Hungary for yield

With the ink practically still fresh on its European Union membership card, Hungary has been a favored destination for real estate investors in Central Europe. But those looking to pump capital into the country certainly had reason to hesitate in recent months.

In September, Ferenc Gyurcsany, the country’s Socialist prime minister, was caught on tape admitting to lying about the country’s economic prospects in order to keep power. The broadcast of the tape caused bands of young protestors to fill Budapest’s Freedom Square and lay siege to the state-run television station. When the smoke cleared, approximately 150 people had been injured in the largest uprising since the country shook off communist rule.

The administration had placed the country’s budget deficit at 4.7 percent of GDP in 2006 when the real figure may be greater than 10 percent—reportedly giving Hungary the highest in Europe. After backing pre-election tax cuts, the prime minister is now touting a package of hard-to-swallow reforms that include large cuts in spending and employment, as well as higher taxes, rarely a beacon for attracting foreign capital.

Hungary’s overall economy is expected to continue to grow over the short term with real GDP growth of 4.5 percent projected this year and 3.5 percent projected in 2007, according to the International Monetary Fund. However, in light of concerns about the country’s fiscal health, the European Union recently sent bank Hungary’s initial proposal to begin circulating the Euro.

The underlying real estate fundamentals in Hungary nevertheless remain strong. Demand for Budapest office space has been at record levels over the past two years. In the second quarter, the city posted the highest level of office take-ups in the past quarter of a century, despite a vacancy rate of 14 percent. In addition, an ongoing highway extension has created fertile ground for new logistics and warehouse facilities, according to research reports issued by Richard Ellis.

However, whether there will be fallout in investor confidence or lingering questions about the accuracy of some of the country’s financial statistics is uncertain. Whether or not such uncertainty drives investors away from Hungary, however, remains to be seen.