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

The CE Invest Group is to merge with Catherine Dickens Properties under the new name Central European Property Group registered in Budapest and serving both Slovakian and Hungarian markets as a leading property management and consulting firm. Combining the professional world class service culture and internationally recognized interiors of Catherine Dickens with the strengths of CE Invest in residential and commercial lettings, international networking as well as corporate and tax consulting which will provide the added value that a foreign investor is looking for in Central Europe.

We are expecting an increase in property prices, especially in Budapest, in the coming years. Today an investor can still purchase a 2-bedroom luxury apartment in a refurbished listed building with 24-hour concierge service in a prime location in the heart of Budapest for €155,000, while the same amount would merely buy a 1-bedroom unit in a new development away from the center in Bratislava. The rental income of the luxury flat in Budapest would be twice that of the 1-bed unit in Bratislava.

The new Hungarian government has introduced incentives for property buyers, has created a more attractive business environment for foreign companies and employers in general, and has taken on the EU Presidency from January 1. Recent constitutional and monetary legislation has created uncertainty in the international markets, so the outlook for the Hungarian currency is ambiguous. Therefore this is a good time to buy property, however, only in the prime areas of Budapest. For those who have purchased property it is best not to sell, but keep it under good management to maximize revenue. The companies under CE Property Group specialize in the planning and project management of the restoration, interior design, and subsequent rental of high-end properties in Budapest.

If you have a question on your property or would like to know more about the Hungarian or Slovakian market, you can ask our expert Andras here

On March 1 the Hungarian government has maximized the loan to value (LTV) on mortgage loans, setting a 75% limit in case of Hungarian forint (HUF) loans and 60% in case of euro loans. Swiss francs and other currency loans cannot exceed 45% of the value. There percentages apply to the value of the property as determined by the bank, so the real figures are closer to 65% and 50%, respectively. Reason: Household debt has significantly risen in Hungary over the past two years and the government wants to decrease the risk of personal bankruptcies and resulting foreclosures.

From June 11 collateral alone will not be enough; the applicant’s credit record, personal financial statement, and net income will determine whether they are eligible for the loan. Most banks already operate under such conditions; the government regulation merely formalized the existing situation, preventing banks from returning to more liberal practices after the recession. On the one hand this is a guarantee for more stability and less foreclosures in the future, on the other hand there will be much fewer loan applications, it will take longer for the economy and the property market to wake up from its long slumber. The reason net income is such a problem is the fact that much of the economy is still in the grey. Hungarians have money, but are unwilling to declare it.

Why is this important? Investors seeking to exit and resell on the local market must take into consideration the incentives offered by the government to potential buyers. It seems the situation will not improve in the near future; it will not be easier to get a mortgage loan. Therefore we suggest furnishing and improving the property to attract a stable tenant, otherwise radically reducing the price to be able to sell.

Real estate experts speak of a needed annual 40,000 new units in the country for any quality changes to appear on the residential market. There were altogether 32,000 units completed in 2009. Projections for 2010 point to merely 19,000 units, which would be a 50-year-low. Since 1991, 2009 was the first year when the number of units handed over exceeded the number of units planned. In order to boost the economy, the real estate industry is anticipating government-subsidized loans from the new administration when it launches its program this summer after the elections, but nobody has suggested a source for this budget yet.

Some good news: Government has also maximized the penalty payable when repaying the principal before the term of the loan expires; it cannot exceed 2% of the repaid amount. This only applies to loans taken after March 1, 2010. Why is this important? The penalty used to be higher. Investors can now save on costs when selling property in Hungary. This, coupled with the reduced stamp duty and less capital gains tax, should make it easier to resell on the Hungarian market. All we need is financing for the buyers, unfortunately this is exactly what has been obstructed by the government.

In Slovakia the situation is quite the opposite. The government is encouraging young couples to buy apartments by introducing government-subsidized loans where people pay as little as 2% interest on long-term loans on condition they do not resell within 4 years. However, these options are only available for local residents.

For those who sign up through Property Secrets, we offer a 50% discount on Property Management Services in Hungary, for a year. This means we will manage their apartment for 5% of the monthly rent + VAT instead of 10%, for a year. No strings attached, no obligation to remain with our company if not satisfied.

This is a way for apartment owners to further cut costs in Hungary and we will add value to their investment by providing professional advice on furnishing, rental, financing, resale, and taxation.

For those who do not wish to transfer the management to our company, we offer a Property Audit Service, which means for a fee of 300 EUR + VAT we make a thorough assessment of your apartment, get the full status reports as an independent third party regarding your lease, utility contracts, tax situation, and outlook for the future – possible exit strategies. We will include suggestions regarding insurance and where we think you can save costs. No obligation to use our services afterwards, this is an independent expert opinion, so you are not limited to your existing property manager’s opinion.

Andras Patkai andras@ceinvest.hu

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)