A cautionary tale of losses in Budapest

[amgd28]

Hi I thought I'd share my experience of the budapest property market as a cautionary tale of what NOT to do when dabbling in foreign property.
Background is that I bought in 2004 and have been trying to sell for the last 12 months effectively. Property still for sale, but at least there is interest now that we have had successive price reductions
Agent informs me that the main issue was that the outside facade of the building is in poor condition, even though the apartment is in good nick. Of course, when I bought it I swallowed the line "building to be upgraded next year". Anyway.......Agent says realistically she hopes to be able to sell it for 17.5MHUF, based on current interest.
So, just to highlight to people potential costs of rushing into investments when you don't know what you are doing.........here goes:

Purchased: April 2004
Sale Price: 20M HUF
Stamp Duty: 1.2M HUF
Agents Fees: 3000 Euro
Solicitors Fees: Approx 1000 Euro (was told buyer covered all legal fees)
Renovation & Furniture: Approx 4000 Euro
Total Costs of purchase - 93k

Now say we agree a sale at 17.5M HUF - edit SALE AGREED AT 16M HUF
Sale Price: 16M HUF
Agents Fees: 640,000 HUF
Renovation costs for preparation for sale: 2,600 Euro

Total proceeds of sale: 57,000 euro

NET LOSS = 36,000 Euro (approx 45% loss based on initial purchase price)

Now I'm not looking for sympathy - I rushed in in 2004 and got what I deserved, and it has taught me a lesson, but I'd like to share the lesson with everybody here
............And at least I don't need to worry about capital gains tax

 

[ClubMan]

What, if anything, was your strategy here - e.g. with regard to capital gains, rental income, timeframe etc.? Did you do much, if any, research and get much, if any, independent professional advice?

 

[amgd28]

As I said, I was not acting in a calm, rational manner when purchasing in 2004. I broke all the rules of investing, followed the hype, did limited research, believed the sales guys, and made a decision too quickly.
On the other hand, we viewed a lot of apartments during our visit, and priced local stuff and it seemed reasonable. Our rental projections were somewhat higher than we actually got, but on an interest only basis we did alright. Due to other commitments now, I regretfully must sell, but I have said that for a long time now.

I suppose my point is that a lot of people have based "investment" decisions on the same cack-handed approach I used in 2004, and if any are considering a rash move 'beacuse eveyone else is doing it', I'd like to help open their eyes

I am much wiser now, and perhaps in the long-run 30k is not a huge price to pay for a valuable lesson.....then again if I had consulted AAM at the time

 

[IFT]

edit..

 

[MichaelDes]

I wonder are some oversea property investments and the hype in which they are sold...the 21st century time share of yonder year that became so stigmatised. Will people look back in 10 years thinking we were all crackpots? As said before…I’d an email to buy property in Ulaanbaatar in Outer Mongolia. It can not be beaten. Should dredge up the link.
Sorry for the earlier posters losses, a salutary tale for us all. Can you offset the CGT here, as some compensation to the misery.

 

[amgd28]

(i.e. better sometimes to learn from losing 30K now to avoid losing 100K in the future) you should be able to learn from your experience and gain in future transactions.

Absolutely - this is how I am viewing it. Like I said, I'm not looking for sympathy, just alerting any potential naiive "investors" out there. I was in their shoes in 2004.......

I'm quite sanguine about the experience to be honest, harsh lessons are the best ones, once you make sure you learn from them.......

 

[ringledman]

Absolutely - this is how I am viewing it. Like I said, I'm not looking for sympathy, just alerting any potential naiive "investors" out there. I was in their shoes in 2004.......

I'm quite sanguine about the experience to be honest, harsh lessons are the best ones, once you make sure you learn from them.......

Cheers for being so honest. It is good advice that you give. Am sure your luck wil change next time.

Its unfortunate you need to sell as I reckon Budapest will pick up in a couple of years.

 

[z109]

Its unfortunate you need to sell as I reckon Budapest will pick up in a couple of years.

Bloody hell, the guy has just given a warning about the dangers of overseas property investment and here you go spouting the same nonsense that got him to invest there in the first place.

Unless they strike oil, the locals in Budapest are not going to be able to afford the prices that foreign suckers have paid/are continuing to pay for property in Budapest.

Look at http://www.worldsalaries.org/hungary.shtml you'll see the average annual salary is 1.9m HUF. At 17.5m HUF to sell the apartment, you are looking at 9 times annual income. Contrast this to Ireland where the average price is 400k odd in Dublin and the average salary is around 33k, 12 times annual income. That makes the apartment in Budapest a quarter cheaper than it might be in Dublin, but still well above the long-term EU median of 5 times salary for property prices. It is still out of reach for locals at those prices, unless it is a particularly good apartment. Many of the apartments that have been built/sold to foreign are not.

Now, lets look at demographics, important if you are thinking of the future value of your property. The population growth rate in Hungary is -0.253. That's right, there are fewer people willing to buy/rent your apartment each year. ([broken link removed]).

Edit: apologies, used monthly salary figures rather than annual. Now corrected. The figures look a lot less bad, but are still bad.

 

[Guest127]

last week Sunday Times had an article which basically stated that English Farmers were being priced out of agricultural land by........... Paddy Farmers.

hope things work out amgd28, and thanks for shareing . We all make mistakes.

 

[MaxIII]

Look at http://www.worldsalaries.org/hungary.shtml you'll see the average annual salary is 1.9m HUF. At 17.5m HUF to sell the apartment, you are looking at 9 times annual income. Contrast this to Ireland where the average price is 400k odd in Dublin and the average salary is around 33k, 12 times annual income. That makes the apartment in Budapest a quarter cheaper than it might be in Dublin, but still well above the long-term EU median of 5 times salary for property prices. It is still out of reach for locals at those prices, unless it is a particularly good apartment. Many of the apartments that have been built/sold to foreign are not.

Now, lets look at demographics, important if you are thinking of the future value of your property. The population growth rate in Hungary is -0.253. That's right, there are fewer people willing to buy/rent your apartment each year. ([broken link removed]).

Edit: apologies, used monthly salary figures rather than annual. Now corrected. The figures look a lot less bad, but are still bad.

Exactly, and this is why the key factor to take into consideration is how fast wages are rising - in hungary they are rising at about 7% per year in the private sector - or just under. Now consider that this is the situation when austerity measures are causing the most pain.

The situation is over the worst for now and the property cycle is on its way up again in my view. We are heading for a prague like boom for the next 5 years at least perhaps longer dependent on the EMU effects.

Unfortunately the speculator effect is kicking in .... foreign purchases are booming - sometimes you just have to follow your instincts and right now mine are telling me to buy a second apartment.

 

[MaxIII]

Thankyou Mr Brown,

Second home and buy-to-let tax gift

The tax rate on profits from sales of holiday homes or buy-to-let investments has been slashed from as much as 40% to 18% from next April.


The move fuelled speculation at Westminster that Labour rushed out a 'botched' pre-Budget report in response to Conservative tax proposals.
There were further signs of disarray when Gordon Brown was humiliated by David Cameron in a Commons clash today.
The cut in capital gains tax announced by Alistair Darling yesterday was mainly aimed at increasing the tax paid by wealthy private equity bosses who currently enjoy a 10% rate.

But tax experts said it had inadvertently handed a major tax break to second home owners and will save them thousands of pounds when they sell. Andrew Goldstone, head of personal tax and estate planning law at Mishcon de Reya, said: 'It's a massive tax cut for property owners. Hardly what you'd expect from a Labour government.'

Owners pay CGT - a tax on the difference between the price they paid for an asset and the price they sell it for - on all homes except the one they live in. The rate is currently 40% for the first three years that the property is owned, falling by two% a year to a minimum rate of 24% after 10 years of ownership.

As well as hitting private equity bosses, Mr Darling's new flat rate of 18% is designed to simplify the system by bringing the rate for business and non-business assets such as holiday homes in line with each other.
Experts said the move looks certain to boost the property market next year, although it could mean a dramatic drying up of supply until April. Liam Bailey, head of residential research at Knight Frank, said: 'This will help underpin demand for second homes and prices of second homes. However, the second home market prices are very expensive in most parts of the UK and affordability is the key to demand.'

What that article doesnt say is that most property portfolio owners have many more than 2 properties and this will encourage those that do to sell their excess properties so as to fall into the 18% bracket.

Mr Brown is fueling international property speculation with this one! Watch out Hungary ....... the Brits are coming!

 

[Bronte]

Amgd28, thanks for your story, you are so stoic, a lesson indeed for us all. It's thanks to people like you that the rest of us here on AAM can learn what not to do...... As the others said we all make mistakes, hope you sell easily now and that things work out..... If you have another investment property that you sell in the future you may be able to offset the capital loss against it........ not too sure but I think so, something to check with an accountant if the time comes.

 

[amgd28]

If you have another investment property that you sell in the future you may be able to offset the capital loss against it........ not too sure but I think so, something to check with an accountant if the time comes.

Well I do have an Irish property that CGT will apply to (thinking of selling in the coming year), but I had thought that losses from foreign properties could not be offset against Irish liabilities or does that just apply to rental income/losses?

 

[budapest]

Unless they strike oil, the locals in Budapest are not going to be able to afford the prices that foreign suckers have paid/are continuing to pay for property in Budapest.

This is partially true. Despite appearances, Budapest is a relatively wealthy city. Most people I know own two apartments/holiday home by Lake Balaton, etc. The majority of people earn less than the average salary but a significant number earn quite reasonable salaries. With Budapest, statistics are generally misleading.

The local market for quality central apartments under 20M HUF is actually quite competitive. However, I agree that certain developments, which are aimed at foreign 'investors' are unlikely to be affordable to the local population anytime soon.

We are heading for a prague like boom for the next 5 years

I don't see any evidence for this. The austerity measures are going to last for another two years or so, which is curtailing affordability.

Amgd28, I think your main issue is that you were sold an apartment which locals are not really interested in at an inflated price (possibly by CH?). Secondly, as property is a long term investment, you have been unfortunately forced into a sale at the wrong time in the cycle. Hope you manage to sell the flat quickly and move onwards and upwards. (By the way, there won't be any legal fees as part of your sale.)

 

[z109]

Most people I know own two apartments/holiday home by Lake Balaton, etc.

Indeed, but many of these are 'family' properties (i.e. have been handed down). When I was in Balaton in the summer there were for sale prices everywhere and prices were on the slide. Now that Germany is reunified, many of the split German families (between east and west) no longer need to go to a third country to meet up, so a fair number of Germans are selling up.

 

[asdfg]

Well I do have an Irish property that CGT will apply to (thinking of selling in the coming year), but I had thought that losses from foreign properties could not be offset against Irish liabilities or does that just apply to rental income/losses?

Afaia you can carry forward the loss including legal expenses etc and offset them against any gain in the future in order to calculate your CGT liability.

 

[amgd28]

I think your main issue is that you were sold an apartment which locals are not really interested in at an inflated price (possibly by CH?)

No it was through an Irish company called hungarinvest. No longer trading! Personally I thought the apartment had/has a lot of charm, but I guess the older apartments are not that exciting for locals just now, particularly if the facade of the building is not good. Again it highlights the traps of applying Irish/Dublin criteria on appraising a property to an foreign market...

By the way, there won't be any legal fees as part of your sale

Some good news at last - I had been told on buying the apartment that the legal fees were paid by the buyer, but recently I presumed that I was told that because they saw SUCKER written on my forehead. Nice to know at least some of the spin was true....

 

[budapest]

Hungarinvest was basically an arm of CH and seemed to sell from the same database of properties at the same prices.

Theoretically, locals would be interested in the apartment, but at the right price. Because it's on the half-floor with a courtyard view, it is probably not the brightest of apartments, which is a major stumbling block in the local market. The exterior of the building is also a problem, but at some stage (who knows when?) it will be renovated and the apartment will become instantly more desirable.

 

[dereko1969]

sorry for your loss....
however in your figures above you haven't included rent received so would that not have an impact on your 'true' loss? you do mention that the rent you received wasn't as much as you'd hoped but as you were interest only you say you did alright, so that obviously has an impact on the total investment.
anyway it's good that people are posting actual experiences here.
good luck

 

[amgd28]

above you haven't included rent received so would that not have an impact on your 'true' loss? you do mention that the rent you received wasn't as much as you'd hoped but as you were interest only you say you did alright, so that obviously has an impact on the total investment

True, but when taking out the agent's fees, insurance, and rising interest payments, it effectively cancelled itself out. The tenant has been gone since June