A recent study by Otthon Centrum on the Residential Property Market in Budapest (OC Lakaspiaci Monitor) reveals 4 proposed impact factors which could initiate an increase in apartment construction.

1) Improved consumer expectation of households
2) Increase in wages
3) Affordable loans
4) 5% VAT (down from 25%) on newly-built apartments

Between January 2010 and January 2011 the number of unsold new apartments in Budapest has been 3200 units (down from 3800).

There are roughly 2000 new apartments to be handed over this year in the capital. 500 of these are being built in District 11 (Buda), 300 in District 14 (Zuglo, Pest), and 180 in District 12 (Diplomat District, Buda), just to name some of the most popular residential districts.

There is much uncertainty regarding the second-hand market, for it is difficult to judge how many foreclosed properties will enter the market as soon as the government freeze on evictions is lifted on July 1, 2011. There is a pressure on the banks to get rid of their bad loans in order to bring more activity to the mortgage market.

Read 90,000 Households in Default http://ceinvest.hu/2011/04/90000-households-in-default/

How has the Recession Impacted Property Prices?

The average prices of used apartments have changed in varying degree since Q1 2007, until today, influenced by apartment type, and location.

Budapest regular apartments dropped 6.67% from 300,000 HUF (1120 EUR) to 280,000 HUF (1050 EUR)/m2.
Budapest “panel” apartments dropped 10% from 200,000 HUF (750 EUR) to 180,000 HUF (670 EUR)/m2.
Country regular apartments dropped 5.26% from 190,000 HUF (710 EUR) to 180,000 HUF (670 EUR)/m2.
Country “panel” apartments dropped 18.75% from 160,000 HUF (600 EUR) to 130,000 HUF (490 EUR)/m2.

Please note these are AVERAGE prices throughout the entire city of Budapest, a city of over 2 million, including mass housing projects of outer districts, low income neighborhoods, as well as industrial areas. Many of the housing estates were built before the 70′s, very similar to the so-called panel blocks. By “panel” we mean the grey “Communist-style” pre-fab blocks of flats built mainly in the housing boom of the 70′s, so common in Eastern Europe, which suffer from poor construction, insulation defects, and awkward layouts. Property in the country is also averaged, including former industrial towns of Eastern Hungary most hit by unemployment. The numbers only refer to apartments/flats, not detached houses or other property.

Andras Patkai

www.ceinvest.hu

2010 statistics by Otthon Centrum and Ingatlan.com show that the average square meter price of apartments in Budapest has dropped below the psychological 350,000 HUF (1310 EUR/m2) threshold. This means the typical price of a studio apartment is around 10 million HUF (37,425 EUR). Note this is a city average, including remote outer districts as well. The average size of the apartments for sale on the market is 67 m2. Therefore the standard apartment sells for 85-90,000 EUR in the Hungarian capital.

The difference between the actual sales price and the advertized value can be 10-15%, which leaves room for negotiation.

Roughly 1600 new-built apartments were sold in Budapest in 2009. The number has not been so low for decades. The number of unsold apartments in projects which have already been handed over reached a record 3000, climbing to ca. 3800 at the beginning of 2010. Add to this around 3000 more apartments in projects in their final stage of construction, so -- good news for new buyers! -- there are roughly 7000 apartments to choose from in 2010.

Developer Financing

So 2010 would be the year to buy because of the large supply, lower purchase tax, and developers' special offers. Tricks developers used until now (half-priced garage, kitchen furniture thrown in, LCD TV included) are not doing the job; the key issue is financing. We see offers where a 15-20% down payment and the signing of a preliminary contract are enough for the buyer to move in. Part of the remaining purchase price is then paid in installments throughout the next year or two, making sure the monthly payments correspond to the payments of a theoretic bank loan. After this period buyer has an option to sign the final purchase contract and pay the full outstanding amount. Depending on the developer, part or much of the monthly payments may be offset from the purchase price. Should buyer fail to come up with the necessary financing, he forfeits his deposit.

Developers target the large group of would-be buyers who do not have the necessary collateral or initial capital to successfully apply for a bank mortgage. There is a striking resentment of rental, a phenomenon on the housing market in the CEE region, where Eastern Europeans would rather live under impractical crammed conditions and commute from incredibly long distances than 'throw money out the window' for rent. On average a much smaller percentage of the population rents than in Western Europe. However, the grim financial reality forces changes in large urban centers as well as remote provincial locations and the adjustment which took place decades ago in the West is slowly happening in Eastern Europe as well. Knowing this, developers offer the following crucial advantages for buyers:

• 1-2 years delay in having to obtain a mortgage, when loan conditions will most probably be better

• pay the stamp duty only after you sign the final purchase contract

• secure property at a low 2010 price level

• part of the monthly payments may be offset from the purchase price

• gain time to save for a larger required down payment for a future loan

• gain time to sell your existing apartment to free up some capital

Actively Combat Vacancy

CE Invest is currently involved in a number of projects where maintenance costs are reduced and the overall rentability of an apartment is improved. For example in one apartment we are about to replace the outdated heating system to cut monthly heating costs by 75%, thus making it more attractive to tenants and more efficient for the owner in the long run. In another apartment double-glazing windows are installed for perfect sound insulation on a busy street. We install functional kitchens and reception-room furniture in apartments which may be rented as office space later, so the first impression of a potential tenant is favorable.

Is there anything we can do for you in order to rent your apartment?

Find Me a Solution

We at CE Invest are presently securing financing for corporate clients who want to use their existing real estate as collateral and make further leveraged investments. We are also working on joining two smaller penthouse apartments to provide a solution for an investor who wishes to purchase a large luxury apartment in a central location. In another instance we are exploring the possibility of developing several luxury apartments in the attic space connected to one of our apartments for sale.

Is there anything we can do for you in order to realize your investment plan?

Andras Patkai (CE Invest)

www.ceinvest.hu

info@ceinvest.hu

Property owners renting their apartment in Central Eastern Europe have a tax liability in the country where the real estate is located. We differentiate between corporate and private ownership in Hungary. In case the owner is a company, all the expenses connected to the operation of the company are deducted from the total income, VAT is handled separately, and the company is taxed at a 16% corporate tax rate on profits. Generally, as with companies everywhere, there is much more room to “optimize” the tax at the end of the year, than in the case of private ownership. Establishing a company is not required; non-residents may own property directly without any restrictions in Hungary. Properly maintaining a company is time consuming and costly, so most foreign investors of apartments in Budapest are individual owners.

The governing document regarding taxation of non-residents is the agreement to prevent double taxation between Hungary and the investor's country of residence. In most cases this document prescribes taxation in Hungary when the property being rented is located in Hungary. Later this tax may be deducted from a similar category of personal income in the country of residence.

There are three ways of calculating and paying income tax on rental. The first method, called Source Tax, is simply deducting 25% of the rental income, submitting a tax return, and making the payment every quarter. The second method, called Combined Income Tax, deducts 10% as expenses and the remaining 90% is taxed at 17%. In the rare case that annual income exceeds 5 million HUF (18,500 EUR), the tax bracket is 34%. The third method, called Thorough Expense Reporting, allows the investor to deduct all relevant expenses, after which the remainder is taxed at 17%.

Before we examine each of these options, let us determine what the income and expenses are. Accountants do not agree about the nature of utility expenses, whether they are included in the rental income, thus are taxable, or not. Let us work with the worst case scenario and count the electricity, water, gas, and common cost expenses as part of the rental income. Later we will see how they can be deducted as expenses. Expenses may be any money spent on the apartment, as long as it is backed up by invoices.

Source Tax

Those apartment owners who want the least hassle have the option of simply paying 25% of the total rental income every quarter as income tax. No expenses can be deducted whatsoever. The income is immediately taxed at its source, hence the name.

Combined Income Tax

There is an option of paying significantly less tax if one declares the rental income as part of the combined personal income in the country. The law states that if expenses cannot be determined accurately when renting an apartment, there is a fixed 10% which may be deducted from the tax base as expenses and the rest is taxed according to the applicable tax brackets. There are only two tax brackets, 17% and 34%, the threshold being 5 million HUF between them. So unless the rental income exceeds 1540 EUR/month, the tax is 17%. Since only 90% is taxed, the rate is effectively 15.3% of the total income. Note that other sources of income in the country, if any, must also be declared.

Thorough Expense Reporting

There is an option to further reduce the tax base, although there are additional accounting expenses. If all the expenses can be justified with the relevant invoices, there is an opportunity to write off much more than the fixed 10% suggested above. The property management fee itself is 10%, to which we add VAT and we are already in this category. Property management fee, tenant finding fee, costs of furnishing and renovation, as well as the utility bills and the interest paid on a bank loan can all be offset against the rental income. The items must be approved by the accountant individually to determine whether they would stand in case of a tax audit. What remains is taxed at 17%. Therefore theoretically in the end the income tax may be pushed down towards 10%. Here again the 5 million HUF threshold pushes us up into the next tax bracket.

The deadline for submitting the tax returns and paying the income tax for the year 2009 is May 20, 2010, in case of private ownership.

There is no need for non-residents to pay an additional 14% Health Subsidy (EHO) on top of the personal income tax. Hungarian citizens are obliged to pay this health tax, which apparently discriminates between Hungarian and non-Hungarian apartment owners, giving a market advantage to the foreign investor.

In order to start the process one has to obtain a Tax ID (adoazonosito) as well as a Tax Number (adoszam) from the Tax Authority (APEH). The Tax ID registers the investor as a tax payer in Hungary. The Tax Number refers to the specific activity of renting real estate. The investor may rent his/her apartment only after the Tax Number is issued. There is an obligation to issue monthly invoices either from a numbered invoice pad or a computer program registered with the Tax Authorities. Copies of these invoices, along with invoices (not receipts or bills) of expenses, form the basis of the annual or quarterly tax returns. It is highly recommended to employ professionals to handle the paperwork properly, who have the relevant liability insurance and competence to handle issues promptly and accurately.

It is fairly common and legal in Budapest to rent an apartment in a residential building as commercial premises, for example a lawyer's office or a marketing agency. In case the apartment is rented to a company, a monthly tax advance must be deducted from the rent. Reference to this must be included in the rental contract and the tenant (the company renting from the foreign private investor) must pay the tax advance regularly. In case tenant fails to pay the tax advance, it will be held liable, not the apartment owner.

Andras Patkai www.ceinvest.hu

January 27, 2010

Slovakia – Locals Buying

CE Invest is successfully selling the apartments of foreign investors to the local market in Bratislava. The demand for quality housing in the capital city has not abated and now that the prices have come down a little (20%), Slovaks have decided to buy. This phenomenon can only be observed in the segment of the residential market which has always been most attractive to buy-to-let investors, namely city-center, preferably newly-built, attractive 1-2-bedroom units.

What drives the market?

As opposed to Prague and Budapest, there is such a drastic relative scarcity of new stylish apartments in the city that as soon as one crosses the imaginary affordability threshold, people rush to buy. What may not seem so apparent from Western Europe, the contrast between old “Communist” housing and new developments built between 2004-2008 is tremendous. We are not only talking about grey pre-fab blocks of flats; the average apartments in the city, advertised as “brick buildings,” whether pre- or post-war, are avoided by new buyers. The main issues are the “old feel;” poor infrastructure; poorly lit, cold, ghastly stairwells and corridors full of the neighbor’s flower pots, laundry, and household junk; aggravated by the inefficient heating methods, leaking roofs, and aging plumbing and electric systems, which fuel constant debate among the tenants of the building. New buyers are not looking for old units and existing owners are looking for ways to sell at a reasonable price, and move out.

What is more, because of the recession, practically all new construction has stopped, so the supply is limited. The significant demand for new-built apartments has not disappeared in the wake of the credit crunch, for it was driven by a healthy economic need in this post-Communist Central European country. The boom until 2008 has certainly brought unrealistic expectations, so prices are still high, it takes a while for owners to settle for a lower price and now, seeing the increasing demand, those who can afford it, have decided to wait.

Credit is readily available in Slovakia for local residents. The banks provide mortgage loans with the same conditions as before the credit crunch. The only change is that credit is not available (yet) to non-residents. It is possible to obtain a loan with 4.3% interest while the rental yield on the apartment is 6%. There is practically no unemployment in Bratislava, as opposed to the eastern part of the country where the gap between rich and poor is widening. On top of the favorable credit situation, many Slovaks have saved up sizeable amounts of cash. Therefore all the circumstances are ripe for a steady rise in property transactions and prices in 2010.

Examples of what is for sale in Bratislava

Three Towers Development, Bratislava

Stunning views from the landmark buildings of Three Towers, proudly rising over Bratislava. The amazing stylish feel of this apartment for sale, the many sports facilities next door, attract the corporate community from the nearby office buildings and shopping-entertainment mall.

Total area: 49m2 (1-bedroom)
Balcony: 5m2
Floor: 9
East orientation

Price: 135,000 Euros with indoor parking
Furniture: 10,480 Euros (optional)

Realistic rent: 600 Euros net

Kitchen in the Three Towers Apartment Block

Fully-furnished apartment for sale in the unique Three Towers development. Spacious bright living room, quality finish, very elegantly and practically furnished.

Total area: 58,4 m2 (1-bedroom)
Balcony: 4,85 m2
Floor: 11
East orientation

Price: 143,000 Euros with indoor parking

Realistic rent: 600 Euros net

Hungary – Booming Rental Market

The recession has brought some noteworthy changes to the Hungarian buy-to-let market. First of all, because of the halt on loans and troubles back home, foreign investors have disappeared from the residential market in Budapest. Construction all over the country has stopped, creating much unemployment and bankruptcy as the wave moved down the line of subcontractors. Because of the large supply of centrally-located renovated apartments as well as new-built units, the market is beginning to move more slowly, but CE Invest has already registered a steady increase in transactions and prices as the new year started.

Since loan conditions remained strict and credit is expensive, while prices did not come down much, the average Hungarian home owner finds it more difficult to find a good deal. Therefore the rental market is booming in Budapest. Rising unemployment in the country brought all the more opportunities to the capital city (30% of the population lives in and around Budapest), so people are looking for accommodation. The limited space of the inner city districts and the lack of new developments keep prices reasonably high. It is extremely rare to find quality new-built housing with underground parking and Western European amenities in the centre.

The city employees and many foreign companies in the metropolis do not feel the “crisis” at all. The restaurants and shopping malls are crowded; the streets are swarming with tourists; there are no more fears of a currency crisis; the new government seems to have created some economic balance (the base interest rate is down to 6%); and the country is preparing for parliamentary elections due April 11. Hungarians hear stories of the effects of the recession in Britain and Ireland and they cannot believe it. There were no foreign guest workers in Hungary, there was no over-valuation of property, a much smaller percentage of the population was indebted, and credit was never as cheap as in Western Europe. Although there are a few peripheral new developments where a number of flats could not be sold, or cannot be rented; there are no empty ghost streets or ghost districts built on speculation.

CE Invest has successfully rented apartments and residential villas over the past months to the diplomat community, corporate circles, foreign students, Hungarian businessmen, and higher-income families in the city centre. The main reason for the success is intensive networking. The property management company has also doubled its portfolio in recent months by taking over the management from individual managers, lawyers, and competing management firms. Apartment owners find the results of a swift and straightforward rental process compelling. There is nothing like a regular, transparent, computerized financial report system, which gives full control to the property investor.

What is for sale in Budapest

Pleasant, quiet, already rented 2-bedroom apartment for sale in the popular Istvan Park new development in central Budapest. Furnished with style, next to a major public transport hub, sports facilities, and every city-amenity imaginable. Underground parking included.

Floor: 1
Total floor area: 59.16 m2
Balcony: 3.92 m2
Aspect: NW

Price: 85,000 EUR
Current rental fee: net 445 EUR/month
Rental yield: 6.28% p.a.

Amenities: 24-hour security.

For general enquiries on Slovakian or Hungarian properties click here to ask our experts or see the following contacts:

HUNGARY - Richard Vigh, richard@ceinvest.hu +36 30 449 1591

SLOVAKIA - Michaela Erdelyi, michaela@ceinvest.sk +421 911 251 030

Regards

Andras Patkai

ask our expert, Andras a question here