Category: Hungary

Laszlo Krupl, Attorney at Law and Head of the Real Estate Practice in Hungary at Schoenherr, on the status of the Hungarian Real Estate Market in a COVID-19 world.

CEELM: What was the state of affairs in Hungary’s Real Estate sector in the years leading up to the COVID-19 outbreak?

Laszlo: I’d describe the last four to five years prior to the crisis as a period of stable prosperity. The market had a very good transactional pipeline, with five-to-seven percent yields being available depending on asset class and prime or non-prime location. There was also a good amount of greenfield investments keeping us busy, with a lot of international clients looking at the country, especially in the automotive industry. Overall, I’d say the pre-COVID-19 period was a very good one. 

CEELM: Was there a real downturn during the first wave? How did the market react to it?

Laszlo: When the shutdown came into effect, pretty much all of the sub-sectors of the real estate market basically shut down for a couple of months. Hotels didn’t operate. Office buildings cannot really be banned from use but most were pretty much empty. Retail was dead. It really was hit the hardest since non-essentials were not allowed to open at all. The same can be said about bars and restaurants, all of which led to a real downturn in these sub-sectors. The logistics sector was the one that remained relatively strong as a result of the shift towards home-office work and the rise of e-commerce.

CEELM: Would you say most players were prepared, in terms of cashflow, to take this kind of a hit?

Laszlo: That is the key question, isn’t it? I’d say different sub-sectors face different realities with regards to this. In terms of office leases for example, yes, we did get some clients asking whether lease agreements can or should be terminated, but two, three, or even four months is really a rather short time frame for these types of assets. Retail was in a far worse situation since it is very common to run those spaces on a turn-over rent basis. Immediate cash flow challenges there are far more impactful, and we did see some disputes resulting from that. 

In terms of ordinary people, I think many suffered some form of financial damage, and the biggest question in my mind for the future if these individuals will be able to keep up with private apartments’ rents and mortgages. The government did introduce a unilateral possibility to stop paying mortgages, but eventually these people will need to start paying again (the current statutory moratorium is set to last until the end of March, 2021). People staring down the barrel of this moratorium ending face a rough challenge since it has not been clearly communicated when payments will become due nor what will happen to all of the interest that has not been paid and that banks will be looking to capitalize. 

CEELM: Other than the moratorium, what else did the Hungarian Government do to help the real estate sector?

Laszlo: Aside from the moratorium on bank payments I already spoke about, one particularly useful element was the introduction on a ban on the unilateral termination of leases in certain sectors – in particular targeting the likes of gambling establishments, restaurants, and bars. This was clearly aimed at helping those enterprises hit hardest by the lockdown and I believe it was a rather good measure to patch up the hard-hit sector.  

CEELM: How are things shaping up in this second wave?

Laszlo: I am rather skeptical that the Hungarian Government will be brave enough to close down the country again, and, as a result, cause critical economic damage to the country. I just can’t imagine they’ll take that on despite the constantly increasing number of reported infections. The main messaging from the Government at this point focuses on masks-wearing, not on other drastic measures. I am not surprised. Before the crisis began, state debt was floating around healthy numbers. The newly communicated stats show a massive spike on that front so I think further economic strain would be a tough sell. 

That said, there are still ongoing transactions and development projects in the country, but the majority of these were commenced before the outbreak. The banking system did not crash and the Hungarian National Bank is trying to support financing but really, you can see the uncertainty levels taking a toll on the big market players. We are hearing of new developments here and there but not a lot in terms of deals taking place, so I think most are simply waiting to see how things will play out. 

CEELM: How have things evolved on the pricing side?

Laszlo: As I touched upon already, a few months are not really enough to have a great impact on a slow-moving mammoth of a vehicle that is the real estate market as a whole. Rental prices have seen a slight decrease but in the case of leases, while there were some attempts at renegotiating rates, I think most were unsuccessful. And I get it. As long as I ensure that the facility (such as an office) can be used, why should I accept a lower fee than what we already agreed upon? There were some lessors who agreed with their tenants to keep the assets alive by accepting a slight reduction, but others simply turned to their contracts and argued “there was no increase in the last few good years, why should there be one now in a bad one?” We also saw a few creative compromise solutions such as agreeing that tenants will no longer pay parking fees. Legally speaking though, it is not really possible to achieve a rent reduction on the basis of what is going on – at least not in a matter of the short few months we’re looking at. If that were to happen, it would have to be done in court, but that is a really slow route, and if it does happen, we’ll only see it next year. 

CEELM: What about the legal market — how have law firms been affected? Have fees been influenced? 

Laszlo: The first week of the lockdown was all about setting up the infrastructure needed to ensure the whole team can work remotely – which, between the flood of client questions coming up, was a bit of a challenge. We then had to adapt to working with our team members without regular contact and with our clients without personal meetings as well as go into overdrive in terms of informing our clients on the regular updates on the “COVID-19 laws” front. 

It is difficult to assess a negative impact on our real estate practice’s pipeline since a considerable amount of client requests came in that relate to COVID-19, which are less practice-specific but more of a set of holistic calls with clients seeking overall help. The workflow in summer actually seemed to reach the levels of February but we are seeing a bit more modest of a pipeline since the second wave. 

I wouldn’t say we felt much in terms of fees – I think we are doing fine on that front. I am not really seeing any decrease in the hourly rates of fees or increased demand for capped fees, both when it comes to the projects we already had in the pipeline as well as new mandates. I was personally expecting much worse.  

CEELM: What does the future hold for the Real Estate market — in terms of the short- and mid-term as well as in the long run?

Laszlo: I think retail will be critical. If the government decides to close down non-essential shops all shopping centers will really suffer. The office sector is interesting, not just in the short-term but also in terms of seeing what influence the work-from-home culture will have. If I had to place a bet now, I would estimate things will change, but in a manner that balances out. Yes, there will be fewer people working from the office, which would mean less office space rented out, but for those that do, more space will be needed to ensure separation/safety in this new world, so I think the overall area rented will balance out. 

On the tourism side, I’d say the summer period that just passed is not really representative since a lot of spots were full of Hungarian tourists. If you look at the March/April period, things were dead and I suspect the worry is that the conditions from then will reoccur, meaning there is not a lot of potential revenue that hotels can plan around. I even know of a couple of hotel openings that were planned but never happened. And things were made even trickier since the Hungarian Government introduced new FDI screening rules, based on which, special permission is needed for foreigners investing in hotels in the country. The case law on this is not yet known and in the few transactions this came up we did get a green light — but it slowed down the process considerably. Sure, that created more legal work but I worry it will discourage potential investors. 

CEELM: What are your projections for 2021?

Laszlo: I’d like to remain optimistic and we, as a team, are planning to grow. We’re not seeing a high downturn in terms of either workload or fees so we’re feeling like we’re on a relatively stable footing. Looking at the big picture, obviously, 2020 will not be the strongest year for anyone but I expect a slow pick-up of the real estate market in 2021, especially because I feel we all learned our lessons this year and I am eager to see how they are put to good practice in the next one.

At the time of the COVID-19 pandemic, remote working became the “new normal” in many industries: large numbers of people who had previously worked and commuted across the border within the EU or Switzerland, had been forced to work from home. Telecommuting, however, worked out so well that most people would want to continue in this way. However, in terms of taxation, this can put them on thin ice, and not just them, but the companies employing these workers.

Many people who opted to work remotely permanently might risk thousands of euros a year with their home office, Bloomberg points out in its recent article. The portal immediately provides an obvious example: a French IT scientist works in Geneva and is taxed where he earns his income under the prevailing tax rules. Previously, this has clearly been in Switzerland. But now, permanently working remotely from his home in France, the French tax authority might also present a tax claim and not only against the employee but also against the employer. According to Eurostat this is not a rare phenomenon: there are 173,000 French citizens working in Switzerland. Moreover, if the employee has or enters into a management contract, working from a different country may result in tax residency and thus corporate tax implications in that country as well.

Since COVID-19 is expected to stay around for a while and as estimated, more than a million EU citizens are affected, a comprehensive solution would be needed. The Member States and countries, however, seem to be addressing the issue differently: in London, the tax office has already discreetly warned bank employees working from another country to return home as soon as possible if they do not wish to be subject to a comprehensive tax audit. Italy, Germany and France on the other hand agreed with Switzerland to nullify the tax implications of working abroad, but only for the duration of the pandemic.

By Balint Zsoldos, Head of Tax, KCG Partners Law Firm

On September 9, 2020, CEE Legal Matters reported that the Kapolyi Law Firm had advised Duna House, a property brokerage group in Central and Eastern Europe, on its participation in the National Bank of Hungary’s Growth Bond Program. CEEIHM spoke with Duna House Chief Financial Officer Daniel Schilling to learn more.

CEEIHM: To give our readers a bit of background, tell us a few words about Duna House.

Daniel: We are present in Hungary, Poland, and the Czech Republic. We are the largest residential real estate brokers in the region and also one of the largest loan brokers in the region (we are number 1 in Hungary, and 5th-largest-but-growing in Poland). 

The company was founded in Hungary 21 years ago by two brothers who are currently still the largest owners in the company. Our focus was Hungary at first, then we entered the Czech Republic in 2010, but the major step to international markets came in 2016 when, towards the beginning of the year, we entered Poland through our acquisition of Metrohouse, the largest real estate broker in Poland. Our growth in Poland then continued with two other acquisitions of loan brokers in the country — one in November 2018 and one in January 2020. At this point, Poland is already the largest market for us in terms of revenue numbers. It is not as profitable as our Hungarian operations but profitability there is growing fast. 

CEEIHM: What is the “National Bank of Hungary’s Growth Bond Program” and why did Duna House decide to participate in it?

Daniel: This is run by the National Bank of Hungary with the aim to create a corporate bond market in the country. So far there have been a couple of issuers who managed to issue corporate bonds and the National Bank aims to widen the range of companies involved in that market. There is almost EUR 1.3 billion available to finance such bond issuances with the National Bank also committing to buying up to 50% of the total proceeds as long as companies find investors for the rest. If you don’t have any investors you don’t have your bond issuance. Beyond that, each company aiming to go through this program has to go through a credit rating and have it set at least B+ in order to participate. 

We considered this particular program for a long time and decided at the beginning of this year that we need additional financing, mainly to finance future acquisitions. We looked at alternatives, but the incentive of the National Bank made this program quite attractive for issuers who are not afraid of the process and the transparency needed. Sure, as an issuer you have a higher interest rate than through a traditional bank financing but you don’t have the same restrictions on what you can do as a company and collateral needed — so the bottom line for us was to go for a slightly higher cost but remaining more flexible. 

CEEIHM: What is the capital you raised intended for? What can we expect next from Duna House?

Daniel: We started our M&A-driven expansion back in 2016. When we had our IPO in November 2016, we promised we would continue to grow, not only organically but also via acquisitions. We have multiple negotiations ongoing and we are hoping we’ll be able to announce a deal in the relatively new future. The amount that we secured would actually allow us to finance two more acquisitions and we are looking to expand into new markets. Our goal is to further develop our position into a leading role in the region. For that, we would like to continue our M&A strategy and approximately 60% of the new funds will go towards this push. The rest will be used to refinance our existing loans. 

CEEIHM: What would you say was the most complex aspect of the issuance? Any unforeseen challenges along the way, and, if yes, how did you overcome them?

Daniel: I have to say that it was a pretty smooth process. The whole bond issuance involves following very strict procedures and those restrictions applied even more since we are a publicly-listed company. I think the previous IPO helped. We knew how to prepare the prospectus and what to expect. We received excellent support from our legal advisors and from OTP, our arranger. One challenging aspect for us was that the bulk of the work behind this happened during the summer period. The bond auction was on August 31, 2020, which is not within your typical transaction-window. Because of the holiday season, it was sometimes challenging to sync everyone up and even investors had a hard time driving the deal through their internal approval processes. We were under a time pressure to secure these funds as soon as possible so that, in our ongoing negotiations with potential sellers, we could prove that we have the financing needed to conclude the transactions. It worked out very well at the end, the results exceeded our expectations.

CEEIHM: Why did you turn to the Kapolyi Law Firm for advice on this issuance, and what did they advise on specifically?

Daniel: They worked for us as a fully-fledged advisor, assisting in structuring the bond, preparing the prospectus, and handling regulatory discussions. We had a thorough procurement process. We invited five law firms to bid for the mandate. We never worked with Kapolyi before, but they have a good reputation and we needed someone who has particular experience in this particular type of the bond program of the National Bank and who worked in this program with a publicly-listed company. We needed a legal team that understood the challenges of that particular set of limitations. Plus it seemed they were keen to work with us as well as they put forward quite an attractive offer in terms of price. 

Originally reported by CEE In-House Matters.

MVM has brought on Emese Szitasi as its Transaction Manager in Hungary.

Szitasi started her legal career in 1998 as an Attorney at Allen & Overy. In 2004, she joined Baker McKenzie as a Senior Attorney and stayed at the firm for more than 11 years. She then became the Lead Attorney for ENKSZ, working there for four years. Prior to MVM, Szitasi worked as a Senior Associate at DLA Piper, having joined the firm in April 2019 (as reported by CEE Legal Matters on April 5, 2019).

Commenting on her move, Szitasi told CEEIHM: “I’m happy to work again with a team of great experts and former colleagues on interesting and challenging deals. This position would give me the possibility to participate from the planning of a transaction until its conclusion and even further (e.g. until the full integration of a company or a business) which is, in my opinion, the best part of my work as a transaction manager. I hope that, as I’m finishing my MBA, I will be able to use my economic and legal knowledge and expertise to achieve this.”

Originally reported by CEE In-House Matters.

The extended deadline for implementing Strong Customer Authentication (“SCA”) expires on 31 December 2020. Originally, Hungarian laws prescribed 14 September 2019 as a deadline for the implementation of the new SCA, however, in parallel with the decision of the European Banking Authority, a new deadline has been set to 31 December 2020 by the Hungarian National Bank.

SCA was introduced as a part of the 2015/2366 Directive on payment services in the internal market in order to fight e-commercial frauds among the European Union. SCA is a multi-factor authentication method, as it requires two identification factors. These factors can be knowledge (something only the user knows, e.g. PIN code), possession (something only the user possesses, e.g. mobile phone), or inherence (something the user is, e.g. fingerprint). It is advised by the European Banking Authority to use biometric data for authentication as they are less easily reproduced and they cannot be forgotten.

According to the Directive, SCA is required for accessing payment account online, initiating electronic payment transactions, or in cases where there is a risk of payment fraud or abuse through a remote channel. However, SCA will not be required if the payment in question is under EUR 30 as it is considered a “low-risk transaction”. Nevertheless, if this exemption is used five times in a row or the aggregated amount of the exempted payment exceeds EUR 100, SCA will be needed.

By Rita Parkanyi, Partner, KCG Partners Law Firm

Noerr has advised UniCredit on financing it provided to South Korean real estate investment trust JR AMC for its acquisition of the Nordic Light Trio office building in Budapest from Skanska. Partos & Noblet — the Budapest office of Hogan Lovells — advised JR AMC on both the financing and the underlying acquisition, while Kinstellar advised Skanska.

Nordic Light Trio is located on the Pest side of the Danube. It offers a total leasable area of approximately 14,000 square meters and 221 parking spaces. According to Skanska, 98% of space within the building is already leased, with the anchor being a multinational healthcare company. The building is located in Vaci Corridor, the popular office hub and new CBD of the Hungarian capital Budapest. The area around the Nordic Light complex will offer 2,400 square meters of landscaped multi-activity gardens open to tenants and neighboring communities, bicycle storage facilities with changing rooms and showers, as well as parking with charging stations adapted for electric vehicles.

“We, JR AMC, are very happy to sign Nordic Light Trio with Skanska,” said Hyon Suk Jang, Executive Managing Director of Foreign Investment at JR AMC. “With yields in Western Europe breaking historic records, our interest is to constantly explore new markets whereby we can achieve high yields, simultaneously minimizing any trade-off in building quality or macro risk profile. In such sense, we strongly believe the CEE market is in favor of any other market. In the case of Budapest, Hungary, we have been following the market for the past year and a half with high interest. Considering both macro/micro economic figures and also the trend of the real estate market in Hungary, we are convinced of the significant potential for further growth and establishment.”

Noerr’s team was led by Partner Edina Schweizer and included Attorney Szilvia Andriska and included Trainee Attorney Barbara Herczegfalvi.

The Partos & Noblet team was led by Partner Sandor Bekesi, who was assisted on real estate and corporate matters by Senior Associate Zoltan Janosi and Associates Krisztian Devecz and Miklas Weiczer, and on financing matters by Senior Associate Gabor Koszo.

Kinstellar’s team was led by Partner Anthony O’Connor and included Senior Associate Marcell Horvath and Managing Associate Monika Frank.

The coronavirus pandemic has an unprecedented effect on economy on a global level. Similarly to central European countries, the special situation caused by COVID-19 had an adverse effect on the performance of most branches of the national economy in Hungary as well. The Hungarian GDP declined with a historical 13.6% in the third quarter of 2020 compared to the same period of 2019.

The industry and service sectors are both in recession, and even though the construction industry was said to be performing well, there was a 13% decline overall in this field this year. The main reason behind this statistic is the fact that state investments declined by 10%, partly due to the fewer amount of EU funded projects and partly due to the pandemic itself. The lower activity among private investments was caused mainly by the unfavourable economic environment, however, to a lesser extent than in the public sector.

The market of turnkey housing projects also show a 20% decline, mainly due to the increase of the value added tax, but also due to increased material prices and labour costs. In general, it can be concluded that the prices of these investment became around 20% more expensive. As a result of the higher prices, the level of construction requested by customers has also changed fundamentally: while last year 90% of the demand was for turnkey buildings, this year only one in three or four buyers require an almost complete house. This decline is seen almost exclusively in the lower-middle price category, the much smaller premium segment appears to be unaffected.

With fewer construction projects taking place, the amount of construction materials purchased decreased by around 10% compared to the figures of 2019. Building materials related to the construction of new residential projects, such as structural elements like bricks and other masonry items, among façade fenestration elements show a 20% decline in sales. Surprisingly, the demand of décor products such as interior design related items and paving stones increased. This phenomenon can be accredited to the fact that people required to stay at home felt the need to tidy up their living environments during the lockdown period, and decided to do it themselves since they had the free capacity on their hands.

Another interesting fact is that regardless of the decreased volume of construction materials sold, the market of house remodelling, refurbishing and their sales is said to be unaffected, which trend comes together nicely with the downfall of turnkey projects and the increase of home refurbishment demand. According to industry data, 16% of family houses and 8% of condominiums made from precast concrete were affected by some sort of refurbishment or remodelling. The majority of these projects are located in central and western Hungary, however, with the pandemic situation intensifying again, 13% of the entire residential edifices are expected to be affected, meaning around 500,000 homes in total all around Hungary.

By Eszter Kamocsay-Berta, Managing partner, KCG Partners Law Firm

DLA Piper Hungary’s busiest practice lately has been its Litigation and Regulatory team, headed by Partner Andras Nemescsoi. COVID-19-generated legal uncertainty and a set of opportunities arising from a relaxation on state-aid rules fuel the workload.

In terms of disputes, “there are a lot of mandates and questions surrounding COVID-19,” Nemescsoi reports. “The crucial question is how to address situations when you are the obliged party of a contract and you are unable to fulfill that contract – maybe you want to take the route of claiming frustration or force majeure.” Nemescsoi notes that the workload on this front came in waves: first in the form of questions, then requests for memos, then slowly evolving into formal arbitration and litigation cases.

Regarding the regulatory arm of the practice, Nemescsoi explains that there has been a whirlwind of “special legal orders” implemented by various countries in light of the outbreak and Hungary’s “special legal framework” gave rise to a lot of questions. “Probably all law firms were crazed with work here,” he says, since “although it can be taken as a threat or overexposure, this exceptional legislation – both domestic and EU-wide – was perceived by a good few as a breeding ground for new opportunities – including those arising from what they perceive to be more room to maneuver when it comes to state-aid.” According to the DLA Piper partner, the EC is “more flexible in this period of time, leading to mandates from clients who are looking to identify ways of taking advantage of this newly-found flexibility.”

“On the short-term, if the legal regime changes with other measures being implemented, more questions will come up for sure,” says Nemescsoi. “The first memos are now out and clients have had a chance to digest them. I expect more and more legal disputes to pop-up and these are projects that last quite a while.”

The COVID-19 pandemic and the physical distancing measures force many employers to introduce telework (working from home) on a large scale. In order to respond the current challenges, in September 2020 the Hungarian Government set the objective to reform the regulations on teleworking. The purpose of the new rules is to allow more employers to introduce telework and also to make the regulation more flexible.

The new provisions will abolish the current distinction between ‘telework’ and ‘home office’, i.e. the provisions on telework will uniformly apply if the employee works wholly or partly in a place other than the employer’s site. The parties should stipulate in the employment contract that the employee works under the framework of telework. However, this does not affect the employer’s possibility to unilaterally instruct the employee to work from home for a limited period of time (i.e. it may not exceed a total of 44 working days or 352 working hours per year).

In parallel, the tax rules relating to teleworking will also be modified. In particular, the employers may provide to the employees a tax-free lump sum compensation for the utility fees increased due to the teleworking, the amount of which might be HUF 16,100 per month.

By Eszter Ila-Horvath, Attorney at Law, KCG Partners Law Firm

On 1 September 2020, a new government decree entered into force on travel restrictions during the pandemic period. Based on the new rules, Hungarian citizens arriving from abroad may get through a health inspection and in case of suspicion of contamination, the Hungarian citizen must be placed in quarantine. In case the suspicion of contamination has not been established by the health inspection, the Hungarian citizen also must be placed in official home quarantine or in quarantine determined by the pandemic authority for 14 days. In certain circumstances, the Hungarian citizen may be exempted from this quarantine obligation, if he/she arrives from the Czech Republic, the Slovak Republic or the Republic of Poland.

In principle, a foreign citizen may not enter the territory of Hungary in passenger traffic. However, the government decree lists some cases when, upon request, the competent police entity may give an exemption, i.e. may permit the entry to Hungary, if the applicant verifies that the aim of the entry is for example the participation on a Hungarian judicial or authority procedure or the use healthcare services. The person received the exemption may also get through a health inspection in the course of the entry and in case of suspicion of contamination, the person may not enter Hungary. If there is no suspicion of contamination, the person must be placed in quarantine for 14 days. However, the citizen of the Czech Republic, the Slovak Republic or the Republic of Poland may enter Hungary, if such person has an accommodation booked in Hungary and has a negative COVID-19 PCR test completed within 5 days prior to the entry.

Upon request of the person placed in quarantine (either a Hungarian or a not Hungarian citizen), the pandemic authority may permit that he/she participates within 5 days, at least with a difference of 48 hours, twice on a COVID-19 test. In case the test shows that the coronavirus was not detectable on the date of the tests, the competent pandemic authority may decide on exemption from the order of quarantine.

There is an important exemption for business travels, i.e. in case a Hungarian citizen travels abroad for the purpose of business or economic activity, and verifies this purpose in the course of the return journey to Hungary, such person may enter Hungary without restrictions. Similarly, foreign citizens may also enter Hungary without restrictions if they prove that the aim of the entry is an activity of business or economic purpose. Furthermore, the managing director or employee of an affiliated undertaking arriving from abroad may also enter Hungary without restrictions, provided that this person supports the fact of the travel for business purpose with proper documentation. In addition, the frontier workers may enter Hungary for a maximum of 24 hours period within a distance of 30 km from the state border.

By Lidia Suveges, Attorney at law, KCG Partners Law Firm