Real Estate sector – current trends in Hungary
The year 2020 had a negative impact on the real estate market of Hungary; the number of real estate investments declined by 35-40% compared to 2019 figures. As for the total value of real estate investment, even the most optimistic estimates propose an approx. 30% decrease. While the total amount invested into real estate was nearly EUR 1.2 billion in 2020, the same figure was only EUR 1.8 billion in 2019.
- The only exception from this negative trend is the market of industrial and logistics real estate, where the transactions concluded in 2020 involved a total floor area of 460,000 m2, nearly double that of the 2019 value. The demand for leased real estate also increased by nearly a quarter based on data from Q3 2020.
- Demand also significantly increased on the market of logistics real estate as well, while sellers began planning forced sales in the retail real estate and hotel segments.
However, if the seller of the real estate or real estate management company has the opportunity to prepare for the transaction, it may be able to demand a higher purchase price and create the optimal transaction structure.
Criteria to consider and things to do before selling real estate
The company or company group planning to sell its real estate should consider the following factors and perform the following tasks during the preparatory phase:
1. What is the owner planning to sell: the company that owns real estate or real estate itself?
The first step should be the separation of the property from the organizational structure or in the case of a company, from the operation of the company. It is especially important to create the right ownership structure before the planned real estate transaction, in part due to fiscal considerations, and in part to ensure that the ownership structure is more transparent and ‘digestible’ for the investor. Separating the property from the organizational structure in advance also contributes to the smooth completion of the real estate transaction. This typically involves the transfer of the real estate to a separate company or planning its separation from the operations of the seller; this is when it should also be decided whether to sell multiple properties in a single transaction or one by one. Time should be taken to consider the manner in which the real estate will be separated from the organizational structure of the company to ensure a final result that fulfills all relevant requirements. It should be decided on a case by cases which solution is ideal for the seller in any given situation.
2. Preliminary fiscal planning, creating an optimal real estate ownership structure
During real estate restructuring and the separation of properties from the organization of the company, the possible scenarios should be analysed in order to identify the most favourable solution from a fiscal, legal, and financial point of view and maximize the purchase price. It is important to calculate the tax burdens the real estate or the company owning real estate will be subject to and review the optimal VAT management solutions. The application of specialized tax arrangements may be worth considering depending on whether the company/real estate is being sold by a private individual or a company. In addition, the existing fiscal practices should also be reviewed, e.g. whether any taxes will be payable on exchange rate gains when the company owning the real estate is sold unless steps are taken in advance to avoid such losses.
3. Ensuring transparent operation and resolving issues
Any ‘skeletons in the closet’ that may emerge during the transaction process will surely have a negative impact on pricing. An important objective of preliminary screening is to identify important or systemic practices that may be considered defective by analysing and managing the areas that typically carry risks, such as fiscal, legal, and financial matters.
As the real estate sale transaction progresses, these areas and issues that carry potential risks may also be discovered by the buyer/investor as they generally perform their own screening at their own expense. If the real estate seller initiates the screening of the fiscal, legal, and financial matters of the company/real estate during the preparatory phase, such as the verification of whether the necessary licences and documentation are available and the regulations have been complied with, this may facilitate the transaction process when the same questions are posed by the buyer as well. The seller may be able to reduce or even eliminate completely the factors which may reduce the purchase price in the future.
Additional tasks to be completed by the real estate seller
- Reconsideration of any business decisions postponed in the previous years and consideration of any cancelled investment.
- Assessing the condition of the real estate and restoring it an appropriate condition.
- Review of any encumbrances on the real estate, examination of any prohibitions on its sale, investigating the option for invalidating any liens, considering changes to the usufruct rights.
- Preliminary valuation of the real estate or the company owning the real estate, establishing their fair value for future price negotiations.
- Ensuring compliance with the regulations applicable to real estate (environmental protection, health and safety).
- Resolving any cases of litigation the company or the real estate may be subject to, assessing the possibility of future litigation.
If the seller initiates the screening of the affairs of the company/real estate during the preparatory phase, this may facilitate the selling process and allow the seller to prepare for any factors that may negatively affect the purchase price.
It is in the interest of the real estate seller to analyse potential scenarios and select the solution that is the most favourable from a fiscal, legal, and financial point of view. This can only be guaranteed if preparations are made regarding the key areas (operation, taxation, law, finance).
Depending on the value and complexity of the real estate transaction, it may be advisable to begin preparations 1-3 years before the transaction itself.