Property investors need to know where to look

It seems to be impossible to switch on the television or open a newspaper without reading gloomy stories about the knock-on effect of the US sub-prime mortgage crisis and the resulting global credit crunch. But its not all bad news for the Budapest market.

Actually, Hungary was not heavily exposed to the losses incurred by institutions such as the French Société Générale or Swiss investment bank UBS, which invested billions in mortgage bonds that turned out to be very risky indeed. However, many are talking about a slowdown on the Budapest market. How should people looking to invest in the Budapest property market treat such news?

Well it does not pay to think of Budapest as having a single, uniform property market. As in any other city in the world, the market is segmented – and the astute investor will know which areas offer the best returns.

New builds

Firstly, it is worth mentioning that there are some grounds to be cautious about investing in low- to mid-priced properties – especially new builds. There were 21,140 new flats on the market in 2007 in Budapest, most of them in the low- to mid-price range, and 26.2% did not find a buyer.

Now, the investor might think “Aha! A buyers’ market, prices are sure to drop.” Well, actually not that much. It’s easy to drop prices in cities experiencing a house price bubble, but Budapest prices have remained comparatively modest over the past few years. Hungarians are simply holding off from buying at the moment due to a package of government austerity measures that has seen taxes hiked and services cut.

Resale market

This has also impacted on the resale flat market: there are many properties on the market, but owners are choosing to sit out the economic doldrums rather than drop their prices. The indications are that – barring pre-election silliness – the country’s budget deficit will be down to acceptable levels and Hungary back on course for Eurozone entry within three or four years.

If you simply want to buy a small flat as a holiday home, then now could be as good a time as any. If, however, like the majority of foreign investors in the Budapest property market, you are looking for a buy-to-let option, or hoping to make at least some rental income from your new purchase, then you should be more careful.

Banking on renting

Hungary still has the highest rate of property ownership in the EU, at over 95%, and Hungarians are very reluctant to rent. Many investors have suffered in past years after making ill advised purchases and finding themselves lumbered with mortgage repayments and no rental income.

One way in which the credit crunch has affected Hungary is that real estate developers are having to borrow at higher rates of interest, and banks are less likely to finance projects by lesser-known developers. This might even help lessen the current oversupply on the market for low- to mid-price flats.

Upper end OK

In the meantime, there is another segment of the Budapest market where buy-to-let remains a very astute investment proposition. There is strong demand from corporate and private tenants for expertly renovated, well appointed flats – still a relative rarity – in the classic buildings that characterise central Budapest. This means there is still a healthy rental market for well-located prime residential properties in the historic centre of Budapest.

Whether you want to buy an old flat for renovation and then have the satisfaction of seeing it transformed into somewhere you would be happy to live yourself, or if you want to avoid the extra effort and buy a ready-to-let, totally refurbished flat, the opportunities are there if you know where to look.

Yields over 6%

With careful guidance from people who know the market, there are still plenty of opportunities for a solid return on your investment in Budapest property. With the right advice, yields in excess of 6% are very much achievable.

Alternatively the best option may be to invest in a professionally run real estate fund such as Pactolus Hungarian Property plc. This is a locally managed fund focussing exclusively on prime residential property in central Budapest but listed on the UK’s AIM stock market. Often, these funds (and many exist for the Central European region as a whole) can make more sense for investors than a direct investment in a property located in a foreign country with all the surrounding legal, language and liquidity issues, not to mention dealing with agents and builders in a foreign language.

Nicholas Leigh-Wood lives in Budapest and is Managing Director of Midas European Property. If you have any questions relating to this article he can be contacted on +36 20 351 3881.

	1. Written by T on 11-04-2008 08:22 - Guest
	Interesting article - question regarding your comment "Hungary still has the highest rate of property ownership in the EU, at over 95%, and Hungarians are very reluctant to rent".  The average Hungarian's wage is pretty small (even for professionals) - surely there must be a segment of the market that wants to buy but just cannot afford to - does this just mean they live at home until they can buy, rather tha rent?

	2. Written by zoe on 13-05-2008 22:55 - Guest
	Just another biased article by a Developer...

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