7th January 2008 - Budapest

The debate on the slowing-down of the development of the economy has come to focus again due to the listing published by European Cities Monitor at the end of last year, in which both Budapest and Hungary were assessed less favorably in terms of business climate. Colliers International real estate agency’s Investment Analyst Remi Couture says that Hungary may follow the Irish way of development and long-term improvement in investor interest and corporate real estate market may be forecasted.

According to the news published at the end of last year losing 4 positions Budapest fell back to the 6th place in the comparison of European cities in terms of the business climate created by the government and according to analysts we might fall even lower if the tax system remains so difficult. Nevertheless in terms of political risks Hungary and Budapest is still considered the most stable in the Central Eastern European region.

GDP has shown constantly positive increasing rate in Hungary since 1995 although the rate has decreased due to restrictions. Long-term prospects are favorable and investments are continuing. Considering Ireland and Portugal as examples economic development and investments were really significant at the time of their joining to the European Union. Many experts think that Hungary will follow this model.

However Irish growth did not start by a press of a button due to joining the EU. In the late 70s and early 80s the Irish government was struggling with high budget deficits and taxes were generally high (value added tax was 35%). Moreover the country fell into economic recession in the mid-80s due to which the government introduced restrictions: the health-care and social system was restricted and the tax system was transformed also encouraging employment. It was essential that these decisions were supported by the political opposition as well. As a result of the measures Ireland soon managed to close up to Europe and by 2003 the GDP per capita was as high as 140% of the EU average.

Similarly to Ireland the Hungarian government was spending beyond its resources. It is praiseworthy however that on the basis of the principle “better to prevent than to cure” they did not wait until the beginning of the recession to cut expenses. Consensus would be necessary in the issues of restrictions and tax reforms to follow the Irish model in Hungary that would facilitate the confidence in business and investment, and legalizing the labor market. If these conditions are met the growth of the Hungarian economy could reach a level of 4-5% or even higher again.

Significant development is expected on the real estate market. There is approximately 2 million square meters of class “A” office space in Budapest, while the same is 10.2 million square meter in Vienna. Real estate developers are eager to fill the gaps on the Hungarian market as soon as the economy gets back to a predictable (4-5%) development line. Many huge projects are on the planning desks; if those were implemented in the following 5 years they would expand office market supply by at least 1.850.000 square meters. The only remaining question is whether the Hungarian economy and budget will be stabilized.

Development of industrial and logistics facilities is increasing as well; more and more companies are settling in Hungary for that purpose.

Consumption will also increase significantly; there are especially great opportunities in shopping centers and department stores. It is worth stating that we are still below the European average in terms of total floor space and shopping center floor space per thousand people.

Although there is strong competition in real estate consultancy it is favorable for developers and investors as well. Transparency of information is improving exchange of information among corporate real estate consultants is becoming more and more efficient at international levels too – summarizes the market overview Colliers investment analyst, Remi Couture.