It seems the newly-built apartments currently available on the Budapest market will be sold by the end of 2010. This means there will be an evident shortage on the market in 2011, which will produce a 15-20% price increase, according to Elephant Holding and OTP Bank's Property Leasing experts.

10-12,000 new apartments were built and sold in Budapest every year in the period before 2008. By 2010 this number has dropped to a mere quarter of the previous amount. According to local developers, the currently available supply will run out by the end of this year and a definite shortage will be felt, claims Zoltan Zelei, Sales Director of Elephant Holding.

Market professionals emphasize that only about half as many building permits were issued over the past two years, as before; the number of handovers after successful completion, has also been reduced. In a European capital city like Budapest, which is the largest commuter hub of the region, attracting over 3 million people, there is a healthy demand for 15-20,000 newly-built units in order to keep the apartment stock refreshed.

Since there was no bubble on the residential market in Budapest, as witnessed in Western Europe and North America; square meter prices remained around 1100-2200 EUR, as opposed to the 3700-7400 EUR peaks in large European cities, or 1800-3300 EUR in Eastern Europe. This is another reason why a natural market correction is expected in 2011.

District 5

We continue our discussion of the primary investment segments of the city, beginning with District 5 of Budapest. Click here for a detailed map. (Google)

This is the prime commercial hub of the city, the most expensive are of Pest, the down town. Also referred to as Belvaros, that is Inner City, it is a fairly large area, containing the posh Bank District and expensive Government District, along the grand and beautiful Danube River. Exclusive hotels, the Cathedral, the Parliament, the central bank, various public institutions, grandiose bridges, and the pleasant view of the historical sights of Buda across the river, characterize the district. Restaurants, bars, pedestrian shopping areas, and beautifully maintained public parks make the district especially attractive. Most of the characteristic art-deco / art-nouveau and gentry buildings are renovated, which makes real estate especially expensive, a frequent choice of Hungarian celebrities.

It is the dream of every investor to purchase a low-priced unrenovated classic apartment here and convert it into an attractive rental property for the business and foreign community. Capital appreciation is relatively stronger as the number of properties available in this district is limited (19,180 apartments in all), with the most exclusive properties overlooking the Danube River. The Danube promenade is a World Heritage Site and many buildings in the district are listed monuments.

There are 836 residential buildings in the district, 93.5% of them were built before 1944. The average number of apartments per building is 23.5. The average number of large rooms, including the living room, is 2 per apartment, with the typical square meter size being 68.5 m2. An estimated 13.3% of the apartments are rented.

The busy roads which form the borders of the district are not recommended; Szent Istvan korut, Bajcsy-Zsilinszky ut, Karoly korut, Muzeum korut, and Vamhaz korut are too noisy for residential property. The district is divided into sections at the bridges (Lanchid and Erzsebet hid, that is Chain Bridge and Elisabeth Bridge, respectively), the northern, mid- and southern sections, where the dividing main streets (Jozsef Attila u., Szabad Sajto u., Kossuth Lajos u.) are also to be avoided for investment property.

The northern section of District 5 consists of three parts, from north to south: 1) The quiet streets (Balaton u, Stollar u., Falk Miksa u., Nagy Ignac u.) north of Alkotmany u., where there are not as many places for dining and entertainment. 2) The area around the Parliament Building is the government district with ministry buildings, public institutions, the High Court. The streets around Szabadsag ter are also known as the bank district. This is the hub of the top-paying jobs. 3) The most popular streets for tenants & investors are those south of the beautiful square Szabadsag ter (Hercegprimas u., Sas u., Oktober 6. u.) around the Cathedral (Basilica), with recently-pedestrianized streets attracting pleasant restaurants & bars.

The middle section of District 5, between Chain Bridge and Erzsebet Bridge, is the chief tourist area with the stunning Danube Promenade, luxury hotels, famous restaurants, the world's finest shopping brands. Vaci utca and the surrounding streets and squares form the core of the pedestrian zone with the famous Fashion Street leading to Budapest's central square, Deak ter, the only point where the 3 metro lines of the city cross. Therefore Deak ter is the first square people coming to the city learn about. Those who don't mind the constant tourist buzz are happy to rent in this area, it is generally considered to be a very attractive and pleasant part of town. 

The southern part of the district is not as popular. Kossuth Lajos u. off Erzsebet Bridge, leading to Astoria Square is the main thoroughfare of Budapest connecting east and west; this is the point where the motorways from Lake Balaton and Vienna in the west are linked to the large residential areas of Pest and the main motorway leading east, so there is a constant flow of traffic, noise, and air-pollution. The streets south of Szabad Sajto - Kossuth Lajos are narrow, the buildings are older, there are no significant public institutions or work places here and the neighborhood is generally lower-income than in the northern parts. The pedestrian street Vaci utca (referred to as "new Vaci utca") which leads to the Market Hall (Vasarcsarnok) in the south is the most significant investment area for buy-to-let apartments. Another point of attraction is the streets around the square Kalvin ter, where foreign university students prefer to rent.

In summary, the middle and northern sections of District 5 are and will always be a prime location in Budapest. Since location is the primary factor in real estate investments, the best deals are made when one can enter the market relatively low, buying something unrenovated where the value can be further increased creatively. District 5 is the benchmark district, which projects the standard and the future of the Budapest property market.

Andras Patkai www.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