Hungary: Jet to Let Guide to Hungary

The story so far…

Hungary gained independence in 1918 following the collapse of the Austro-Hungarian Empire. In the Second World War Hungary fought alongside Germany and after defeat, it became part of the Soviet bloc.

Hungary’s transition to a Western-style democracy was the first and the smoothest of the former Communist states and the Republic of Hungary was established in 1989. Since then, the country has made considerable progress in terms of political democracy and economic growth, successfully taking control of inflation and unemployment to become a leading destination for foreign investment in Eastern Europe. Hungary joined NATO in 1999 and the European Union (EU) in 2004.

Where is it?

Hungary has borders with Slovakia in the north, Ukraine in the north-east, Romania in the east, Croatia, Serbia and Montenegro in the south, Slovenia in the south-east and Austria in the east. The total territory is 93,030km squared.

What is the weather like?

Summer or winters may differ significantly from one year to the next. Summers tend to be warm from June to August and winters are cold and with lots of snow. Spring and early summer are the wettest seasons with regular thunderstorms.

Language

Hungary has an estimated population of just over 10 million people, consisting mainly of ethnic Hungarians (92 per cent). Other groups include Germans, Roma, Slovak and Romanians. The official language is Hungarian, spoken by 94 per cent of the population with German as the most common second language, although English is becoming popular.

Currency

The currency is the Forint (HUF), which is equal to 100 Filler. Hungary is forecast to adopt the euro in January 2010. The Forint is pegged to the euro at HUF 282.36: €1.

Politics

Politics is dominated by the centre-right Hungarian Civic Party (also known as Fidesz) and the centre-left Hungarian Socialist Party (MSZP).

Hungary is a parliamentary democracy. The present coalition government consists of the liberal Alliance of Free Democrats and Hungarian Socialist Party. László Sólyom is the President of Hungary, elected in 2005. The current Prime Minister is Ferenc Gyurcsány, elected in 2004.

Economy

Hungary has completed the transformation from being state run to a free market economy fairly quickly. The economy has been comprehensively liberalised due to a systematic and successful policy of privatisation, with a flow of high levels of foreign direct investment (FDI) and the creation of a wide-ranging set of commercial laws.

The country swapped trading partners in the early 1990s from its post-Soviet neighbours to the West. This was not without some initial pain but has proven successful in the long run. Hungary’s main exports to the EU are high-quality manufactured products, such as cars and electrical goods.

Economic growth

The European Commission reports that the real gross domestic product (GDP) in Hungary is expected to grow by 3.9 per cent in 2006. Hungary’s GDP per capita was €14,500 in 2005. Economic growth has been steady over the last five years.

Year Real growth of GDP (%)
2000 5.2
2001 3.8
2002 3.5
2003 2.9
2004 4.2
2005 4.3

Source: Eurostat, the Statistical Office of the European Communities

Inflation

Inflation was 3.5 per cent in 2005, the lowest achieved by Hungary throughout the transition period. Inflation was typically driven by high oil and producer prices.

Interest rates

The National Bank of Hungary’s base rate in March 2006 was six per cent.

Unemployment

Unemployment in Hungary is below the EU average but started rising in 2005. The government has implemented a series of job creation initiatives in order to boost employment opportunities and has achieved some successes, particularly in reducing youth unemployment.

Unemployment rate (percentage unemployed)
2000 6.3
2001 5.6
2002 5.6
2003 5.8
2004 6.0
2005 7.2

Source: Eurostat, the Statistical Office of the European Communities

Foreign direct investment (FDI)

Since transforming to a market economy, Hungary has attracted a steady flow of FDI. Currently, foreign firms control 90 per cent of telecommunications, 66 per cent of manufacturing and 60 per cent of the energy sector.

The attractiveness of the country as a destination for FDI is enhanced by a low 16 per cent Corporation Tax and tax exemptions for some foreign investors. The high-tech sector has benefited from increasing FDI as the number of research and development companies relocating to Hungary has grown.

Foreign direct investment in Hungary (€ million)
1999 3,106.3
2000 2,998.4
2001 4,390.7
2002 3,185.1
2003 1,909.0
2004 2,948.0
Source: Bank of Hungary

The property market

Alongside the Czech Republic and Slovenia, Hungary is one of the most developed of the new European countries. The Hungarian property market is continually expanding, fuelled by high domestic demand, a growing number of jet-to-let investors and a dynamic expanding economy. Government subsidies for housing play a key role in promoting home ownership. As a result, Hungary has one of the highest levels of property ownership in Europe at 95 per cent.

Property prices grew 15–20 per cent between 2003 and 2005 and are forecast to grow at an annual rate of ten per cent until 2010, when Hungary is expected to adopt the euro.

Rental demand is strongest for studios and one- or two-bedroom apartments in central Budapest. Hungarians can also afford to buy and rent these properties, which provides an alternative market to the corporate, business or expatriate tenant. The expected average rental yields are five to seven per cent.

Property hotspots

Budapest, the capital, is a popular tourist destination and prosperous commercial centre that is also rich in architecture and heritage. For the typical jet-to-let property investor, this city offers a great entry point into the Hungarian property market, where prices are currently rising at an average annual rate of 15 per cent. Budapest is home to 20 per cent of Hungary’s population and it’s where the majority of business activities take place.

The most popular jet-to-let strategy in Budapest is buying new developments off-plan and either selling them on completion or letting them to the local market. Another option is to renovate older properties in central locations to let or sell them when they are completed. You will need to do lots of research on local suppliers, builders and surveyors as well as have the time to keep an eye on the project.

Every corner of Hungary can be reached by car from Budapest within two hours. Commentators are predicting that other major Hungarian towns and the countryside will follow the lead of Budapest and develop their own strong and dynamic jet-to-let markets.

Transaction costs

Foreign nationals can purchase any type of property freehold apart from agricultural land and the process of buying a property is relatively simple. If a foreign national is buying multiple properties as a private individual, then he must get a permit from the local Administration Office. This is an easy process, and takes two to three months to obtain, costing €350–€400.

Alternatively, incorporating a Hungarian company avoids the need to obtain a permit and allows investors to purchase as many properties as they wish.

In the Hungarian system it’s a lawyer rather than a notary who acts as a representative of both parties. The lawyer prepares the preliminary contract, the buyer pays a ten per cent deposit and the remaining balance is paid on signing the contract.

If you buy an off-plan property, you will be required to make stage payments throughout the building process.

The transaction costs are:

• Purchase Tax (stamp duty) is calculated on a progressive rate between two and ten per cent, depending on the value and type of the project purchased. You are advised to take professional advice on which category your property is in before committing to the investment.

• Legal fees are about 1–1.5 per cent of the purchase price.

• Notary fees vary but usually come to one to two per cent of the purchase value.

• Estate agents’ fees are three to five per cent of the purchase price.

Total purchase costs amount to about eight to ten per cent of the purchase price.

Annual costs

This is a tax imposed by a local authority on land and buildings.

• Buildings – to an upper limit of HUF 900 per square metre per annum, or 1.5 per cent of the market price.

• Land – to an upper limit of HUF 200 per square metre per annum, or 1.5 per cent of the market price.

• Communal charges come to approximately €350 per year, depending on the size of the property.

Taxes

Income Tax
Individual Income Tax rate in 2006:

Tax Annual tax base (HUF)
18% 1,500,000
36% 1,500,001 and over

Corporation Tax
The rate of Corporation Tax is 16 per cent.

Capital Gains Tax
Capital gains of companies are generally taxed as income. The Capital Gains Tax rate for individuals is 25 per cent.

Facts at a glance

Geography

Population (2005 estimate): 10,006,835
Language: Hungarian
Ethnic groups: 92.3% of ethnic Hungarians. Other ethnic minority communities include Germans, Roma, Slovak and Romanians
Local currency: Forint divided into 100 Filler

Political system

Political structure: Parliamentary democracy
President: László Sólyom
Prime Minister: Ferenc Gyurcsány
Main parties: Hungarian Civic Party (Fidesz), Hungarian Socialist Party (MSZP)

Economy

Unemployment rate in 2005: 7.2%
Unemployment rate, February 2006: 7.6%
Inflation rate in 2005: 3.5%
Inflation rate, February 2006: 2.3%
Interest rate, March 2006: 6.0%
GDP growth in 2005: 4.3%
GDP growth forecast for 2006: 3.9%
GDP per capita: (income €14,500 per person) in 2005

Taxation

Income Tax: 18–36%
Corporation Tax: 16%
Capital Gains Tax: 25%

Corruption statistics
Corruption rate: 5.0
Corruption rank: 40th

Industry and technology

Major industries: Mining, Metallurgy, Construction materials, Chemicals

The Hungarian property market

Hotspots: Budapest

Property taxes (transactions)

Stamp duty: Progressive rate from 2 to 10%
Notary fees: 1–2%
Estate agents’ fees: 3–5%
Legal expenses: 1–1.5%
Total fees: 8–10%

Property taxes (annual)

Property Tax:
Buildings – to an upper limit of HUF 900 per square metre per annum, or 1.5% of the market price.
Land – to an upper limit of HUF 200 per square metre per annum, or 1.5% of the market price

Communal charges come to approximately €350 per year, depending on the size of the property

Mortgage

LTV: 50–70%
Term: 1–20 years
Currency: Euro, pound sterling and Hungarian Forint
Current interest rate: 4–6% in euros

Investor resources

Embassies

British Embassy in Hungary
1051 Budapest
Harmincad utca 6
Tel: +36 1266 2888
Fax: +36 1266 0907
Website: www.britishembassy.hu

Embassy of the Republic of Hungary in the UK
35B Eaton Place
London SW1X 8BY
Tel: 020 7201 3466
Fax: 020 7235 8630
Website: http://dspace.dial.pipex.com/huemblon/front.htm

Useful websites

Bank of Hungary
www.mnb.hu

Hungarian Central Statistical Office
http://portal.ksh.hu

Invest in Hungary
www.itdh.hu

Tourism in Hungary
www.hungarytourism.hu

© Lawpack Publishing 2006

“The Jet–to–Let Bible”, Dominic Farrell
Reproduced with the permission of Lawpack Publishing.

Further information on this topic can be found in “The Jet-to-Let Bible”, by Dominic Farrell, ISBN 1 905261 11 X

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