Hungary for the Suburbs

Three years on from becoming a member of the EU, Hungary shows all the signs of a marketplace that has grown up, matured, learned from its mistakes and is progressing towards becoming a fully-fledged member of Europe. The country has pursued decidedly reformist policies since the early 1990s and has been rewarded for it with consistently above-average rates of economic growth and a relatively high standard of living compared to other Eastern European countries. The regeneration of the city has taken form over the last few years as the last vestiges of Soviet-era tower block architecture are being smartened up for the discerning international clientele which now flock into Budapest. Almost two-thirds of Hungary’s economic activity is concentrated in Budapest, which has kept the market here thriving, and continually attracts millions of tourists every year, who regularly rate the capital among such vaunted company as Paris and Vienna. The gold rush in the build-up to EU accession and the aftermath of the frenzied excitement of rich pickings may be over, but now the dust has settled, we are in an excellent position to view Hungary’s true identity and judge the shape of what it is to come. At first glance, the marketplace may seem a lot less attractive than the boom years of 1999 to 2004, when land, apartments and new-builds in central Budapest were soaring at over 30% per annum. But that was when property was going for a song, and the only way was up. Prime plots in the capital’s cultural heart in Districts 5, 6 and 7 were picked up at lightening speed by developers, funds and commercial institutions, and developed as fast as was humanly (and bureaucratically) possible, while historic buildings were hurriedly restored to their former glory or converted into luxurious apartments. Prices per square metre in the more coveted areas leapt from around €1,000 per sqm up to over €5,000 per sqm. Quids in for those that had dared.

Budapest Offers Lower Prices than Bucharest and Istanbul

Isolated dramatic increases aside, Hungary’s fine capital is still one of the cheapest prime cities in Europe, with prices per square metre averaging around €1,792 EUR, which is the 5th lowest in Europe, below even Romanian and Turkish levels. Buyers can also take advantage of a falling currency rate. With recent concerns over Hungary’s target of adopting the euro in 2010 over the country’s large budget deficit, the Forint has fallen. This has proved beneficial, as property becomes ‘cheaper’ than it was five years ago. In addition, the local population’s love affair with the ever-increasing variety of mortgage products has kept the market buoyant and retained a healthy demand for property in the capital that does not rely on foreign investment. Traditionally, Hungary has one of the highest property ownership rates in Europe - a staggering 92% of the population - so with the increase of mortgage availability, it is no surprise that over half a million people took out a mortgage in Hungary between 2000 and 2005. An amazing 80% of new loans are based on Swiss francs, which are then converted into Hungarian Forint - a higher yielding currency that can generate a decent return. The preferred loan maturity tends to be 20 years, with the average amount drawn down rising. Market competition to lend is fierce, with banks now offering 100% for new-build homes, making this property type a favourite among local buyers. Indeed, according to the Global Property Guide, prices of existing new-builds in Budapest rose by 13.2% in 2006, on top of a 4.17% rise in 2005.

Up to 80% LTV for Foreign Buyers on Off-Plan Investors

And the good news for us foreigners is that we also get to enjoy many of the same benefits as the Hungarians, including mortgages on off-plan property at up to 80% loan-to-value, some of which also offer us interest-only products. Try finding that kind of deal in other emerging markets! One mortgage broker in Budapest I use achieved an average of 79% LTV for foreigners in 2006, and expects to accomplish the same feat this year. Another attractive aspect includes a low interest rate of around 5.25%. What I particularly like about the Hungarian market is that it offers an investor financial security, and the opportunity to leverage, just like here in the UK. If you’re buying off-plan property for example, an Escrow account is regarded as a normal part of the purchasing process, unlike in other emerging markets where a query about a ‘secure, bank or lawyer-governed bank account’ is often met with a furrowed brow and a shrug. Smart local developers have also tapped into our desire to limit our exposure. The developers I’m investing with only require a deposit of 20%, with nothing more to pay until completion in 2009. Bye-bye to cashflow-unfriendly stage payments. This gives me the perfect opportunity to leverage my cash in the meantime, acquire a mortgage, and feel safe in the knowledge that my deposit is locked in a secure escrow account strictly governed by bank rules. Much more civilised. On top of this, it means I’m not taking the risk with the developer. The lending bank is taking the punt, which proves that the developers have built a strong enough relationship and reputation to secure bank finance for the project – an aspect that is always worth looking for in any development project.

Budapest’s Orbital Is Creating Important New ‘Office Corridors’

Indeed, Hungary has moved on significantly since it first gripped international investors during the late nineties. Its infrastructure and accessibility have improved in leaps and bounds, further encouraging new investment and driving the market forward – this time out of the city, into the suburbs. The new circular highway surrounding Budapest, the M0 – the capital’s equivalent of London’s M25 – has made it possible for commuters to take advantage of modern, affordable accommodation in leafy environments, perfect for raising families, or for professionals who simply want to get away from the rat race. The M0 is well under way and is scheduled for completion in 2010. As various stretches complete, new areas around the capital open up for business. Two such districts expecting significant regeneration and new employment opportunities include District 21 on Csepel Island and District 18. Csepel Island is poised to have an exciting new central business district akin to Canary Wharf or Docklands built at its northern tip, while District 18 is home to Hungary’s main international Ferihegy airport, which is set for a massive redevelopment programme over the next 5 years.

Regeneration & Investment Fuelling Commuter Belt Markets

Ferihegy Airport was recently acquired from BAA by the HOCTIEF Consortium in June this year in a buy-out worth €1.86 billion. The new management company, which includes investors from Canada, Singapore, and Germany, has unveiled a €261 million development plan to significantly redevelop Terminals 1 and 2. Plans also include an ambitious ‘airport city’ with hotel and conference facilities, car parking, and a business and trade park. The Consortium also has stakes in Düsseldorf, Athens, Sydney, and Hamburg airports – in total 83 million people use the airports every year. So Ferihegy is in good company. For the year until October 2006, total passenger traffic at Ferihegy airport reached 8.3 million, an increase of 6% over the same period a year before. In the first quarter of 2007, traffic was 1.6 million passengers, which corresponds to an expansion of 3%. Ryanair recently announced flights connecting Budapest and Nottingham East Midlands Airport from October 2007, which means that three UK cities (London, Manchester, and Nottingham) will be connected with the Hungarian capital. Also easing travel into the city centre is the arrival of a new express railway. According to a recent statement made by the Minister of Economy, plans are under way to have it completed by 2010. This express train is expected to leave Ferihegy airport and arrive at Keleti station in the 8th district, a strong choice, as it currently services the majority of Budapest’s inter-city rail connections.

Good Business & High Tourism Will Continue to Drive the Market

This new infrastructure, routes and transport systems are hugely benefiting the capital and country generally. Hungary relies heavily on overseas tourism receipts, which have grown to $4.1 billion in 2006. Therefore, government policy is very pro-active in this area as evidenced by figures on government expenditure in the tourism industry, which is estimated to total $665.7 million in 2007. The 12 million international arrivals in the country outnumber the actual population of Hungary, which is 10 million. The importance of this industry to the overall economy is further highlighted in the growth in investments and changes in overall operating environment that have come about in the last few years. With EU accession in 2004, the liberalization of the previously state-controlled aviation industry has resulted in a rapid growth in the number of flights into both Ferihegy International Airport (Budapest) and other regional airports. Rising competition also resulted in falling ticket prices, much to the benefit of both domestic and foreign tourists. Domestic tourism is a major factor in the sub sector’s health as rising incomes since the 90s have seen the number of domestic tourist trips increase dramatically from 12 million in 2000 to 21 million in 2005, registering an increase of 67% over the 2000-2005 period. Overall, the tourism sector generates $17.1 billion worth of economic activity and is estimated to sustain 310,000 jobs or 7.8% of total employment in 2007. Returns in this industry are almost guaranteed as the World Travel and Tourism Council predicts a growth in the travel and tourism industry of 4.6% per annum from 2008 until 2017.

Suburbs Offer Solid Year Round Rental Yields Over 6%

So now is an excellent time to take advantage of a market that has advanced significantly, and where the benefits of experience furnish investors with a stable and financially-sophisticated investment environment. But this time around, the best investment direction is not city-centric. That’s largely been done, and in some city centre districts, such as the 9th and the 13th, there is in fact an over-supply of properties, as well as prices that local agents estimate are over-inflated by around 10% – a result in some cases of too much foreign investment and insufficient numbers of local buyers who can afford these prices. The focus is now clearly on the suburbs. Property prices are rising at around 15-20% per annum, and driven by local direct investment, rather than by foreigners, while rental yields are achieving on average between 6-8%. This figure is expected to improve as the areas develop. And to diffuse any concerns about the rental market being saturated, a property manager I use recently let 67 apartments in two months in the suburban 16th District, which he was almost embarrassed about. “I was aiming for 80,” he told me. I’d say that isn’t bad going in two months. He also confirmed that the prospect of rentals in Districts 18 and 21 would be excellent. “Tenants are looking specifically for high quality accommodation in areas close to their workplace that offer the convenience and comfort of good schools, excellent public transport, surgeries and shops. They want a village-style environment with connections into the city. This is what the suburbs provide.” Overall, in the medium to long-term, the property market in Hungary remains a safe investment choice. There is no inherent fragility in the country’s political structures and institutions, which in fact can only be strengthened over the coming years as the country’s accession into the EU from the 1 May 2004 proved. UniCredit Bank sums up Hungary’s positive future growth perfectly: “When the painful stabilisation plan is successfully completed this year, Hungary can return to a path of more dynamic growth, as the fundamentals and export prospects of the real sector remain sound.”

Call Hollingworth & Associates on + 44 (0) 1273 697 437 now for exciting off-plan properties available for just 20% deposit in Budapest’s suburbs

or visit their website at www.hollingworthandassociates.com.

You can also email Caroline Hollingworth at info@hollingworthandassociates.com.