The Hungarian government is contemplating to introduce the concept of REIT (Real Estate Investment Trust), in order to re-vitalise stagnant real estate market activity and to support utilisation of the high volume of distressed properties.

REIT, a relatively new form of real estate investment, working as a combination of a real estate fund and a corporate entity, has been successful in many countries all over Europe in the past years. Although REIT entities may have different characteristics in each country, they all have similar advantages: better tax conditions; relatively high profitability; liquidity and stability.

According to the plans, REITs in Hungary would be set up as corporations listed on the stock exchange. The contemplated REIT regulation will most likely contain a clause stating that 75-90% of the portfolio of such entities has to be represented by real property investments. Further, as a common average, 80-90% of the REITs' income will need to be generated from rental fees, utilisation of rights attached to real properties and sale of real estate portfolios. However, the main goal shall rather be the sufficient and profitable operation and development of real property portfolios than alienation of assets.

It will be compulsory for a REIT in Hungary to distribute 90% of its annual income as dividend to its shareholders each year. The government also plans to exempt REITs from corporate taxation, only their shareholders would have to pay personal income tax on the basis of the amount of dividend distributed to them. The current personal income tax rate, as decreased effective from 1 January 2011, is a flat rate of 16%.

As major investments are mainly implemented through project companies, holding or utilising the real estate, the REIT regulation would also correspond to this approach and allow the transfer of real estate project companies belonging to a REIT's portfolio. This means more flexibility in comparison with real estate funds, as the current regulation on real estate investment funds allows only asset transfers but prohibits share deal type of transactions.

Although the exact legal provisions are not in place yet and the accurate timing of the introduction of REIT legislation is also uncertain, the Hungarian government is expected to prepare a "best working solution" in order to maintain and increase the volume of real estate investments in the country, strengthen the country’s reputation and attract new foreign investors.