Hungary’s new Guest Investor Visa (GIV) is the latest EU Golden Visa to take the world by storm.
The new program, set to begin on July 1, 2024, operates on a simple residency by investment framework that awards successful investors who contribute to Hungary’s economy through investing in approved asset categories with a ten-year, renewable residence permit.
The world greeted the GIV with great enthusiasm, especially since Hungary itself is a highly desirable destination for many. The country is a member of the EU and Schengen Zone, meaning that those with a residency permit in Hungary can access Schengen Zone countries without a visa.
What Are the Eligibility Criteria for Hungary New Guest Investor Visa?
Hungary’s GIV also provides investors with three different investment options to choose from, which are:
- Invest EUR 250,000 in investment certificates issued by a real estate fund registered with the Hungarian National Bank;
- Invest EUR 500,000 directly in Hungarian residential real estate projects (free of encumbrances or claims);
- Donate EUR 1 million to an institution of higher learning to support educational, scientific, artistic, or creative activities “maintained by a public interest trust foundation performing a public task.”
Everyone expects the vast majority of applicants to apply under the real estate or fund options, as the donation requires a much higher financial outlay that can never be recouped (but it can help with lowering annual taxes).
However, even if the donation option does help out with one year of taxation, it isn’t enough to justify the massive price point and no financial returns on the investment.
Hence, the two main investment categories are set to be the fund and real estate options.
Both categories are aimed at developing the Hungarian housing market, and both will eventually end in real estate investment. This is where the similarities end, though, as the varying details between the two options may lead some investors to question which one is the best for them.
In this piece, we will delve into the intricacies of each investment option, providing more insight into each one’s structure and the overall investment environment surrounding them in a bid to help our readers decide on which GIV investment option suits them best.
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Hungary Real Estate Investments vs. Funds: How to Choose the Right for You?
It is important to note that the fund option under the Hungarian GIV isn’t open to all investment funds in the country. Funds that will qualify must invest at least 40% of their capital in Hungarian real estate in order to qualify.
Thus, nearly half of a qualifying fund’s ROI will come from real estate profits, such as rental returns and appreciation rates obtained through reselling and arbitrage trading.
One key difference between the fund option and the real estate option is the investment amount. Funds require an investment of EUR 250,000, half of that of the real estate option (EUR 500,000).
This key difference may prove critical for investors who want to minimize their initial financial outlay.
1-Return on Investment (ROI)
Beyond the investment amount, investment fund ROI can tend to be higher than typical real estate rentals. For investors looking for ROI rates that can successfully hedge (and even beat) inflation, fund investments are an excellent option.
It is worth noting that each fund will have its own investment strategy, and that will significantly affect an investor’s ROI margin. For example, some funds may focus on long-term, stable rentals that provide less risk with lower ROI margins.
Others may go for short-term rentals on a higher margin but with greater risk. Some funds may use rentals as a stop-gap and focus their efforts on maximizing ROI by reselling real estate, which can provide very high profit margins.
However, investors looking to make significant ROI through arbitrage gains may opt for the real estate option directly, as this way they can do the same operation the fund does but without needing to share the arbitrage gains with the fund management company.
Hungary’s real estate market provides an excellent opportunity for arbitrage gains. The property price index in Hungary grew 2.82% year-on-year (YoY) in the second quarter of 2023, but that doesn’t tell the whole story.
Pest, the eastern part of the Capital, Budapest, saw average home prices drop a massive 35.62% YoY in Q1 of 2023. Central Transdanubia saw prices drop 10.53% during the same period.
Considering that Pest and Central Transdanubia neighbor the two territories that witnessed the highest growth rates (Buda and Western Transdanubia, 3.47% and 1.15%, respectively), these two areas provide massive potential for high-level arbitrage gains.
2-Passivity of the Investment
There are more essential differences between the fund and real estate options to consider other than ROI. For example, funds provide a completely passive income approach.
Funds are managed by the fund manager and do not require any input or activity on the investor’s side. Renting out real estate requires the investor to find a renter and collect rent, as well as handle issues such as maintenance and upkeep.
An investor could, of course, delegate these responsibilities to a property management company, which would in turn, make the investment a completely passive one.
Property management companies will take a cut out of the rental income as a fee. Average rental yields in Budapest are 5.75%, so, there is enough room to employ the services of a property management company.
Some areas, such as Erzsébetváros, have average rental yields that can reach 6.72%, meaning that choosing a high-yield property can result in considerable earnings throughout the ten-year residency permit’s validity.
Combining high-rent and appreciation potential is the best way to obtain the highest possible ROI and maintain a completely passive approach under the real estate funds.
It is worth noting that while funds offer more passivity by their nature, this doesn’t come free as fund managers usually charge a management fee or deduct their fees from the investment’s earnings.
Comparing the possible returns of both while in complete passive investment mode is essential for investors to maintain a solid ROI level and ensure they do not have to continuously actively engage their investment.
Pest, the eastern part of Budapest, saw home prices drop 35.62% YoY in Q1 2023, and Central Transdanubia saw a 10.53% drop, both offering significant arbitrage potential due to their proximity to high-growth areas Buda and Western Transdanubia.
3-Liquidation of the Investment
Another key difference between the fund and real estate option is the exit strategy.
Funds offer a simplified liquidation process as after a holding period (or in some cases, at any given moment) an investor can recoup their initial investment. The fund manager transfers the money directly to their bank account.
Real estate is a different matter as it is a tangible asset that needs to be liquidated through active sales. Investors can try to sell real estate themselves or, once again, hire a third party to handle it, such as real estate agents.
In the case of hiring a real estate agent, investors need to consider the agent’s fees, and this may lower the overall profit margin for investors.
Funds provide simpler liquidation but carry a bit more risk (as all liquid investments do) than real estate investments, which are tangible, stable assets.
This is where the genius of the Guest Investor Visa comes in, by ensuring that qualifying funds invest at least 40% in real estate within Hungary, the Hungarian government has effectively lowered the risk level of these funds to put it nearly on par with typical real estate investments.
The key difference here is that funds are easier to liquidate, but each fund will have its restrictions and liquidation criteria such as holding periods and more, so it is vital to understand how each fund functions before investing in it.
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Finally
To truly understand which Hungary GIV investment option is the best one for you, contact Savory & Partners today to book a comprehensive consultation with one of our experts.
Savory & Partners‘ team will analyse your case and provide you with the best solution that meets your needs, objectives, and preferences.
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