The Hungarian real estate market has recovered from the 2008 global crisis, analysts say, with the number of transactions in both commercial and residential property sectors having significantly increased, challenging developers to build more. Yet the volume of new commercial and residential property coming on the market has yet to catch up, with the amount of new housing being built lower than in the years before World War II.

The last two years have proved much better for Hungarian real estate. David Valko, head of market research at OTP Mortgage Bank, says the number of transactions in the residential property segment dramatically increased over the last year and it’s projected that by the end of 2015 it will hit the 150,000 mark, which is almost twice as much as the annual average seen during the five years of post-crisis calm. Yet it’s still far from the good years of 2002-2007 when the number of transactions was 215,000a year on average, analysts admit. The same goes for real estate prices; the 13% increase of this year merely returns housing prices nominally back to close to pre-crisis levels.

Valko says that the recent renaissance of the residential housing market is happening partly due to a lack of small investment alternatives. “Depositing your money in the bank for 2.0-2.5% interest rate doesn’t sound promising and many people invest in property that they can rent out,” Valko tells bne IntelliNews. “The rental market survived the crisis pretty well, as people were trying to avoid long-term mortgage obligations.”

Purchasing real estate for securing passive income and favourable mortgage conditions (approx. 6% interest rate) have significantly boosted activity on the housing market. According to Valko, nearly 40% of real estate purchases last year were made for investment purposes.

Positive changes have also been spotted on the commercial property market. Demand has considerably increased across all segments of the commercial market (office, industrial, retail) over the last two years, and there is room for further growth, believes Gabor Borbely, head of research at CBRE. Hungary’s economy is performing quite well; GDP growth is considerably outperforming the EU-average and all major macroeconomic indicators have significantly improved over the past two years. Overall, economic sentiment toward Hungary is largely positive, which enables existing companies to expand and new firms to enter the country. “Due to the limited new supply on the market and the very strong demand, the amount of vacant space has drastically decreased and, as a consequence, rents have started to pick up across all sectors after several years of stagnation,” Borbely tells bne IntelliNews.

Back in 2012 the vacancy rate on the Budapest office market was at 21% – now it’s only 13.5%, the lowest level of the past seven years. On the industrial and logistics market, the drop in the vacancy rate has been even larger, falling from 2012’s peak of 24% to the current level of 12%. Decreased availability has led to a gradual rental growth, providing favourable signals for real estate investors. “Due to the limited supply in existing buildings, large tenants don’t have much choice but to sign a pre-lease agreement. Currently, there are 110,000 square metres of office space under construction – 45% of this volume has already obtained a pre-lease agreement,” Borbely notes.

Taxing times

Both analysts say that developers should not waste the momentum and try to meet the growing demand. Developers are ready to respond, but concerns over a number of obstacles remain. Time-consuming paperwork for construction permits can take up to two year, bank loans for developers are more expensive compared to other regional countries like Poland and the Czech Republic, while the 27% VAT rate is too high.

Recently, developers have started to face another problem – a shortage of domestic construction workers after many left the country for better paid jobs in Western Europe. “Developers now have to fill in the gap with non-EU skilled workers from neighbouring Ukraine and Moldova, because they lack their own,” Tibor Foldi, CEO of the developer Cordia Hungary, told delegates at the “Portfolio Property Investments Forum” that took place on November 24 in Budapest.

Most developers, investors and analysts agree that the major factor impeding new construction is the high VAT rate. Developers are keeping major projects on hold, waiting for more favourable tax rates to come into place. “We have a thousand house volume in preparation and we are waiting for the VAT drop,” Foldi says.

OTP’s Valko says that the current 27% VAT rate kills off the profitability for developers. The projected decrease to 18% would definitely spur more activity on the development market, but it probably won’t change the final price for buyers. “This drop by 9% would mainly cover the increasing costs of the construction plots, other related costs such as labour, while benefits for buyers will not be that visible,” Valko explains.

The long-awaited development and a real estate market boom could follow if VAT is reduced to 5%. “Developers are lobbying for this 5%, as it is going to be mutually beneficial for them and for the buyers by giving more opportunity to lower the gross home prices,” Valko concludes.

The timeframe for any fall in the VAT rate is not set yet. Draft amendments have been completed and sent to parliament for consideration. Industry remains hopeful it is a matter of the next two years.