For Hungarians, membership in the European Union has meant joining the war in Iraq, thinking about the euro, and being scolded for rising interest rates. But for Israelis, Hungary means one thing: Budapest real estate.
For much of the last decade, local investors and developers have been heading to there to purchase apartments and construct offices, hostels, and hotels. They are part of the wave of foreign investment, which attracted 756 million in direct foreign investment in the first quarter of this year.
"What brought us were opportunities and prices," said Oscar Katznelson, CEO of Olympia Real Estate Holding, a Tel Aviv Stock Exchange-traded firm that has been building in Budapest for the last three years. "When opportunities narrowed in Israel, we came to Budapest and Warsaw."
Olympia recently purchased a Budapest lot zoned for 450 luxury apartments and plans to build 60- to 90-square-meter apartments that will be sold at $1,800 per meter. The project is Olympia's sixth in Budapest, where it has already constructed three apartment projects.
not alone. Several other local developers and investors, including Ofer Brothers, Engel Construction Enterprises, Profit Construction Industries, and Bank Hapoalim, have moved into Central and Eastern Europe. The Ofer properties include two hotels, a hostel, half a residential project, and 65,000 sq.m. of commercial space and parking lots. Profit, also a TASE-traded company, bought two hotels in downtown Budapest in partnership with a Hungarian company. Engel is building 5,000 housing units in Budapest, valued at some $700 million, with an Austrian partner.
Bank Hapoalim recently opened an office in Budapest, part of its strategy to expand its international business. Bank Leumi is also planning to open an office in Hungary, after abruptly closing a Budapest branch in the early 1990s, when it accumulated heavy losses.
"I can't say whether it has anything to do or not to do with Israelis in Budapest," a Poalim spokeswoman said. "It's just part of our global plan."
With the fall of communism in Hungary in 1989, and a concurrent switch from a blue-collar industrial economy to a white-collar, foreign investment-oriented market, the country, and specifically, Budapest, has become a haven for foreign investors and multinational companies looking to set up shop in the middle of Europe. It's also a high-end residential market, given the strong emphasis on companies buying apartments for their employees who will be living there.
With rents ranging from $1,400 to $5,000 per month - generally calculated in euros - foreigners tend to look for the "turn-of-the-century apartments with foot-thick walls, five-meter-high ceilings, and parquet floors" that will draw the highest rents, said Stan Ward, a senior representative for A1 Real Estate, a Budapest firm specializing in foreign buyers. "The buyers are people looking for capital appreciation and rental income."
He also looks to the "Hungarian brain train" for potential buyers and renters. With Hungarians returning from stints abroad for education and work, they now want to rent or buy luxurious flats, creating more opportunities for foreign buyers aiming to make a profit on their purchases.
Ward is a former New Yorker who moved to Budapest two and a half years ago and works with foreigners investing in Budapest. The average budget of a buyer looking to purchase an apartment is $170,000, although investments range from $90,000 to several million dollars. People may end up buying one apartment in a turn-of-the-century building or a floor of flats in a newer building. What draws them is the return on their investment, ranging from 6% to 9% on residential properties, and 10% to 15% on commercial real estate. And as usual, location is everything.
"We're seeing the greatest appreciation of 25% and higher on the Pest side," Ward said. "Properties on the Pest side tend to be less expensive than on the Buda side."
Budapest consists of three cities, Obuda, the oldest section; Buda, on the hilly, residential western bank of the Danube River; and Pest, the flat, industrial area on the eastern bank. The three sections were united in 1873, forming what was initially called Pest-Buda, and the city grew as one of the two capitals of the Austro-Hungarian Empire.
These days, there are more landmarked buildings and UNESCO protected streets on the Buda side, leaving little room for new construction but offering a vista of grand boulevards and neo-Baroque buildings. Buyers who are thinking about using an apartment for themselves might look on the Buda side, because it's quieter and has a view of the Pest side, Ward said. Then again, the Pest side offers views of the castles in Buda.
Whatever the decision, it doesn't take much time to settle on a Budapest property, Ward said. He generally shows six to 10 properties to a potential buyer over the course of two days. When a buyer decides on a property, he calls in an offer and meets with lawyers to set the terms of the purchase. Around 95% of Hungary's foreign property buyers form a small corporation or limited partnership when purchasing investment properties, which involves opening a bank account in the name of the corporation to set up financing.
Most buyers arrange financing in their own country, according to Ward, and many come with cash in hand. Mortgage rates are 10% and offer only 50% loan-to-value, not much of a deal.
"Israelis are coming in with liquid cash, and that's true of most foreigners," he said. "This investment makes sense for them. They're only getting 2% interest in the bank and after taxes, there's a negative real return on their funds."
There is also a high return buyer rate, about 15% to 20% over the last six months, and a 50% referral rate from current clients to new clients.
"We're trying to increase the penetration of Budapest real estate among Israelis, because the values speak for themselves," Ward said. "There were the pre-European Union opportunities, and now it's time for the post-European Union membership opportunities."