Generally the year 2009 has been a bleak year for buy-to-let investors worldwide. The crisis came with a delay to Eastern Europe where sellers and developers refused to believe the gloomy predictions until there were obvious signs. Individual buyers, mainly from the UK, and foreign investment funds, which flooded the region until late 2008, suddenly disappeared. Banks toughened their lending criteria, unemployment rose, and the property boom came to an abrupt halt. What used to be a gold mine of opportunities and relentless optimism, gave way to a desperate scene where many property agents and developers were forced out of business.

The main issues for investors throughout the year were finding the right exit strategy with the least possible loss, and negotiating favorable property management options in the aftermath, for those who could not or would not sell.

In spite of the bad news and the market slow-down, prices merely stagnated and did not come down as much as expected. There were no massive foreclosures or easy lucrative opportunities. Investors hoping to buy 40-50% below market value were surprised to find tough resistance from unbroken sellers.

Slovakia

CE Invest, as the leading property management company of Bratislava, provides up-to-date data about the prices in the city. The rental market is strong in Bratislava. Apartments are rented within a week or two. The reason for the demand is the low supply of newly-built apartments in the city. A central location is also a much-sought-after deal for the tenants, 50% of whom are locals, the other 50% foreign businessmen, diplomats, and students.

Rental prices of newly-built units in Bratislava

Rental prices of Old Town apartments in Bratislava

Utilities are paid by the tenant. Note that in case of a vacancy, it is not only the missing rent, but the mounting utility expenses, namely building common costs, which take their toll on the investors.

Mortgage Information

Currently only two Slovak banks, OTP Bank and VUB Bank, the latter only in exceptional cases, provide mortgage loans for non-residents in the range of 50-70% loan to value (LTV). The current interest rate varies between 5.2 and 5.6%. The administrative period is around one month until the mortgage is released.

Some recent examples from the re-sale market of newly-built properties:

1-bedroom 59m2 apartment in the 3 Towers development bought by an Austrian citizen working in Bratislava for 152,000 Euros, including parking space.

1-bedroom apartment in the development Jegeho Alej by Finep was bought by a Slovak bank employee for 110,000 Euros, including parking space.

Re-sale Prices of Newly-Built Properties in Bratislava

No VAT is involved when apartments are re-sold by private persons. Costs involved in apartment re-sale for the owner include a brokerage commission of 3.5% + VAT as well as legal fees at 0.5% + VAT. Regarding 19% capital gains tax, which is to be paid on the difference between the current sales price and the original purchase price, there is a tax exemption after 5 years in case the foreign owner is registered in the apartment as his/her “place of residence.” Expenses of renovation, furniture, legal & agency fees as well as a standard 4025.70 Euro tax deduction, can be offset against the tax base.

For those who do not wish to or cannot sell, the fee for property management is 10% of the monthly rental income + VAT. An additional tenant-finding fee of one month's rent + VAT is charged upon finding a new tenant. Costs of complete furnishing including full kitchen with appliances, delivery, assembly, installation, and VAT, are as follows.

Hungary

According to a market study and predictions for 2010, by HVB Bank, yields on the property market are approaching the 6% average of Western Europe and residential prices will not rise faster than inflation.

The investment environment is somewhat blurred, which means it holds opportunities not present in the “stable” and more organized West.

Ambiguity factors include the small size and immaturity of the market, its undeveloped cyclic nature, uncertain liquidity, and the often short-sightedness of the market players. According to the HVB Bank study, there is a chaotic market with a lack of market standards or voluntary law-abiding behavior, a slow legal system, government overspending, and currency risk.

In 2009 the amount of transactions on the residential market fell back to 2004-2005 levels, around 10,000 units annually in Budapest. This is expected to rise to 12,000 in 2010. In 2009 there were 3300 newly-completed unsold units in the city of 2 million. Previously sold apartments re-enter the market as investors rather lose their deposits than complete on the sale. Effective rise in prices is only anticipated in luxury inner-city apartments and newly-built projects in the popular residential neighborhoods close to the center, where low supply will drive prices further up.

The lowering of the base interest rate of the Hungarian forint, currently at 6.5% (down from 11.5% since Oct 2008), and competition between the banks will reduce the burdens on home mortgages. Buyers are reluctant to buy off-plan, they are looking for already completed units. Experts do not expect further price drops. Property professionals expect modest interest from foreign buyers in 2010 and much improvement by 2011, primarily from British, Spanish, as well as Irish investors.

Instead of looking for bargain foreclosures, investors are encouraged to consider the commercial market for opportunities. Most of the foreclosed property is large, often incomplete family houses outside the capital.  On the other hand there are rented inner-city retail units for sale and yielding commercial buildings with yields well over 10% p.a. in Budapest.

Those who own property should not seek to sell at this time, instead minimize expenses of property management and keep a close eye on the market for exploitable leverage.

Andras Patkai (CE Invest - Bratislava)
Martin Melisko (CE Invest - Budapest)