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home about us Red Guides - Eastern Europe 2005
 
Red Guides - Eastern Europe 2005
 

 

Letting property

The real estate market in Hungary and Budapest in particular, currently offers significant capital appreciation, and looks set to do so for the foreseeable future

Traditional, classic, turn-of-the-century flats in Budapest have been appreciating at 20 per cent to 35 per cent per annum and more for the past several years. Additionally, a buyer can expect approximately six per cent rental income on a good property in a good location, especially if it's well maintained. A furnished flat will usually let more quickly and may fetch even greater rental income.

Our firm, A1 Real Estate is involved in renting and managing property, including forwarding the monthly rental income to the buyer's bank account. Typically, the tenant will pay the first month's rent in advance. Also, the tenant will give the buyer the last month's rent and the equivalent of one month's rent as security. For short-term rentals, we will often employ letting agencies to assist. This trend of excellent capital appreciation on investment real estate and a favourable rental market is expected to continue for many years for a variety of reasons.

Recent developments

Hungary emerged from the post- Soviet era in better financial condition than its neighbouring countries, and this economic advantage has increased over the years. The EU Spring Economic Report estimates that Hungary 's GDP will exceed the overall EU average by approximately 50% over the next two years. Direct Foreign Investment increased 20 per cent from 2003 and many major multi-national companies have made significant capital investments in Hungary . Budapest has been the prime beneficiary of the increase in foreign investment, and as a result has seen phenomenal growth in real estate investment. Budapest is a centrally located, gateway capital city. It is strategically positioned to serve as a commercial crossroad from west to east and north to south, with one of Europe's most important waterways, the Danube , coursing through its heart. With a rich history and culture, Budapest boasts a highly educated and motivated work force and these are just some of the reasons why major corporations house key personnel here. For example, General Electric recently declared Budapest to be its European, Indian, African and the Middle Eastern headquarters for their 26,000 person low-voltage production division. This contributes some $ 1.5 billion to GE's bottom line. Companies such as Audi, Electrolux, and Samsung have made investments in Hungary or are significantly increasing their investment here. These developments are major factors in the robust housing market that exists. Add to this the forecast that over the next ten to fifteen years, an estimated thirty to forty million people will migrate to more affordable locales and the outlook for Budapest real estate gets even brighter.

An attractive investment?

There are other factors that make buying to let attractive here. Capital gains taxes have been steadily declining and are forecast to move even lower; the rate presently stands at 16 per cent. Also, if a foreigner purchases property as a corporation, which is the recommended and most popular way, many tax benefits accrue to the buyer. For instance, you can deduct a great deal of expenditure, such as repairs, renovations, insurance, mortgage interest, travel and other items. Most expenditure also serves to raise the cost basis of the property, thus lowering the tax bill upon sale. If you were to purchase as an individual then no deductions are allowed to be made. In addition, the corporation, which can be as few as two persons and costs only 600 euros plus 25 per cent VAT, can take a depreciation allowance of between two and five per cent each year. An individual cannot begin to take depreciation until after the sixth year. Also, an individual purchaser must pay tax on rental income at a rate of 20 per cent per annum, whereas a corporation does not.
The corporation accrues the rental income, after deductions, which is added to the value of the corporation and is taxed as part of the 16 per cent capital gain. The taxation issues are the same for short- term and long-term rentals, though the fee structure for obtaining a tenant will differ. Whether you're buying as a corporation or an individual, a stamp duty of two per cent to 5.7 per cent must be paid. On new construction there is no stamp duty on properties under 120 000 euros although the government is lowering the limit to properties priced 60 000 euros and less from January 1, 2005. However, new construction duty could be as high as 10 per cent for some projects. 

At A1 Real Estate, we would suggest that as the time for a prospective purchaser coming to Budapest draws near, they should carefully review the aforementioned tax information and obtain professional accounting advice.

Letting and the law

The laws in Hungary heavily favour the landlord and evictions are swift. Also, the tenant pays for utilities and contributes to the house fund for maintaining common areas, some of which goes into a general fund for building renovations. In some cases, the municipality will contribute to such improvements, while a municipality or district ( Budapest has 23) may even pay for an entire exterior renovation to a landmark building. The advantage of a short- term let is that it enables the owner to enjoy it for personal use or for the use of relatives and friends for some of the year. Also, the owner may choose to make modest enhancements, such as painting, if so inclined thereby saving money on labour. A long- term rental precludes this, but the owner would receive more income and not have to continually look for a desirable tenant. When looking for tenants, websites can be a hit or miss proposition. Newspapers and magazines are a better bet but can be expensive and time-consuming, requiring the owner to be present to constantly show the flat or house.

 

2003 A1 Real Estate