Buying a Property in Hungary

Where are People Buying?

There was considerable interest in the purchase of property in Hungary five or six years ago. The Hungarian economy then hit the buffers (well, at least slowed down) as a re= sult (partly) of the aggressive approach of Slovakia to capturing inward investment with the result that the property investment also declined to a = relative trickle. In recent months the= re has been a revival of interest, particularly in Budapest.

This is still a small market. Foreign buyers amount to between 1= ,000 and 2,000 per year, most of whom are buying beca= use they are going to be living in Hungary.

The main focus of activity by foreign bu= yers is as follows:

Historic Budapest

Budapest is a truly great city. This is particularly true of Buda, the part on the west bank of the Danube. Its historic heart, whilst not qui= te in the same league as Prague, is very attractive and in considerable demand. Better still, it is likely to rema= in so. Hungarians have rediscovered the j= oys of city living. These are = the areas that have been growing most rapidly in value. They have been averaging ove= r 20% per year and look likely to continue growing at about 15%+ per year for the next few years.

New Suburbs

In the period leading up to the slowdown= in the Hungarian economy many new developments were started in the outer part = of the historic city and further out into the suburbs. They have focused in the III, VI, = VII, VIII, IX & XI districts. All Budapest's districts (the equivalent of P= aris' arondissements= ) are numbered in roman numerals.

These new units were generally apartments. They were aimed a= t the emerging middle classes and the ex-pat investor or businessman. Some of these have been difficult = to sell. Some are still empty. The sellers have often been reluct= ant to negotiate significantly on price but some are now doing so.

The rate of construction of new housing = has now slowed a little, so raising the chances of the market coming back into balance.

It is worth taking local advice as to the merits of any such development as many people feel that there is an oversup= ply in some categories for the time being.

Rural

Rural tourism in Hungary has great potential.<= span style=3D'mso-spacerun:yes'> There has been a lot of interest b= ut little in the way of actual purchase transactions. This will change with time.=

What is available and at what price?

There is always a huge range of prices i= n any property market. This one is = no exception. You need to rememb= er that, by and large, you get what you pay for. That is to say, a more expensive property is usually more expensive because it has some special quality abou= t it and, conversely, a very cheap property is usually very cheap because it has= a very poor location, it is built to a very low standard, it is in a bad stat= e of repair -- or all three!

Prices have been rising steadily over th= e last 2 or 3 years. Clients have se= en growth of about 10% per annum in recent years.

The table below attempts to show some ge= neral indication of prices as at January 2005.

Place & T= ype of Property	Low £	Mid £	High £
Budapest – New 1 bedroom apartment – 60m2		£40,000	£60,000
Budapest – New 2 bedroom apartment – 100m2		£70,000	£90,000
Budapest – Historic 2 bedroom apartment 5^th district – 90m2=	£80,000	£125,000	£150,000

Why are People Buying? – Hungary as a Place to Invest

The main reason why people are buying in Budapest is that they believe that the economy is fundamentally strong, that the growth rates of the last few years (which have been higher than those in Western Europe) are likely to improve still further, that property prices w= ill rise naturally with increasing prosperity and that prosperity will be enhan= ced by Hungary's recent membership of the European Union.

Many of the people investing in Budapest are larg= er, "professional" investors but a lot are smaller "buy to let&q= uot; investors for whom there is an additional advantage. This is the much underestimated pe= rk of being able to handle some personal use of a property that you own in one of= Europe's great cities. Budapest is, truly, such a city. Cast = in the Central European tradition, it has a long and rich culture that appeals as = an occasional holiday destination.

The Climate as a Factor in Investment

Most British people buying abroad are motivated, in large measure, by the thought of a better climate. What is "better" depends= on your personal perspective. &nbs= p;

If the property is for retirement the bu= yers will want a climate that is acceptable all year round. If the property is a holiday home = the buyers will be looking for a climate that appeals to them at the time is wh= en they are most likely to use the property.&= nbsp; If the property is for investment and for letting to the holidaymaker they will be looking for a long rental season.

Maximum Temperature - Budapest

Minimum Temperature – Budapest

Rainfall - Budapest

Sunshine - Budapest

Growth of Gross Domestic Product as a Factor in Investment

A growing economy will produce more in t= he way of growth in the value of real estate than a stagnant or declining economy. The gross domestic p= roduct is one way of measuring that growth.

The Exchange Rate as a Factor in Investment

For us, one of the key indicators of any country where investment is likely to prove successful is either a stable exchange rate against other major currencies or a rate that is slowly impro= ving against other major currencies.

A common pattern for emerging market cou= ntries is that when they first get their independence the exchange-rate sinks rapi= dly, improves slowly and then stabilises or, if the country is doing well, slowly gains ground.

If the exchange rate is rising against t= he pound or the dollar the effect is that, in addition to benefiting from any increase in the value of the property you have bought, you also benefit from the increase in value of the currency.&nbs= p; The reverse is, of course, also true.

Tourism as a Factor in Investment

Estate Agents & Property Finders

Estate agents catering to the internatio= nal market are new. The market it= self has only really existed in any volume for the last seven to ten years, so y= ou could not expect anything else.

There are some good, reliable Hungary= and estate agents. There are also= some highly doubtful ones! There a= re also good, reliable overseas agents operating in Hungary. There are, unfortunately, also a l= arge number of people who have seen the renewed explosion in the volume of sales and who have decided to get into the business for the quick buck - or or offloaded stock they cannot otherwise dispose of o= n the overseas market.

You are much better dealing with a reput= able agent. Seek recommendations.<= /span>

As a preliminary step, check out all of = the websites you can find to get an idea for the prices and types of property available. Remember that not = every agent will sell the same property at the same price.

Mortgages

Mortgages are available from a few banks= and from developers themselves. T= hey are available for both houses and apartments.

Over the last year interest rates in Hungary= have fallen sharply. They are like= ly to fall further. Thus it is like= ly that anyone contemplating taking a mortgage on a property still in the cour= se of construction will be paying an interest rate lower than that currently available. Of course, this ca= nnot be guaranteed.

Low to value ratios of up to 60-70% are available. The mortgage is only paid to you once the house has been completed.<= span style=3D'mso-spacerun:yes'> This means that you will have to f= ind any stage payments to yourself. Normal interest rates are currently about 6.5%. Mortgages are only available= on a repayment basis (i.e. where both capital and interest are repaid by the end= of the mortgage term) and they must normally be paid off by the time you are 70. Obviously, the precise offerings vary from bank to bank.

See the main section of this book as to whether the Hungary<= /st1:place> mortgage or a mortgage in the UK is more likely to meet your needs.

The Process of Buying

Freedom to Buy

You can buy land, buildings or apartment= s in Hungary= .

At the moment, if you wish to buy land or buildings as an individual you will need permission to buy. This is more or less a formality.<= span style=3D'mso-spacerun:yes'> It takes about 3 months. By owning through a Hungarian company the property is treated as being owned by a Hungarian, even if the company itself is 100% owned and controlled by foreigners, so permission is= not needed.

Initial Steps

Once you have found a property that you = want to party you will be expected to sign some form of contract. This will generally either be a Reservation Contract or a Preliminary Purchase Contract. See the main section of the book f= or an explanation of these concepts.

The signing of a reservation document is particularly important in Buda= pest as, like in Paris<= /st1:City>, property (and particularly good, city centre, well located and well priced property) sells extremely quickly. Unless you pay over a deposit and thus take the property of the mark= et asked to make your inquiries the apartment is likely to be sold to somebody else. This is very frustrating. It makes paying = the €2000 or €3000 reservation deposit very sensible. See the main part of the book for = an explanation of the nature of a reservation contract.

During the period covered by the reserva= tion contract you and your lawyer will make any necessary enquiries about the property. Assuming you are satisfied that everything is in order you will sign the Preliminary Purchase Contract. If you are buying an older property (as many people are) it is very sensible to have the property surveyed. If you are contempl= ating carrying out any restoration of the building it is even more sensible to ha= ve an estimate prepared of the likely costs involved.

Note that the title Preliminary Purchase Contract is misleading. It is actually a full binding purchase contract.

We recommend that, wherever possible, you insist on signing a Reservation Contract rather than a Preliminary Purchase Contract at this stage if at all possible.

The Main Dangers

The main problems that we come across in= Hungary= are defective title and defective planning consents. This is true of most of= the old Eastern Bloc countries. It reflects the fact that for many years the private ownership of property was very low down the list of the government's priorities.

A secondary problem is people choosing t= he wrong form of ownership. I ha= ve stressed the importance of this many times in this book but it is particula= rly important in Hungary= . This is because of the tax consequ= ences in both Hungary and the UK that flow from this choice.

The Contract

Once your lawyer has checked out the pro= perty and found that everything is in order you are ready to sign the Preliminary Purchase Contract. This commi= ts you and the seller to signing the full contract transferring ownership shortly afterwards or, if the property is still in construction, once the property = has been fully built.

The Preliminary Purchase Contract contai= ns most of the clauses you would expect to see in an English contract. These will include a description o= f the property, a statement of the legal title to the property, the price to be p= aid, how it is to be paid, the deadline for payment and any other deadlines applicable, what should happen in the event of breach of contract etc.

You may wish to make the contract condit= ional upon the happening of some event such as obtaining a mortgage at home or a satisfactory survey result. T= his is legally possible but often resisted by the seller for the very sensible rea= son that it reduces the certainty of the outcome of the transaction.

Many Hungarian contracts are badly drafted. This is because ther= e is really no history in Hungary of drafting contracts for the sale of land. The problem is exacerbated by the = fact that many contracts are drafted (for foreigners) in English, which is clear= ly not the first language of the person doing the drafting. As a result they are unclear or muddled. Specifications tend = to be very "thin". The co= ntracts tend to be lacking in detail as to what happens if anything goes wrong.

At this point you will normally pay a de= posit 10% of the price of the property. In the case of an existing resale property the rest of the price is, typically, paid about six weeks later at the time of the signing of the final contract/deed of sale.

In the case of a property under construc= tion ("off plan") you will start to make stage payments. The size and number of these payme= nts will vary from property to property. A typical scheme would provide for an initial payment of 30% followe= d by two further payments of 30% as construction progressed and followed by a fi= nal payment of 10% upon delivery. Occasionally schemes are found where there is only one preliminary payment of, say, 30% with the balance being paid on delivery. This is obviously very useful if y= ou are taking a mortgage.

Signing the Contract of Transfer of Title

Once you are ready to take delivery of t= he house you will sign the Final Purchase Contract. This is signed in front of a notary public, in the way described in the main section of this book. It is at this point that the balan= ce of the money is paid across to the seller.

You do not need to be present in Hungary= to sign this document as your lawyer can prepare a Power of Attorney under which you can appoint somebody else to sign on your behalf. This is a sensible thing to do as = it saves the need for you to go to Hungary, often at short notice, to sign the final title.

Registration of Title

Once you have paid the balance of the pr= ice the seller will authorise you to register your ownership of the property in= the local title register. Once th= is has been done you -- or the local Hungarian company that you have set up to own= the property -- will be the full legal owner of the property in much the same w= ay as you would be in B= ritain.

The Expenses of Buying

The main expenses of buying are as follo= ws:

Tax - the equivalent of stamp duty - 6% = of the price.

Municipal permission required by a forei= gner buying property in H= ungary - £200.

Notary's fees -- these will vary from ca= se to case but will typically not exceed £50.

Legal fees – T= ypically 1.5%.

Fees to set up a com= pany -- if you want to set up a Hungarian company. This is likely to cost £1,50= 0 +2% of company capital.

Conversions & Renovations

There are many properties on sale in Hungary= that need huge amounts of work. The problems associated with the renovation project can be huge. Not least will be your probable inability to speak Hungarian. If you are contemplating a renovation project it is vital to get good advice r= ight at the outset.

Building costs are fairly low. A full restoration project is like= ly to cost about £200 per square metre.&nb= sp;

As is the case with many countries, it i= s very easy to find that once you have finished your project the cost of buying the property and the work you have undertaken is more than the value of the property as it stands. Keep c= ontrol.

Despite these problems, buying historic property in Hungary<= /st1:place> for repair and onward sale can be a rewarding and profitable business. If this appeals to you it is essen= tial to get good advice right at the outset.&nb= sp; Your lawyer should be able to refer you to suitable professionals.

A fairly comprehensive renovation might = cost about €250 per square metre.

Renting out your Property

If you are renting out your property you should make sure that you use a proper rental contract. Your lawyer will be able to supply= you with a draft that you can change as necessary.

Renting on short term lets to tourists produces the least problems in terms of what you can do if the tenant does = not pay the rent or refuses to leave, though in general lettings in Hungary are= not a problem in terms of the legal framework or in terms of excessive protecti= on for the tenant.

At the moment, we would expect to see a = net rental yield in Budapest (i.e. net of all expenses apart from your finance costs and personal taxati= on) of about 4-5%. In the longer = term I expect to see demand increase but also supply to increase. These may well cancel each other o= ut leaving yields more or less as they stand today. The one factor that it is likely to spoil this picture is the rapidly rising price of property. A person who bought an apartment f= or £50,000 and who rented out for £250 per week will be much happi= er than the same person who spent £75,000 on the same property and will = also rented out for £250 per week. When thinking of your rental yield we always suggest that you work it out on the basis of current value, not purchase value as that will allow yo= u to compare the performance of your investment with opportunities elsewhere.

Visas and Residence Permits

Hungary is a member of the Eu= ropean Union.

Taxes for Non-Resident Property Owners

Local Property Taxes

These are the equivalent of your English Council Tax or our old rates. Local property taxes in Hungary are very low. The 100 square = metre apartment in an average location would be likely to ca= rry local taxes of about £250.

Management Charges

Management charges are not taxes but thi= s is a convenient point to think about them. If you live in an apartment complex or in a group of buildings that share a common facility (such as a swimming pool) you will have to pay a management charge to cover the cost of providing those common facilities. In the case of a block of apartmen= ts, those facilities will include the cleaning and electricity for the general areas, any gardening, the maintenance of pools, lifts, car parking areas et= c. Obviously the cost of the management charge will vary dramatically dependent upon the quality and number of facilities provided for you. £200 per year provides a lot= of facilities.

Income Taxes

Individuals pay tax on the profit made f= rom renting out their property in Hungary at 20%. If you choose to over= throw a company, following recent drastic reductions in the corporate tax rate, y= ou will only pay 18%. All of your normal expenses, including interest charges, are deductible from your income before calculating the tax due. Properties owned by companies have more tax deductible expenses and properties owned by private individuals.

Capital Gains Taxes

For a private individual, these are trea= ted as part of your income and so are taxed at 20%. If you keep the property for more = than six years the rate of tax diminishes.

Capital gains made by companies are also treated as part of the company's income.&n= bsp; They are, generally, therefore taxed at 18%. Note that if you sell a property t= hat belongs to a company you will pay tax at 18% of the gain made but that if y= ou sell the company itself the tax will only be 5%. This is just one reason why you ne= ed good advice before deciding on the correct form of ownership.=

Wealth Taxes

None

Taxes for Resident Foreigners

This is beyond the scope of this book.

Double Taxation Treaty

The Double Taxation Treaty determines wh= at happens if, under local tax law and UK tax law, you are deemed to= be liable to pay tax in both countries.

The general principle behind all Double = Taxation Treaties is that it is unfair that you have to pay the same tax twice, so t= he rules are designed to help the two countries decide which of them should get what.

The treaties are long and complex. Seek advice as to their effe= ct in your case.