similar to the office market, the development of
Budapest’s modern industrial stock started in the late
1990’s. At that time most of the assets were owner
occupied, but as Hungary’s accession to the European
Union became certain, the need for leasable modern
warehouses boomed.
Photo: ProLogis Park Budapest Sziget
11
In terms of quality, the majority of warehouses are in line
with Western-European standards and can be fitted out for
logistics or, light industrial purposes.
actively monitoring the market for better options in
terms of lease conditions and have pushed landlords into
achieving better terms. Although demand has relapsed in
recent years, the setback was not that large. The average
demand for the period 2009-2013 was at 150,000 m2/
year, only 17% below the typical average for the period
2005-2008.
Typical technical standards of warehouses include:
Warehouse
Office
Concrete/steel building
structure
Flexible layout with
sufficient social areas
Internal clear height 10 m
Mezzanine above loading
dock area at Clients’ request
ESFR sprinkler system
Heating maintenance
system to 20ºC with outside
temp. of -15ºC
Skylights and smoke vents
Average lighting level of
400 lux
Interior fire hydrants /
hoses
Parapet cable trunks for
cable systems
The volume of renewals increased significantly in recent
years, which was simply the result of the major leases
signed in early and mid-2000 rolling over, along with
early renegotiations by occupiers to secure preferable
terms from landlords that were keen to secure them in the
context of increasing vacancy. Looking ahead, we expect
occupiers to be especially active in 2014. Nearly 180,000
m2 industrial space was let during the first half of the
year giving grounds for optimism. Demand from 3PLs is
picking up sharply, with the largest transactions of the first
half of 2014 being signed by DB Schenker, DHL and UTT.
Gas fired dark radiators
heating system to 5°C with
outside temp. of -15°C
What will happen with vacancy
and rents?
Floor loading capacity of
5,000 kg/m²
First of all, given the Budapest industrial market’s small
size, we need to bear in mind that even a relatively
small occupier exit or entry can cause a wide swing in
the vacancy. Until mid-2008, the vacancy rate used to
fluctuate between 8-10%, considered as a healthy level,
providing a sufficient number of options for occupiers to
choose from while guaranteeing a stable level of rental
rates for landlords. In mid-2008, the largest occupier
in Budapest, Rynart, went bankrupt, releasing some
100,000 m2 of space to the market at once; suddenly
adding 8% of vacancy.
With an average one rack
point load of ~6,000 kg
Average lighting level of
200 lux
Electrical loading docks
with levellers and drive-in
doors
Source: JLL Research
Occupiers are back
In general, most of the industrial space (built
for letting purposes) is leased by logistics
service providers or, companies dealing with
light industrial and manufacturing activities.
The most important clients of 3PLs are
the automotive, food and pharmaceutical
industries. Besides them, food retailers
(hypermarket chains, discount food retailer
chains) and drugstore chains also operate large
distribution centres across the country.
During the past few years, tenants were
MODERN INDUSTRIAL STOCK IN CEE AND SEE CAPITALS
Belgrade
Zagreb
Bratislava
Bucharest
Prague
Budapest
Warsaw
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
Industrial stock (m2)
Source: JLL Research, September 2014
Since then, the vacancy rate has fluctuated between 20
and 22% in almost every quarter.
Since mid-2014, the rate fell back due to absorption in
both older, lower quality parks and in prime modern
parks. The current robust leasing and expansion activity of
major occupiers, points in the direction of further vacancy
decrease by year end. Taking into account that there are
no on-going speculative developments in Budapest, we
foresee a shortage of high quality industrial supply in the
mid-term.
Rents have reached a level where any further decline
would simply make the maintenance and operation of
parks unfeasible for landlords. Adding to the signs of a
pick-up in leasing activity, we foresee a positive trend
ahead for landlords with the reduction of rental incentives
and the stabilisation of rents at around €3.0-3.5/ m2/
month.
The industrial
property market
is clearly on an
upward cycle.
Occupancy is increasing as a result of
expansions and new business, however
yield compression is just starting, so
Hungary provides attractive investment
opportunities. After the difficult past few
years, occupier activity is firmly gaining
momentum in our parks and we see an
increasing interest from 3PLs again, as
well as from manufacturers. We will close
2014 with positive results.
László Kemenes
VP Country Manager Hungary & Romania ProLogis
Photo: ProLogis Park Budapest Harbor Park
13
Retail market
Retail sales are shooting up,
consumption is increasing
Shopping centres are being upgraded:
tenant mixes and layouts are improving
High street market is developing further:
uniform “Váci Street” brand, flush of
luxury retailers in Il Bacio di Stile at
Andrássy Avenue
New shopping centre in the pipeline
Budapest, the retail hotspot
Budapest is the centre of the Hungarian retail market. The
Hungarian capital has approximately 1.8m inhabitants,
the largest concentration of population in the country.
Moreover, it has the wealthiest residents. Based of GfK’s
latest purchasing power study, the average Budapest
purchasing power per capita was more than 30% higher
than the Hungarian average.
average Hungarian customer. Unlike secondary cities in
the Hungarian regions, Budapest offers more than just
giant shopping centres. The last few years have seen a
revival of the high street scene with luxury and premium
brands: the beautiful historic scenery of Andrássy Avenue,
part of the World Heritage, the recently refurbished and
branded Váci Street and the premium corridor of Fashion
Street, offer a retail experience for locals and tourists in
the heart of the city centre.
Evolving tenant mixes and exciting new
projects
Although there are no on-going shopping centre
developments in Budapest at the moment, existing
centres are constantly upgrading their tenant mixes and
layouts to attract more customers. This way, the best are
getting even better. The tenant mix of Westend, Aréna
Plaza and MOM Park has improved notably during the
past 2 years and the footfalls of Allee, Mammut and MOM
Park have shown significant increases. When a new brand
enters the Hungarian market, they tend to look for a unit
in one of the top 6 shopping centres. This was the case for
Marc Cain, Michael Kors, Napapijiri, Gap, Superdry and
Budapest’s retail market has a long
history. While Western-style shopping
centres were almost unknown in
the regions until the late 1990’s,
Budapest was an exception. In line with
international trends, the first rudimentary
shopping mall developments in the
capital were handed over in the 1970’s
(Flórián Üzletház, Skála Nagyáruház), but
their GLA barely reached 20,000 m2 at
that time. The first wave of truly Westernstyle shopping centres was realised
in the late 1990’s and early 2000’s, to
the delight of Hungarians, and quickly
overtook outdated high street retailing.
The popularity of shopping centres hasn’t
toned down ever since and they remain
the retail destination of choice for the
Photo: MOM Park
There are
definitely tangible
improvements in
the retail market in
Hungary
suggesting the worst years of the crisis are now over.
Turnover performance is improving generally giving
retailers’ confidence to enter new markets and open
in new locations. Certain retailers like Spar, Inditex
and H&M who have been present in Hungary for a
number of years expanded extensively even during the
crisis, increasing market share. More exclusive brands
like Michael Kors, La Martina and Furla entered in
the past 12 months, opening 1 or maximum 2 stores
in selective Budapest locations. Retailers now have a
better understanding of the complexities of the market,
meaning they are more selective about the locations
they choose and the conditions they are willing
to accept. This is leading to a polarisation within
the sector, with the better shopping centres seeing
improvements in retailer demand and performance,
while less clearly defined schemes are falling further
behind. As the market becomes more sophisticated
landlords must ensure their retail assets stay relevant
to the changing demands of targeted tenants and
customers, as well as meeting investor criteria. Along
with maintaining a strong awareness of local and
international retail market trends it is becoming more
important to ensure the asset meets institutional
standards from every aspect. And just as retailers
are adopting more sophisticated and often regional
expansion strategies, investors need to formulate
clear asset management strategies for their assets
implemented by experienced teams on the ground.
Sports Direct to mention a few, unless their luxury
positioning dictates an Andrássy address. In order
to keep up with shopping centres, high streets are
also transforming and developing. Units along
Váci Street now have a uniformed branding and
the pavement was refurbished. A new multibrand
luxury department store, Il Bacio di Stile, opened
on Andrássy Avenue, with a poignant mix of luxury
retailers from Saint Laurent to Bottega Venetta.
What’s next?
From 2007 to mid-2013, retail sales volumes
suffered tremendously. Since July 2013, this
negative trend was reversed and year-on-year
monthly retail sales volumes have shown a positive
trend. We foresee a slowdown of the growth during
the second half of the year, nevertheless annual
retail sales are likely to reach approximately 1.9% in
2014. Growing household consumption supports the
expansion of retailers and also encourages potential
new brands to enter the Hungarian market.
There is however still room for improvement for the
Hungarian retail market. While retail units on Váci
Street are almost 100% occupied, there are still
several vacant units available on Andrássy Avenue,
where the fluctuation of tenants was especially
striking in recent years. We are now seeing a
stabilisation of the mix with additional retailers due
to enter some of the existing vacant units, following
a full redevelopment / refurbishment. Once
delivered, Andrássy Avenue’s flash will become even
more evident.
As for shopping centres, the upgrade of existing
schemes will continue further but, the market will
also receive stimulus from the potential launch
of a new shopping centre development by local
developer Futureal. The construction of Etele
Shopping Centre, a 43,000 m2 shopping centre near
Kelenföldi Railway Station, is expected to kick off
in late 2015. Taking into account that the shopping
centre density of Budapest is one of the lowest in
CEE at 445 m2/’000 inhabitants, that there is still
room for development in the Hungarian capital.
Jane Petrie
Director, Head of Retail Central Europe
AEW Europe
15
Submarket focus:
Váci Corridor
Densely built-up area with high quality
offices and relatively well maintained
residential buildings
Close to city centre
Largest office submarket with 25%
of the total stock, the fourth biggest
district in terms of population (~118,000
inhabitants)
Includes the whole area of District 13,
divided into two sections by Árpád Bridge
and Róbert Károly Avenue (Northern and
Southern sections)
Excellent public transportation network:
M3 metro line connecting the Northern
and Southern sections, numerous bus,
tram and trolley lines, quick access from
Buda through Árpád Bridge
Pulse of the office market
Váci Corridor is by far the largest office submarket of
Budapest with 25% of the total office stock. Due to its
excellent location (right next to the city centre), easy
accessibility and high supply of affordable plots, it became
the hot spot for landbanking and office developments by
the mid-2000’s and has since been going through a rapid
evolution.
The progress of the submarket has continued during the
past five years (2009-2014) as 23% of the new supply was
delivered there. Growth is not over: between H1 20142016 90% of the future supply, totalling nearly 80,000 m2,
will be delivered in the Váci Corridor, which clearly reflects
that it will remain the darling of developers in the future.
No.1 option for occupiers
As Váci Corridor is the largest office submarket, it is
no surprise that it attracts the most demand. During
the first half of 2014, 28% of the total Budapest takeup was recorded here, amounting to almost 9% of the
submarket’s stock. The largest transaction of the first half
was also concluded there (29,000 m2 renewal), along with
the most significant pre-lease of the year so far (8,400 m2).
Due to its central location, large stock and excellent
accessibility (both by car and public transportation) this
submarket is usually never eliminated when an occupier
starts to monitor the Budapest office market. The
composition of Class A and B buildings is approximately
60% and 40% respectively, meaning that regardless of the
budget of the tenant, Váci Corridor can meet all kinds of
requirements, including the additional benefit of its easy
accessibility.
There is no surprise that Váci Corridor is popular among
all types of occupiers from banks to FMCGs, consultancies
or SSCs.
LARGEST OCCUPIERS:
• Hungarian State (post office, tax office,
national healthcare desk)
• Exxon Mobile
• Budapest Bank (GE Money)
• Citibank
• AXA Bank
• Unilever
• Diageo
• KPMG
M3
1
Eiffel Square
2
West End Business Center
3
West End City Center
4
V17
5
Green House
6
Capital Square
7
Vision Towers
8
Átrium Park
9
Center Point
10
Váci Corner
11
Váci Greens
12
BSR Center
M3
12
11
10
M3
9
M3
8
6
7
M3
5
4
M3
2
3
M3
1
17
Photo: Váci Corridor
Investors’ appetite building up
Váci Corridor has always been on the radar of opened-eyed
investors, especially as it is the best alternative to CBD
properties. It is a central submarket but, unlike the CBD, it
offers a wide selection of suitable ticket sizes for funds and
institutions. There are numerous modern, recently built,
large office buildings with stable and high occupancy
rates and well-known international clients or, secure
entities of the Hungarian State. The list of these buildings
is expanding as the pipeline is delivered.
Having a look at recent transactions, we see that
two recently completed, successfully let offices were
transacted in 2014 and further deals are in the pipeline.
Furthermore, the benchmark for the recently compressed
prime office yield at approximately 7.3% is a transaction
concluded in this submarket, highlighting that prime is no
longer exclusive to the CBD.
Towards a brighter future
The resounding success of Váci Corridor is about to
continue further. Almost 50% of its pipeline is already
pre-let and, due to the lack of adjacent large floorplates,
it is presumable that most of the remaining areas will
be absorbed by the time of their delivery. However, the
growth of the submarket will not stop soon as there
are numerous development options within it (some
with building permits, others just in planning phases)
comprising more than 500,000 m2 of GLA.
Submarket focus:
CBD
The heart of the city with 5* hotels,
prime office buildings, three high streets
(out of which Andrássy Avenue is part of
the World Heritage)
Commercial centre of the city
Includes the whole territory of District
5, the first section of Andrássy Avenue
(between Bajcsy-Zsilinszky Street and
Oktogon) and Kálvin Square
Fourth largest office submarket
comprising 11% of the total stock
Various means of public transportation: 4
metro lines, trams, buses, trolleys
Continuously improving area due to
numerous municipality developments
The No.1 spot to go to
One can find everything one is looking for in the CBD.
Highly prestigious residential properties, 5* hotels, a wide
selection of luxury brands, spectacular tourist attractions,
countless restaurants and theatres and of course: offices.
LARGEST OCCUPIERS:
•
•
•
•
•
•
•
•
Hungarian State (ministries and other bodies)
Raiffeisen Bank
Citibank
PWC
BNP Paribas
LogMeIn
Aegon
Volksbank
Although the submarket comprises only a small territory,
it has a high concentration of 5* hotels with approximately
55% of the 5* accommodation located there. All of the
large hotel chain operators are active in the market
including: Four Seasons, Sofitel, Kempinski, Marriott and
Le Meridien for example.
When it comes to shopping, the CBD does not disappoint
either. Andrássy Avenue, Váci Street and Fashion Street are
well known high street retail destinations, offering a wide
selection of luxury, premium and mass market brands.
Due to its compact size, shopping centres are absent in the
CBD and although there are only a handful of shopping
galleries, Il Bacio di Stile and Paris Department Store
are worth mentioning due to their amazing architectural
designs and sortiments.
The CBD is Budapest’s administrative and entertainment
centre, hence the favourite spot of tourists, local residents
and officials. On top of the various ministries and bank
headquarters, Budapest’s prime office segment is also
concentrated in the CBD, including Bank Centre, Roosevelt
7/8 and the recently completed Eiffel Palace, where the
prime office rent reaches € 20-22/ m2/month for the best
units.
19
M3
7
6
M2
M1
M3
An
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sy
St
r.
5
1
M1
9
8
M1
1
Roosevelt 7/8
Office building
2
Four Seasons Hotel
Gresham Palace
5* hotel
3
Sofitel Budapest Chain
Bridge
5* hotel
M2
4
InterContinental Budapest
5* hotel
M3
5
Bank Center
Office building
6
Szabadság tér 14.
Office building
7
Eiffel Palace
Office building
8
Andrássy Palace
Office building
9
2
3
ty
ar
sm .
rö qr
Vö S
4
M1
tr.
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10
Fa
M1
11
r.
St
ci
Vá
M2
12
Il Bacio di Stile
Retail gallery
10
Le Méridien Budapest
5* hotel
11
Kempinski Hotel Corvinus
Budapest
5* hotel
12
Buddha-Bar Hotel
Budapest / Klotild Palace
5* hotel
13
Kálvin Center
Office building
M3
M3
M4
M4
13
Photo: Szabadság tér 14
And the beat goes on
Based on the aforementioned, one might think that there
is no room for further development in the CBD and that
the evolution of the submarket is out of the picture. The
assumption could not be further from the truth!
At the beginning of 2014, the office stock was expanded
by 14,500 m2 after Eiffel Palace, a new, prime office
building, was delivered - 65% pre-let to PWC. The prime
property caught the attention of several investors and by
August 2014, it was already transacted. This reflects that
CBD properties are always on the radar of investors, who
are aware, that high quality downtown offices will never go
out of fashion. The largest commercial development in the
pipeline is the 30,000 m2 large former Hungarian Stock
Exchange at Szabadság Square. The property is owned
by the Canadian Tippin Corporation, who is planning to
create office and retail components, as well as residential
flats in the building.
As there are several vacant buildings to acquire from
locals or the municipality and suitable for all sorts of
commercial activities, we foresee that the CBD will
continue to transform at a rapid pace. Currently, there are
two ongoing 4* hotel developments (in Apáczai Street by
Zara Hotels and Hercegprímás Street by Aria) both being
refurbishments of vacant buildings. The 5* hotel stock is
also about to be expanded in the upcoming 5 years after
3 landmark buildings, Dreschler Palace (former Ballet
Institute), Parisi Udvar and the South wing of Klotild
Palace were sold to Qatari, Saudi and Turkish investors.
The local municipality of District 5 is keen on transforming
the central areas further into even more appealing
destinations. To do so, they have founded the Heart of
Budapest program. During the past few years, they have
successfully upgraded numerous streets and squares,
creating pedestrian friendly areas. As a result, a new and
colourful tourist hub has appeared around St. Stephen’s
Basilica. The transformation of Október 6 Street, Szent
István Square and Arany János Street is especially
spectacular, which became tourist hot spots due to their
never ending offer of clubs and restaurants.
21
Understanding capital
markets in Hungary
Q:
Our investment group is
active in the Czech Republic
and Slovakia and we are now
considering entering the Hungarian
market. We want to get comfortable
with the land registry, title and
contracting practices.
A:
Real estate property ownership is
registered in the land registry system
controlled by territorial land registry
offices nationwide. Location, size, usage type,
ownership and third party rights on the property
(usufruct, easements, call options, mortgages, etc.)
are all registered.
The commercial buildings and the land on which
they are built are mostly owned in freehold by
one single owner. Nevertheless, some multiple
ownerships (condominiums) as well as cases when
different owners possess the land and the building
do exist.
In all cases, the records are accurate and can be
accessed online (Takarnet).
Sale and purchase agreement, prepared in
accordance with Hungarian Law, and countersigned
by a Hungarian attorney at law (or incorporated in
a public deed made by a Hungarian notary public)
is submitted to the relevant land registry office for
registration.
Q:
A:
How do stamp duties, income
and capital gain taxes impact
the investment?
Stamp duties are levied on real estate
asset deals and SPV transactions
(4% on the first HUF 1bn /€ 3.3m
approximately and 2% above with a total tax
capped at HUF 200m /€ 645,000 approximately).
Capital gain taxes are amalgamated in the
taxable income base and taxed at the general
corporate rate (10% on the first HUF 500m /€1.6m
approximately and 19% above). Tax planning and
proper structuring can ensure the optimisation
of the effective tax rate as Hungarian tax laws are
relatively friendly towards overseas investors.
Q:
A:
Why invest now?
Have we passed the bottom
yet?
The market went from a peak at €2bn
of commercial real estate transactions
in 2007 to a bottom of €200-300m
annually during the 2012-2013 periods. This year,
we expect some €600m of transactions.
In the meantime, the prime office yield went from
5.90% up to 8% and back to the current level of
7.30%. Rental levels have been under strong
pressure since 2008 and we estimate the peak-totrough repricing of net effective rents at 20-25%.
Q:
Q:
A:
Which location and asset
class should I invest in?
There is no easy answer to this
question. The market offers
opportunities across all of the main
asset classes of office, retail and logistics, along
with hotels, residential and since recently, student
accommodation. Depending on the background of
investors, their experience and appetite on the risk
/ return curve, all asset classes can offer interesting
investment opportunities.
What is more important, is to get the right
professional advice as similar investment proposals
can have very different outcomes.
Q:
A:
Is the market liquid and
transparent enough for
overseas investors to
succeed?
Hungary is classified as a transparent
market, according to JLL’s Global
Real Estate Transparency Index 2014.
Hungary was among the top improving countries
on a global scale during the 2012-2014 period and
has now a benchmark similar to Japan or Spain
(along with the Czech Republic and Poland). While
there are a number of off-market transactions, large
institutional prime assets are usually marketed
through leading international advisors like JLL.
As a family office we are
concerned about value
preservation and regular
returns. Which product is the best
choice for us in this context?
A:
Private Wealth Investors tend to focus
on established CBD location and prime
assets let to international covenants.
Leases are relatively short in Hungary compared
to other markets in Europe as the standard is
5-year leases in offices (up to 10 years for built
to suit properties) and 5-year leases for retail,
with up to 15 years for anchor tenants in large
shopping centres. As such, the market does not
offer the same income streams than the 20-year
occupational leases of London, but prime central
locations and buildings offer now a long-term value
preservation as development potential is very
limited and rents are at the bottom. Moreover as
current lease contracts were negotiated during the
challenging 2008-2012 years, there is clear rental
growth potential.
Q:
A:
Are environmental standards
applied in the construction
industry in Hungary?
In the last few years, obtaining green
accreditation for new commercial
construction has become a
market standard. In practice, LEED or BREEAM
accreditations are the most commonly used and
based on the database of those 2 organisations,
there are currently ca. 30 buildings accredited
in Hungary (full buildings) with an additional 30
accreditations for operations and maintenance.
In the case of asset deals (as opposed to SPV
transactions), an energy performance certificate,
valid for 10 years, is to be obtained by the seller.
While there are no tax incentives for the
implementation of green solutions, investors are
becoming increasingly sensitive to the subject
and any new construction is incorporating such
requirements today.
23
The real
estate market
fundamentals
in Budapest are
better than they
have been at any
time since 2008
Tenants are actively seeking space and
they are prepared to make long term
BTS commitments. Retail sales and hotel
occupancy are both rising. Economic
growth is predicted for the coming years.
Vacancy is falling across all sectors
and all submarkets. Financing is
available at competitive rates. The
low volume of investment activity over
recent years means that investment
grade product is available at higher
yields than in comparable CEE markets.
The Hungarian government is actively
encouraging and supporting international
investment in services, back office
functions and manufacturing, all of which
are major drivers for further property
development opportunities. In 2014 Wing
is developing major office and industrial
properties for multinational tenants on
a BTS basis, as well as a hotel project.
Wing has investment grade properties for
sale to international investors.
Noah M. Steinberg
Chairman & CEO
WING Zrt.
Trends and projects to
keep an eye on
The city of Budapest is alive with various on-going
regeneration projects and infrastructural developments.
The followings highlight a few interesting projects that will
have an impact on the city landscape.
Regeneration project at the new metro terminal
In early 2014, a new metro line, M4, was completed
in Budapest connecting Buda and Pest through the
Kelenföld and Keleti Railway stations. Futureal, a leading
Hungarian developer acquired a plot just above the head
station of Kelenföld and now that the metro line has been
delivered, the project for a mixed-use development at this
multi-modal transportation hub is ready for kick-off.
The project is composed of Budapest One, a cca 70,000
m2 office complex and Etele Shopping Centre, a 43,000
m2 shopping centre. Futureal have teamed up with ECE
to work on the leasing of the shopping centre, due in year
end 2017.
Photo: Budapest One
25
from the District Municipality.
The District Municipality also sold
another building at Ferenciek Square
in 2014, the Parisi Udvar, a secession
style landmark, built in 1912, to host
offices and a retail gallery. The building
of 12,400 m2 was acquired by Middle
Eastern investors in 2014, with the
intention to convert it into a hotel.
A new chance for Széll Kálmán
Square and its vicinity
Photo: Buda Palota
The revival of landmarks
The city centre of Budapest is a constellation of heritage
buildings, mainly erected between 1880 and 1914 and a
show case for the evolution of architecture from the neorenaissance to the secession. Several landmark buildings,
some of them disused and in desperate condition, are in
need of a full refurbishment and restructuring to put them
back in to use. It seems that 2014 is bringing the long
awaited winds of change for those assets.
Dreschler Palace, the former Ballet Institute, located on
Andrássy Avenue across from the Opera House, is one of
the most prominent spots of the avenue. The property’s
struggle started in 1997 after the sale by the municipality
to private investors and the Ballet Institute had to move
out. The building was transacted again at the peak of the
market while standing idle and rapidly deteriorating.
During the summer of 2014, the property of 17,000 m2
was acquired by a private Qatari investor committed to
transforming it into a 5* hotel in the coming 5 years.
The two wings of Klotild Palace, on Ferenciek Square,
frame the way towards Erzsébet Bridge. While the
Northern wing, in private ownership, was fully refurbished
and transformed into a Buddha-Bar Hotel in 2012, it
is only this year that the South wing of 11,000 m2 was
acquired by the Ozyer Group, a Turkish conglomerate,
Széll Kálmán Square is the main
multimodal transportation hub of Buda,
with several tram lines (including the
busiest lines 4,6) buses and the metro
M2 line connecting. The long awaited
refurbishment of the square and the
transport infrastructure is due to start in
late 2014. This public work, coupled with
the 12,000 m2 Buda Palota office project,
will transform the appearance of this
major square of the city. Built in 1925,
the building used to function as the headquarters of the
Hungarian Post until 2008 when it was acquired by WING,
a leading Hungarian developer. The building is intended
to be refurbished into a Class A office building.
Museum Quarter
One of the most ambitious plans of the Hungarian
government is the Liget Budapest project. The project is
the largest cultural investment of the last one hundred
years in Hungary and aims to relocate six operating
institutions (scattered around various locations in the city)
into 5 buildings to be built next to Heroes’ Square and the
City Park to create a museum quarter.
According to the plans, this will include the Museum of
Ethnography, the Hungarian Museum of Photography, the
new National Gallery, the Ludwig Museum – Museum of
Contemporary Art, the Hungarian House of Music and the
Hungarian Museum of Architecture. An open, two-staged
design competition was announced for the design of
the new buildings and the State is targeting an opening
between 2018 and 2020.
About Hungary
An open economy closely tied to external
markets
Hungarian has a medium-sized and open economy, largely
exposed to the international economic and financial
environment of the Eurozone. Hungary’s main exports are
machinery and transport equipment, consumer goods,
agricultural products, chemicals, apparel, textiles, wine,
iron and steel. Trade with EU countries and the OECD now
represents over 70% and 80% of the total recpectively,
with Germany being the single most important trading
partner.
The engine of the Hungarian economic performance is
the service sector followed by manufacturing. Within
these, the processing industry, retail and wholesale and
real estate activities represent the highest distribution
of gross value added by industries. The industrial
sector (automotive, telecommunications and computer
sciences) account for around one quarter of the country’s
GDP, but the service sector (especially trade, finance,
communication and tourism) represents the largest share
of GDP.
Issues to sort out and their solutions
Although the country joined the European Union in 2004,
it has always been financially vulnerable due to its FDI
requirements to ensure economic growth and to the fact
that nearly half of its household and corporate debt has
been foreign exchange denominated.
Hungary became highly leveraged and piled on high
levels of current account deficit by the middle of the
decade. The country’s public debt and fiscal deficit started
to accrue at a barely sustainable pace and the situation
worsened after the global financial downturn. The
economy needed quick and firm changes, which arrived in
the form of “unorthodox” measures after the centre-right
FIDESZ-KDNP (Christian Democrats) coalition won the
elections in 2010 with a two-thirds majority. Since then,
the coalition repeated its victory during the 2014 election
and is determined to continue their strategy.
Facts & Figures
Area: 93,030 km2
Population: ~9.9m
Government: Parliamentary democracy
Capital City: Budapest
Neighbouring countries: Slovakia, Ukraine,
Romania, Serbia, Croatia, Slovenia, Austria
GDP/capita: € 9,000 (2013)
GDP growth: 3.7% (Q2 2014)
Unemployment rate: 8% (Q2 2014)
THE MOST IMPORTANT GOALS
OF THE GOVERNMENT INCLUDE:
• Boost domestic consumption and lending
• Job creation
• Reduction of bureaucracy, shadow economy and
public debt
• Keep the general government deficit below the
3% EU Maastricht threshold and enhance the
country’s competitiveness
• Respond to demographic challenges
Successful achievements of the past 4 years
Although some of the government’s new measures were
criticised, the significant improvements of the economy
cannot be denied.
Out of the 28 European Union member states, Hungary
had the highest ESI (European Sentiment Index) during
the first 5 months of 2014 and the second highest in JuneJuly. ESI reflects the level of confidence and optimism in
each sector of the economy and shows that Hungarians are
upbeat about future economic prospects. And what are the
reasons for this optimism?
27
Bullish GDP growth
The Hungarian economic performance has regained
momentum.On the back of the increasing performance of
agriculture, manufacturing and construction, the seasonal
adjusted year-on-year GDP growth peaked at 3.7% in Q2
2014, which means that the country’s economy expanded
at its fastest pace in the last 8 years. The growth rate
was significantly above the European Union’s average
(1.2%) and it was the strongest among the 28 EU member
countries.
Q2 2014 GDP GROWTH
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
According to the latest forecasts, Hungary is going to
remain one of the leading pulling forces of the European
economy with around 3% growth in 2014.
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Quarterly GDP growth (%, y-o-y)
Source: Eurostat, August 2014
Improving labour market
Unemployment in Hungary has been constantly declining
since the first quarter of 2013. By mid 2014, the rate
decreased to 8% which is the lowest level since the end of
2008.
In parallel, employment is increasing
and peaked at 54.2% in Q2 2014, which
is the highest ratio of recent years. This
is especially positive as not only public
works schemes support the improving
indicators, but employment in the private
sector is also picking up.
QUARTERLY UNEMPLOYMENT RATE
13,0
12,0
11,0
10,0
9,0
8,0
7,0
2009.
2010.
2011.
2012.
Quarterly unemployment rate (%, y-o-y)
Source: HCSO, September 2014
2013.
01
02
04
03
01
02
03
04
01
02
04
03
01
02
03
04
01
02
03
04
01
02
6,0
2014.
The spectacular growth of the economy,
the strengthening business confidence
and the continuous expansion of the
automotive industry all assist labour
market indicators, which are forecast to
improve further as, based on the latest
sentiment surveys, companies and
enterprises plan to hire new employees.
Galloping retail sales and private consumption
Future expectations
Boosting consumption and increasing household
disposable income are some of the main targets of
the government. The positive effects of the improved
macroeconomic environment were quickly reflected in the
retail sales indices, which started to increase y-o-y in the
second half of 2013, and their improvement has continued
ever since. In March 2014, retail sales growth peaked at
6.1% and reached 3.5% between January and July (based
on the sample data source).
The on-going recovery of the Hungarian economy is
projected to continue in the upcoming years on the back
of improving national indicators and the European macroeconomic environment. The country’s main trade partners
are forecast to experience significant improvements
in terms of GDP growth, which will speed up external
demand and strengthen Hungarian exports, especially
in the machinery sector. This should help the Hungarian
economy to expand by 2% to 2.5% annually in the
upcoming years.
The spectacular growth was the result of a combination of
factors: the improving consumer confidence and labour
market conditions, the close to 0% CPI and the growth of
real wages. As retail sales are in strong correlation with
economic performance, it is believed that growth will
continue through the second half of the year, although at a
slowest pace.
Increased disposable household income and improving
employment rates will help domestic demand to pick
up, while investments will build up with the help of
the “Funding for Growth” program, EU fundings and
the improved, positive sentiment about the country in
general.
Helping retail borrowers and SMEs
Private sector debt had almost tripled between 2000 and
2009 in Hungary. The large share of FX denominated
loans, especially in household mortgages, caused serious
problems for residents, who were struggling with their
increased monthly repayment obligations after the
Forint started to weaken rapidly in late 2008. To solve
this issue, the government introduced several measures
including the early repayment of household loans at a
fixed exchange rate (below the market rate), an FX-rate
cap and most recently it ordered banks to refund clients
for general conditions deemed unfair. Hence repayments
on forex loans are expected to drop by 25-30%, making
borrowers’ lives easier.
To stimulate growth, the National Bank decided to provide
money with 0%-interest refinancing to banks to grant
loans carrying at 2.5% interest and charges to SMEs. The
loan is available for commercial real estate developments.
The scheme creates liquidity on the market, mainly used
by local investors and boosts investments.
29
Leading industries
The two most dominant sectors
in Hungary are the service and
industrial sectors contributing to
~50% and ~20% of the country’s
output respectively. Below, we
describe the most significant and
rapidly expanding industries.
Automotive sector
The automotive sector is one of
Hungary’s thriving industrial sectors
which contributes massively to the country’s
exports. As at February 2014, there were
712 active enterprises in the sector (including both
manufacturers and suppliers) employing nearly 140,000
people and exporting ca. 90% of their products. Four large
automotive manufacturers have production in the country:
Suzuki (Esztergom), Audi (Győr), Daimler (Kecskemét) and Opel
(Szentgotthárd). They continuously expand their production
capacities and hire employees. On the top of this, they attract
numerous equipment manufacturers and suppliers and have
established strong cooperation with local universities to focus
on R&D and provide an uninterrupted flow of highly-qualified,
young labour.
Electronics
Due to the high availability of skilled labour,
the electronics industry developed rapidly over
the past few years and the country became one of
the largest electronics producers in the CEE region.
Similar to the automotive industry, it contributes greatly
to the Hungarian manufacturing production and several
large, leading electronics producers are active in the country,
employing some 80,000 people. According to the American
Manufacturing Market Insider (MMI) magazine, out of the top
10 global electronics manufacturing services (EMS) providers
in 2013 four have a presence in Hungary (Jabil, Flextronics,
Foxconn, Sanmina) providing contract design, manufacturing
and related product support. Moreover, Videoton, the largest
Hungarian industrial company group in private ownership, is the
27th largest EMS provider globally and the 4th in Europe.
Pharmaceuticals
The Hungarian pharmaceutical industry is one of the largest
and most-developed in the CEE region due to its century-long
tradition. It attracts a substantial amount of foreign investment
and employs more than 17,000 people. Pfizer, Astra
Zeneca and Mylan set up regional centres while
the Sanofi Group, EGIS, TEVA and Richter Gedeon
conduct manufacturing.
Information & Communication Technology (ICT)
The ICT industry comprises some 20,000 companies and
contributes to cca 10% of the country’s GDP. The sector has
displayed rapid growth in the past few years and employs
nearly 100,000 people. Most of the major software and
hardware developers are present and the country has become a
regional incubator for software development, including game
programs and geographical information technology systems.
Moreover, Hungarian developer firms contribute significantly
to the global ICT sector and achieved international success and
acknowledgement (much of the damaged global IT data after
09/11 were recovered by KÜRT, a Hungarian firm).
Internationally renowned Hungarian ICT firms
Company
Business
Evoline
Power and data systems
IND
Banking solutions
LogMeIN
Remote desktop software
Prezi
Cloud-based presentation software
Balabit
IT security systems
Graphisoft
Architectural design software
KÜRT
IT security systems
NNG
Navigation and GPS systems
Xapt
Enterprise resource planning solutions
Source: HIPA
Shared Service Centres and Business Process
Outsourcing
Since the late 90’s, Hungary has been a popular European
destination of BPOs and SSCs. The first centres opened before
2000 and after the country’s European Union accession, their
number increased rapidly. To date, more than 70 operations are
present, employing a total of 30,000 – 35,000 people. Their
activity is centred in Budapest. However, about 20-25% of SSCs
are situated in the regions, mostly in county capitals such as Győr,
Debrecen and Miskolc. Typically outsourced activities include:
finance operations & cost accounting, IT desktop support, and HR
administration. Besides traditionally outsourced activities, some
companies perform complex, high value-add activities such as
marketing, procurement and financial modelling.
Subsidies for investment
projects in Hungary
Section provided by the
Hungarian Investment
Promotional Agency
(HIPA)
Northern
Hungary
Central
Transdanubia
The Hungarian Investment
Promotional Agency (HIPA) supports
investments with a one-stop-shop
service.
Northern
Great Plain
Central
Hungary
Western
Transdanubia
As part of the support package, HIPA
undertakes all-inclusive project management
for projects granted direct cash dubsidies (EKD) by
a discretionary government decision and provides
comprehensive information about other subsidies
available.
The Hungarian Government, through HIPA as
intermediary, offers wide range of investment incentives
in order to assist investors with a prosperous investment
in Hungary.
• Cash grants
- Subsidy with Individual Government Decision (EKD)
- EU co-financed tenders
• Development tax allowance
• Training subsidy
• Workshop establishment aid
• Social tax allowance
Southern
Transdanubia
Southern
Great Plain
Maximum Regional Intensity
0-35% max. aid intensity for large enterprises
25% max. aid intensity for large enterprises
35% max. aid intensity for large enterprises
50% max. aid intensity for large enterprises
Subsidy for large investment projects is also subject
to an adjusted regional aid ceiling, on the basis of the
following scale:
Eligible expenditure
Adjusted aid ceiling
Up to €50m
100% of regional ceiling
For part between €50-100m
50% of regional ceiling
For part exceeding €100m
34% of regional ceiling
Hungarian Investment Promotional Agency
(HIPA)
1055 Budapest, Honvéd u. 20
Phone: +36 1 872 6666
E-mail: [email protected]
www.hipa.hu
HUNGARIAN
INVESTMENT
PROMOTION
AGENCY
31
Legal environment of
real estate investments
Dr. Róbert Kotsis
DLA Piper
[email protected]
Dr. Attila Remes
DLA Piper
[email protected]
Real property ownership
The section below presents the main legal
considerations of investing in Hungary and was
prepared by Róbert Kotsis and Attila Remes in
charge of the real estate practice of DLA Piper in
Budapest.
In Hungary, the ownership of real property may be freely
acquired by any person (including private individuals and
legal entities), subject to certain restrictions applicable in
exceptional cases depending on the status of the property
and/or the acquirer.
Under Hungarian law the following rights may be
exercised in relation to real estate:
Land use
The owner of a building built on land has the right to use it
during the life of the building.
Usufruct
This is a right to possess, use and collect income and other
products from a property owned by someone else.
Right to use (beneficial use)
This is similar to usufruct, but the individual can only use
the property to meet his own needs and those of relatives
living in the same household.
Easements
These are granted to enable an individual to use someone
else’s property for a specific purpose or require the owner
to refrain from certain activities. Easements include: the
grant of rights of way, the supply and drainage of water,
the building of a cellar, installing pylons, buttressing a
building, etc.
Mortgage
The mortgagee is entitled to (eventually) sell the
mortgaged property in order to recover unpaid claims
secured by the mortgage.
Call option
The beneficiary of the call option is entitled to purchase
the property at any time within the option period on
payment of the agreed purchase price.
Put option
The beneficiary of the put option is entitled to sell the
property at any time within the option period subject to
the previously agreed purchase price.
Pre-emption right
The beneficiary of the pre-emption right is entitled to
purchase the property on the same terms and conditions
as a purchase offer made by a third party.
Leases
Hungarian law differentiates between regular property
leases and usufructuary leases. Regular leases are used
for commercial or residential premises and are much
more frequent than usufructuary leases. While a lease
entitles a tenant to use the relevant premises, under a
usufructuary lease agreement a tenant is entitled to use
and collect income from the premises. A usufructuary
lease agreement is common in relation to agricultural land
and the legal provisions applicable to regular leases also
apply to usufructuary leases, with a few exceptions.
Co-ownership
When a property is owned by more than one person at
a time (co-ownership), the co-owners may agree on the
specific terms of the possession and use of the property,
including contribution to any costs relating to the repair
and maintenance of the property. When a co-owner of a
jointly owned property wishes to sell his or her interest
in the property, the other co-owners have pre-emption
rights.
Land Register
All plots of land in Hungary are registered with land
registry offices located in designated Hungarian cities. The
land register comprises:
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the land registry excerpts (including title deeds);
the document archives;
the plans; and
cancelled entries.
It also includes other information relating to the real
estate, such as details of encumbrances and easements.
There are details of any physical improvements that have
been made to the property and, in the case of agricultural
land, the cadastral income. This information is normally
reliable.
Land registers are accessible to the public, notes can
be taken and official copies requested. Some of this
information is also available on the internet to registered
users. However, in some cases (for example, in the case of
documents and official resolutions kept in the document
archive) permission is required from the covenantee or
grantee.
The transfer of title is recorded. Transfer of ownership of
real estate is only valid once it is registered in the land
register.
Restriction on Ownership
Although, as a rule, the ownership of real property may
be freely acquired by any person, certain restrictions do
apply. The main restrictions are as follows:
• arable land may be acquired by Hungarian private
individuals and EU nationals (including citizens of
a country in the European Economic Area) only; in
addition, arable land over 1 hectare in size may
only be acquired by professional farmers. Legal
entities, whether foreign or domestic, cannot
acquire arable land with some exceptions (e.g.
listed churches, municipalities, etc.); the Hungarian State, current occupiers and neighbouring
landowners have pre-emption rights over arable
land;
• non-EU citizens and legal entities may acquire
real estate (excluding arable land) only with the
consent of the relevant administrative office;
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• the Hungarian State and municipalities can
expropriate real estate in certain exceptional
circumstances for public purposes laid down
by law (e.g. national defence, energy supply,
development of traffic infrastructure), subject to
providing complete, immediate and unconditional
compensation to the owner;
• the Hungarian State has a pre-emption right over
protected historical buildings;
• in case of a jointly owned property, when one of
the co-owners wishes to sell his or her interest in
the property, the other co-owners have pre-emption rights.
Zoning and permitting
During the silence of the economic downturn the
Hungarian legislation has taken the opportunity to
reshape the Hungarian zoning framework, and to further
improve the building permitting regulations.
The determination of the detailed zoning rules in Hungary
is in the competence of the local municipalities within the
frame of the country wide zoning, and in Budapest within
the frame zoning related to Budapest. The existing zoning
rules have been in effect since the end of the 90’s. The
new zoning will replace the existing ones step by step.
The existing zoning rules if not replaced by the new ones
may remain in effect until 31 December 2018. The most
important change of the zoning will relate to the zoning
of Budapest. The current two stage zoning where detailed
building limitations are provided for in the frame zoning
of the Municipality of Budapest, and also in the detailed
zonings of the district municipalities, will be replaced by a
more transparent regulation. The new zoning regulations
will clarify the distribution of the building regulatory
competences between the Municipality of Budapest
and the district municipalities. With that change the
possibility of the collision between the local and the
frame zoning, which often led to deadlock situations, in
the implementation of large scale investments could be
avoided.
Beside the update of the zoning rules the building
permitting procedures are also refreshed. A number
of new procedures are implemented with the clear
purpose to create a more predictable building regulatory
environment for the prospective investors.
Prior to applying for building permit a prospective
developer, may submit a request to the building authority
for administrative service. In such administrative service
the developer may request (i) the checking of the building
permitting documentation, whether or not the obtaining
of any further document is necessary; (ii) the clarification
of the fees payable for the planned procedure; (iii) the
clarification of the scope of the interested parties having
the right of appeal; (iv) information in relation to the
applicable building regulations (clarification of applicable
zoning rules). The building authority has a tight deadline
for the answer. The position or clarification issued by the
building authority will bind the building authority unless
the related legal provisions are changing.
The Complex Deployment Procedure is integrating
all those procedures which are necessary for the
implementation of a large scale complex project. The
complex deployment procedure may be requested by
a developer to combine two or more than two of the
following procedures: (i) amendment of the zoning of the
real estate; (ii) clarification the building parameters of the
real estate;
(iii) environmental permitting (environmental impact
assessment); (iv) permitting of withdrawal of rural land
from agricultural cultivation; (v) permitting of withdrawal
of forest from forest cultivation;
(vi) land division permitting procedure; (vii) archaeological
permitting; (viii) building permitting procedure; (ix)
environmental permitting (environmental permit); (x)
alteration from national building requirements.
Prospective investors will obviously benefit from these
new procedures for a number of reasons. Building
regulatory issues can be clarified in very early stage
without heavy investment. The position taken in the
administrative service and the deployment permit will be
binding on the building authority. The implementation
of large scale investments are much easier under the
complex deployment procedure, since the prospective
investor shall deal with only one authority under one
procedure and not with five or six different authorities in
five or six different procedures.
Lease contract
The entering into force of the New Civil Code on 15
March 2014 has made a significant progress toward the
liberalization of leases, and the ultimate legalization of a
number of legal concepts imported from the Anglo-Saxon
legal world in Hungary in the last two decades.
The LXXVIII Act of 1993 on the residential and nonresidential leases (“Lease Act” ) was enacted by the
Hungarian Parliament almost 20 years ago. At that time
Hungary was under transition from the highly regulated
socialist economy to a liberalized market driven economy.
In the early 90’s the Hungarian State and the newly
created local municipalities held substantial residential
real estate portfolios, which were aimed to be privatized
on short term. Therefore the focus of the Lease Act on
protection of tenant’s rights was an equitable approach of
those times.
The contractual freedom of the parties had therefore been
substantially impaired by the Leases Act even in the case
of non-residential leases. Since the provisions of the Lease
Act are / were relatively cogent (parties may not agree to
otherwise) the tenants of commercial real estates have
also benefited from the protective provisions of Lease Act
unreasonably.
The Lease Act explicitly defined certain substantial
event of defaults of the tenants (like payment failure,
damaging the state of the leased premises, scandalous/
offensive behaviour against other tenants etc.) which had
entitled the landlord to exercise the right of extraordinary
termination under strict procedural rules. It was even
under dispute for a while whether the parties are free to
add certain additional event of defaults to the explicit list
or not.
building permits, leases and contracts relating to the
property. When buying shares in an entity holding the real
estate, corporate and financial due diligence also takes
place.
Due diligence is carried out before purchase, usually
after the signing of a letter of intent (heads of terms). An
exclusivity period is in most cases agreed between the
buyer and the seller.
Afterwards, the sale and purchase agreement is entered
into and submitted to the land registry office for
registration. The purchase price is usually paid once the
seller has given consent to the registration and other
conditions agreed by the parties have been met.
A contractual or statutory (existing by force of Law)
pre-emption right may limit the conveyance rights of the
seller. For instance the Hungarian State has a pre-emption
right over protected historical buildings. When one coowner of a jointly owned property wishes to sell, the other
co-owners have pre-emption rights.
The existence of a contractual or statutory preemption
right over a real property shall be reviewed case by case,
usually as a part of the legal due diligence exercise.
The liberalization of the said restrictions started in the
court practice and materialised in the New Civil Code and
as a consequence
• the protective provisions of the Lease Act relating
only the tenants of residential leases;
• the Anglo-Saxon origin legal concepts like break
option, assignment and subleasing, immediate
termination provisions are no longer on the edge
of legality;
Purchase contract
When buying an asset, investors usually carry out
technical, environmental and legal due diligence on title,
35
Tax environment of real
estate investments
Dr. Ákos Becher
DLA Piper
[email protected]
Dr. Dávid Bosznay
DLA Piper
[email protected]
Phase 1: Acquisition
The section below presents the main tax
considerations of investing in Hungary for
corporate investors (accordingly, no personal tax
matters were elaborated) and was prepared by
Ákos Becher and Dávid Bosznay in the tax practice
of DLA Piper.
We have assumed that the real estate investment
is made either through an asset deal (i.e. a foreign
investor purchases a Hungarian located real estate
directly) or through a share deal (i.e. the foreign
investor acquires a local, Special Purpose Vehicle
(“SPV”) that holds the real estate). Apart from
the above, alternatively, a Hungarian investment
vehicle may either be set up so as to acquire the
real estate directly or to buy the shares in the local
SPV holding it. Though these approaches show
much similarity with that of detailed hereunder,
still, there are slight differences in terms of tax
implications.
Asset deals
TRANSFER TAX
Acquiring a real property located in Hungary is subject to
transfer tax liability. The tax base is the market value of
the real property without any reduction. Importantly, the
tax authority generally considers the gross sales price (i.e.
including VAT) as market value.
Transfer tax rate is 4% up to HUF 1bn and 2% in excess. A
cap of HUF 200m applies per real property (i.e. per plot
number).
VAT FINANCING
Acquiring a real property may require the buyer to finance
VAT (at a rate of 27%) as long as it can be reimbursed,
on condition the real property has not yet been put into
operation or less than two years have lapsed from the
occupancy permit becoming enforceable. VAT finance
obligation arises even in the case when the real property is
deemed to be a building site (in Hungarian: építési telek).
In any other cases, general VAT exemption applies, unless
the supplier opts – on a discretional basis – treating
the sale as VATable. If so, a domestic reverse charge
mechanism applies requiring the buyer to self-charge VAT.
The VAT charged or self-charged might be deducted at
the buyer if further legislative requirements (e.g. being a
VATable person, disposing of appropriate invoice, having
the property purchased for resale purposes or otherwise
utilizing it on a VATable basis) are met.
Share deals
TRANSFER TAX
Acquiring the real property through acquiring the shares
in a local SPV holding it is also subject to transfer tax
liability on condition that 75% or more of the shares are
acquired therein and if it qualifies as a ‘property holding
company’. Shareholding ratio shall be computed on a
consolidated basis (related parties’ shareholding ratio
must be observed).
A company qualifies as ‘property holding company’ if it
holds Hungarian located real estate property of a value of
more than 75% of its balance sheet total or holds at least
75% direct or indirect shares in such a company.
The tax rate is 4% up to HUF 1bn and 2% in excess. A
cap of HUF 200m applies per real property. Transfer
tax exemption is available to acquisitions from related
parties, preferential exchange of shares and preferential
transformations, unless the acquirer resides in a low tax
jurisdiction.
Real estate investment trusts
In 2011, real estate investment trust (REIT) regime was
adopted in Hungary to promote investors in the real estate
sector and to potentially increase the overall amount of
real property investments.
Hungarian REIT must be established in the form of a
public joint stock company having a minimum start-up
capital of HUF 10bn. The REIT may only hold shares in
SPVs if they fulfil detailed requirements laid down by
law. Real property portfolio of the REIT (referring to real
property held by the REIT and the SPVs) shall amount to at
least 70% of its balance sheet total.
Hungarian REIT regulation prefers small investors by
laying down that the total shareholdings of institutional
investors (i.e. banks, insurance companies) must not
exceed 10% of the issued shares. Additionally, at least
25% of the REIT’s share capital shall qualify as free float.
In this context, free float refers to a series of shares where
no shareholder holds more than 5% of the free float
shares (i.e. 5% threshold is not established based on the
total shares). The shares at least in the amount of the free
float shall be introduced to the regulated market (stock
exchange). Finally, at least 90% of profit after tax shall be
distributed annually.
REIT status is subject to a preliminary registration by the
tax authority. Subsequent to the registration, preferential
tax regime applies to REITs and their SPVs, like a reduced
flat transfer tax rate of 2% on direct acquisition of any
real properties or shares in a ‘property holding company’.
Furthermore, they are subject to no corporate tax liability
(unless failing to observe the arm’s length principle in
related party transactions). Similarly, no local business tax
liability applies on their business revenues.
It is important to note though that no REIT has been
established in Hungary yet. In order for the first REITs to
be established, certain rather impracticable and untested
legal provisions (related most importantly to the free float
requirements) need to be revised and amended. Due to
the increasing interest in REITs and the intensive lobbyist
activities, necessary amendments are anticipated to be
enacted by the year-end.
Phase 2: Operation
CORPORATE TAX
Hungarian residents are subject to corporate tax on their
worldwide income (unlimited tax liability). An entity
qualifies as such, if incorporated under Hungarian law or
effectively managed from Hungary.
Non-residents are taxable to the extent their income is
attributable to a Hungarian permanent establishment
(limited tax liability). In that case, the corporate tax
payable may be exempted or credited at the country of
residence if the double tax treaty prescribes so.
Corporate tax is payable on the pre-tax profit adjusted
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by certain tax base increasing and decreasing items. The
statutory tax rate is 10% up to the tax base of HUF 500m
and 19% in excess. Corporate tax liability may arise even
in the absence of any profit, on condition the pre-tax profit
or the corporate tax base (whichever is higher) does not
reach 2% of the adjusted sales revenues. If so, taxpayers
can either submit a declaration justifying the loss making
position or consider this threshold as a tax base and pay
corporate tax thereon accordingly.
A real property, if leased out, can be depreciated at an
annual rate of 5% eroding the corporate tax base. In case
of vacancy a pro-rata calculation applies where vacant
areas are subject to standard depreciation rate of 2%. The
real property could either be depreciated at a stepped-up
value. No depreciation is available to lands.
Operating expenses are deductible for corporate tax
purposes if borne for business-, revenue generating
purposes. Importantly, payments made to controlled
foreign companies (entities having much of their revenue
deriving from Hungary and residing in a low tax nontreaty country; or a treaty country but without actual
economic activity qualify as such) are generally deemed to
be non-deductible expenses, unless it is proved that they
serve business purposes.
Net operating losses can be carried forward indefinitely,
without permission of the tax authority, on condition
that the losses are incurred due to the regular business
activity. Utilizing the losses is unavailable if a corporate tax
payer acquires directly, or indirectly majority interest in a
Hungarian resident entity. There is a relief though if the
resident entity carries on – for a consecutive period of two
years – the same type of activity that was pursued prior
to its acquisition and shows – in both years – revenues
generated from such an activity.
DIVIDENDS
Dividends received by Hungarian resident entities are
exempted from Hungarian corporate taxation, unless
received from controlled foreign companies.
Dividends Hungarian residents distribute out of Hungary
shall not be subject to withholding tax liability.
DEBT FINANCING
Interest payable is deemed to be recognized (i.e.
deductible expense) from a corporate tax perspective if
incurred for business purposes.
The debt to equity ratio of 3 to 1 should be kept in order
though to get full deduction of interest expenses (thin
capitalization restriction) meaning, in practice, that if the
debts exceed 3 times the equity, the interest expense
falling on the excess part shall be non-deductible. For
bank financing, this restriction does not apply.
If the financing is made through an inter-company loan
arrangement concluded with a related party for tax
purposes, the arm’s length principle should be observed
upon determining the actual rate of interest payable. Such
transaction, subject to the transaction value, should be
documented for transfer pricing purposes.
Interest paid out of Hungary shall not be subject to
withholding tax liability.
Hybrid instruments (deemed as dividend at the recipient,
while recognized as interest expense at the source of
payment) might provide more efficient way of financing.
TRANSFER PRICING
Intra-group arrangements between related parties (e.g.
leasing out the property to another group entity) must
observe the arm’s length principles. These arrangements,
subject to the transaction value, must be documented for
transfer pricing purposes.
VAT
VAT laws are harmonized in accordance with the European
Union by the Council Directive 2006/112/EC of 28
November 2006 on the common system of value added
tax.The standard VAT rate is 27%.
Leasing out a property is, in principle, exempt of VAT
(certain restriction applies e.g. leasing out the property for
parking purposes).
Nonetheless, a discretional option is available to lease
out real property on a VATable basis if such election is
properly reported to the tax authority. The upside this may
entail is that electing the lease as VATable makes input
VAT charged by other suppliers on their services related to
the real property (e.g. on renovation, construction) – that
shall, in principle, be non-deductible for VAT purposes
otherwise – deductible at the recipient instead (further
administrative conditions must also be observed). This
relief on the deductibility of input VAT also applies if the
real property was acquired for resale purposes.
The negative difference between the VAT payable and
deductible might be carried forward to the next VAT
assessment period to be observed as a decreasing item, or
might be reimbursed, subject to threshold requirements,
through a VAT reclaim procedure. The amount reclaimed
shall be refunded by the tax authority within 45 or 75
days (depending on settlement). It is worth to consider
that such refund request generally triggers a VAT audit
by the tax authority that automatically extends the above
deadlines.
LOCAL BUSINESS TAX
Utilizing the real property is subject to local business tax
amounting up to 2% of the annual net sales revenue. Cost
of goods sold, mediated services, subcontractor charges
and raw materials are deductible (subject to certain
restrictions) from the tax base.
stand on it upon establishing the actual amount of the
land tax payable.
Phase 3: Exit
Asset deals
CORPORATE TAX
Sale of the real property will be subject to the statutory
corporate tax rate (10%/19% depending on tax base) on
any capital gains realized.
VAT
In practice, the basis of local business tax payment should
be the net rental fee realized on leasing out the real
property. To establish the actual local business tax liability,
the decree of the local municipality should be analyzed.
The sale of a building site or the sale of a real property
that has not yet been put into operation or less than two
years have lapsed from the occupancy permit becoming
enforceable is subject to VAT at 27%.
BUILDING TAX
In any other cases, the sale of a real property if exempt
from VAT, unless the seller opted otherwise and treats the
sale as VATable (this election has much relevance at the
phases of acquisition and operation as prescribed above).
If so, a domestic reverse charge mechanism applies
requiring the buyer to self-charge VAT (subject to further
conditions).
The owner of the real property is subject to building tax
payment. The amount of building tax is payable up to
1,100 HUF/m2 per annum calculated based on the total
useable area of the real estate or up to 3.6% of the 50% of
the market value of the real property payable on an annual
basis.
The actual calculation method of the building tax payable
is dependent on the discretion of the local municipality on
the territory of which the property is located. In practice,
the calculation method that is based on the market value
of the real property is not typically applied by them. To
establish the actual building tax liability, the decree of the
local municipality should be analyzed.
LAND TAX
The owner of the real property, if it is a land, would be
subject to land tax payment. The amount of land tax
payable is up to 200 HUF/m2 per annum, calculated based
on the area of the land or up to 3% of the 50% of the
market value of the land, payable on an annual basis.
The actual calculation method of the land tax payable is
dependent on the discretion of the local municipality in
the territory of which the land is located.
Share deals
CORPORATE TAX
Corporate tax liability may apply for non-residents as well
when the shares in the local, SPV holding the property are
sold if it is considered to be a ‘property holding company’
and the seller is resident in a non-treaty country or in a
treaty country, where the double tax treaty allocates the
right of taxing capital gains to Hungary.
If so, the sale is subject to Hungarian capital gains
taxation on the difference between the sales price and
the acquisition value of participation. Capital gains tax
is payable at the statutory corporate tax rate (10%/19%
depending on tax base).
Importantly, land tax is also payable on the land which
buildings stand on. The total area of the land shall,
however, be decreased by the basic area of the buildings
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About JLL Hungary
Jones Lang LaSalle Inc. (NYSE: JLL) is a professional
services and investment management firm offering
specialized real estate services to clients seeking
increased value by owning, occupying and investing in
real estate. With annual fee revenue of $4bn, JLL has more
than 200 corporate offices and operates in 75 countries
worldwide. On behalf of its clients, the firm provides
management and real estate outsourcing services for
a property portfolio of 3bn square feet and completed
$99bn in sales, acquisitions and finance transactions
in 2013. Its investment management business, LaSalle
Investment Management, has $48bn of real estate assets
under management.
JLL opened its Budapest office in 1992 as one of the first
international real estate advisory firms on the market.
Today JLL is among the largest real estate consultancy
firms in Hungary with more than 60 employees, being
the absolute market leader in Capital Markets, Tenant
Representation and Valuations.
Our services include:
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Capital Markets (Acquisition and Disposal)
Office, Retail and Industrial Leasing
Project & Development Services
Property Management
Research & Consultancy
Tenant Representation
Valuation
JLL operates a Central & Eastern European (CEE) regional
network across six countries, with offices in: Poland, Czech
Republic, Slovakia, Hungary, Romania and Serbia (acting
as an SEE hub). The first JLL office in CEE was established
in 1992 in Prague. The company has since become one of
the leading providers of real estate services in the region
with over 400 professionals.
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Contacts
Ferenc Furulyás
Benjamin Perez-Ellischewit
Rita Tuza
Marcell Szotyori-Nagy
Managing Director
[email protected]
Head of Research
[email protected]
Director, Head of Capital Markets
[email protected]
Associate Director, Capital Markets
[email protected]
JLL Hungary
1054 Budapest Szabadság Square 14.
+36 1 489 0202
A guide to real estate investment in Hungary
October 2014
www.jll.hu
COPYRIGHT © JONES LANG LASALLE IP, INC. 2014. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written
consent of Jones Lang LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it
contains no factual errors. We would like to be told of any such errors in order to correct them.