Appetite for investment

Hungary is definitely up and coming, but investors will have to be quick

Twenty years ago the property industry considered Hungary to be beautiful but boring - now it is in the EU and fêted as an international hot spot for developers and shrewd investors alike. Budapest, its only very large city, has property prices that are scarcely 40 per cent of those in London. As a result, it is seeing hundreds of foreign investors buying homes to enjoy rental income and appreciation. During 2003, about 1,000 properties in Budapest were bought by foreigners (roughly a 5 per cent rise on 2002) with local agents saying the British, Irish, German and American investors were the largest buyers.

Twenty years ago the property industry considered Hungary to be beautiful but boring - now it is in the EU and fêted as an international hot spot for developers and shrewd investors alike. Budapest, its only very large city, has property prices that are scarcely 40 per cent of those in London. As a result, it is seeing hundreds of foreign investors buying homes to enjoy rental income and appreciation. During 2003, about 1,000 properties in Budapest were bought by foreigners (roughly a 5 per cent rise on 2002) with local agents saying the British, Irish, German and American investors were the largest buyers.

Unlike most cities where new homes are always favoured by investors, many believe that in Budapest there is scope for making the best return from buying an older property in need of work - although never under-estimate the difficulties of managing a renovation project in another country undertaken by builders speaking another language.

Most central and suburban Budapest homes are over 75 years old, but due to low rents and state ownership until the mid-Nineties maintenance was neglected. There are more than 800,000 apartments in Budapest but 25 per cent need renovation. In some areas property prices are still as low as €75,000 (£53,500) but in prime locations soar up to over €1m (£715,000).

Established investment advisers like A1 Real Estate say would-be buyers should avoid areas that have already seen big improvements - for example the 5th district where prices have doubled in three years. Instead it recommends five other areas which have shown modest rises of up to 40 per cent since 2001 but with possibly much more to come:

*The 6th district, which boasts the famous Andrassy Boulevard, Heroes' Square and the trendy Oktogon and Liszt Ferenc squares with their bohemian cafés and restaurants.

*The 7th district, which is the traditional Jewish Quarter behind the Great Synagogue, and which has been the centre of local council environmental improvements to parks and public spaces in 2004.

*The 8th and 9th districts, where Budapest's universities are located, with high demand for accommodation from students especially near stops on the city's Blue metro line.

*The 13th district, which has seen substantial areas win planning permission for new-build developments.

"As a guide, average [second-hand] apartment prices in Budapest are around €1,300 (£930) per square metre. This compares to Vienna, only two hours' drive from Budapest, where property prices are three to four times more expensive," says a spokesman for Property Hungary, an Irish agency selling Budapest properties to west European buyers.

"Hungary has been the most successful of the former eastern bloc countries in attracting foreign direct investment - since 1989, more than €15bn (£10.7bn). Inflation and unemployment have both reduced drastically in the recent past and there are some 30,000 firms with foreign capital currently operating in Hungary," he says.

In recent years there has also been growth in new residential development, although numbers are still relatively low. In 2003, 6,300 new properties in Budapest (mostly apartments) were completed and another 11,800 started. Avatar International, a long-standing agency selling east European properties, predicts apartments built and sold in 2005 should enjoy 15-17 per cent average appreciation in their first year. New-build homes in locations with restricted space and therefore limited development potential (near the Danube, downtown of Pest, and the inner part of the Buda side are three examples) will perform even better.

Rental yields are generally 7-9 per cent - not remarkable, but combined with good appreciation it contributes to the sort of return seen in London about five years ago.

UK estate agency Savills, which already has agricultural agents in the country, is considering marketing homes too. Engel & Völkers - a German agency that is already very big across western Europe, especially Spain - opens a Budapest office shortly to offer what it calls "a unique premium service" in house sales and rental management.

"The story's the same in Warsaw, Prague and so on. They are joining the EU and businesses are beginning to relocate, so the quality and quantity of property will rise. Some will become very fashionable with big capital rises. A long-term investor will probably get a good reward," suggests Richard Donnell, head of research at Savills.

Budapest properties contacts: www.avatar-international.com; www.hungarinvest.com; www.a1realestate.hu; www.propertyhungary.com; www.engelvoelkers.com; www.midasep.com.

Budapest renovation specialists: www.newbudapest.com.

How to buy

*Overseas residents can apply to local authorities for a permit, which must be accompanied by solicitors' letters and the full search documents relating to the property - but experts say this is expensive, slow and does not guarantee success. It is quicker to set up a Hungarian registered company (€1,000 (£715) to establish) which allows you to offset most transaction costs and overheads against tax

*Purchase costs include legal fees (1.5 per cent of property price) plus estate agent's commission paid by the buyer (4 per cent); if you re-sell within two years you may have to pay an extra tax of 2 per cent of the purchase price

*On new-build you pay a 20 per cent deposit, then 30 per cent when the building frame is finished, 30 per cent when the interior is complete, and the final 20 per cent on handover

*Sales taxes reduce if a property is owned for six years or longer

Letting your property

*Local lettings agents say typical annual yield in Budapest (that is, the proportion of the purchase price of a property recovered in rent each year) is now about 8 per cent, although this dips to 6 per cent or less elsewhere in the country

*As in the UK, lettings agents charge commission of 10-15 per cent of monthly rent

*Tenants pay one month's rent plus 25 per cent rental tax as a deposit upon signing the contract with a lettings agent