Based on the Hungarian government's proposal, effective as of 27 July 2011, the Parliament passed a new legislation introducing the concept of REIT (Real Estate Investment Trust) in Hungary. The relevant new Act No. CII on Regulated Property Investment Companies (the "REIT Act") entered into effect in order to re-vitalise stagnant real estate market activity and to support utilization of the high volume of distressed properties. The REIT Act provides for the establishment requirements, the rules of operation as well as the rules of taxation of regulated property investment companies (referred to either as "REIT(s)" or "REIT entities").

A general goal behind the new legislation is to make Hungary again attractive for real estate investments in the CEE region, as well as that REIT entities collect funds and sources of both major and minor size investor entities and channel those sources to Hungarian real estate investments with primary focus being on retail and residential market assets, including distressed ones.    

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.

Main characteristics and permitted portfolio of a Hungarian REIT

Based on the REIT Act, REITs in Hungary can be set up as special form of corporations listed on the stock exchange (i.e. public companies limited by shares), meeting all of the various special requirements set by the provisions of the REIT Act, and registered with the relevant registry of the Hungarian Tax Authority. The benefits, rights and duties attached to the corporate form of REIT shall not commence upon the registration with the Company Registry, but only upon the registration of the new REIT entity with the relevant registry of the Hungarian Tax Authority. 

Companies eligible to adopt the form must manage their own property in Hungary. As another legislative requirement, REITs may only be engaged in the following activities (or the combination thereof):

  • Activities of holding companies, asset management
  • Buy and sale of own real estate
  • Rental and operation of own or leased real estate 
  • Property Management 

The REIT Act does not only cover the operation of REIT entities but also that of their 100 per cent subsidiaries/SPVs, provided that the latter are also engaged in the same business activities as listed in respect of their mother companies above (such subsidiaries are referred to by the REIT Act as "Project Companies"). In other words, unlike Hungarian real estate funds, the REIT is allowed to hold shares in Project Companies.

Other than Project Companies, REITs may also hold shares in other REITs and business entities primarily engaged in development of building projects, but no other corporate entities. In case of ownership stake held in other REITs and business entities primarily engaged in development of building projects, the maximum shareholding and/or voting rights of the holding REIT entity may not exceed 10 per cent.

Capitalization and asset portfolio requirements

The minimum initial capital of REITs shall amount to at least HUF 10 billion (ca. EUR 36,765,000). 

Real properties/investments owned by the REIT entities must account for at least 70 per cent of their total assets per balance sheet, on the note that none of the real properties or ownership stakes held in other REITs may exceed the 20 per cent of the amount of balance sheet total of the holder, individually.

Total debt (covered by repayment obligation) to properties ratio shall not be in excess of 65 per cent for REITs and 70 per cent for Project Companies. Apart from real estate properties, and ownership stakes held in other REITs, Project Companies and business entities primarily engaged in development of building projects (as described above), the asset portfolio of a REIT may comprise only call or fixed bank deposits, securities introduced in recognized capital markets, government securities issued by Member States of the European Economic Area, debt securities issued by international financial institutions, and derivatives for covering risks of foreign exchange losses in connection with income from and costs of real estate deals made under a fixed exchange rate and for covering the foreign exchange and interest risks of loan financing transactions.

Mandatory dividend payment and shareholding structure rules

For REIT entities it is compulsory to distribute at least 90 per cent of their realized profit as dividends each year, and they shall be required to do so 15 days within the approval of their annual accounts. The relevant rules applicable upon their Project Companies set an even higher rate, providing for an obligation to distribute 100 per cent of distributable profits of the Project Company each year and within the same deadline.

Total (accumulated) shareholding stake and voting rights of banks/lenders and insurance companies in a REIT may not be in excess of 10 per cent.

At least 25 per cent of the shares representing the registered capital of a REIT must be traded in controlled financial markets. Further, in order to guarantee minority shareholder participation, a series of shares representing also at least 25 per cent portion of the registered capital of the REIT has to be owned by minority shareholders, whereby such minority shareholders may only hold less than 5 per cent of the total nominal value of said series of shares, individually.

Compulsory market valuation of property portfolio

REITs must have their real property portfolio evaluated at least quarterly by an independent real estate evaluator expert or a professional evaluator firm. The evaluator shall be required to issue an expert opinion on the market value that needs to be compared with book value figures.

In case of any discrepancy between actual market value and book value, the REIT must make a settlement and value adjustment for assets in its financial books in line with the relevant provisions of the Hungarian Accounting Act. This shall also be made at least quarterly.

Special requirements upon REIT executives

The REIT Act contains special qualification requirements in respect of persons in executive positions at REITs .

The persons nominated to be elected or appointed as persons in executive position at the REIT:

  • Must have a college or university degree in finance, economics or law;
  • Must have at least three years of managerial experience (which should have gained either at a company conducting the same activities as that of the permitted activities of REIT, credit institutions, investment management companies, investment management trusts, insurance companies, venture capital funds managers, or at any other regulated property investment companies);
  • Shall have no prior criminal record;

Main benefits lie with special taxation rules

Based on the REIT Act, to vitalize investment activities, REITs are given various significant tax benefits compared to "ordinary" corporate entities.

As the most significant benefit both REITs and their Project Companies are exempted from corporate profit income and local business tax against profit achieved from their activities, including profit realized upon asset deals. (With regular corporate tax rate being 10 per cent of the positive tax base up to five hundred million forints, and 19 per cent of the positive tax base above. Regular local business tax for permanent commercial activities may rate up to an annual 2 per cent of the tax base.)

The shareholders of the REIT have to pay dividend tax or personal income tax on the basis of the amount of dividend distributed to them. 

Transfer tax upon the acquisition of real properties, pecuniary rights attached to real properties and acquisition of ownership/capital share in companies with holdings in real estate properties located in Hungary  by the REIT or its Project Company shall be subject to a very favorable transfer tax rate of 2 %, which otherwise has been applicable in respect of acquisitions by real property funds.