In the summer of 2024, after the launch of the migration platform, Hungary will introduce the new edition of the GIP (Guest Investor Program) that was approved back in January. Participants in the "golden" visa program from non-EU countries can obtain a Schengen visa and a 10-year residence permit by investing 250,000 euros in a real estate fund. GR analysts consider this the most financially advantageous way to obtain residency.
Hungary is considered as a country for liquid investments and relocation for permanent residency (PR). In this safe country, investors can invest in relatively inexpensive real estate in the historic part of Budapest and new developments. In 2023, the price per square meter reached approximately €4255. High rental rates for many become an additional source of income. Those wishing to obtain permanent residency can participate in the updated program through investments in real estate investment funds.
How does it work?
Organizations operate under specific laws in different countries. In Hungary, there are 205 funds with legal entity status. They are registered in the Central Bank's registry and endowed with legal subjectivity rights. Depending on their enforceability, rights can be open, allowing the purchase of shares at any time, or closed, where capital can only be returned after the organization ceases activity. Auditors at Global-Relocate note that closed investment organizations typically yield higher returns compared to purchasing real estate for rental purposes.
The organization can have both private and public forms. Retail and professional investors can become certificate holders. The initial capital of a state fund is 2.6 euros, while for a private fund, half of that amount is sufficient to open. After making the nominal value, investors become owners of a package of securities. The real estate portfolio of the shareholder includes:
- derivatives;
- property rights;
- movable property;
- quickly accessible assets in the form of deposits or funds in accounts.
Foreign investors' capital investment in residential real estate in the country accounts for up to 40% of the asset value. Moreover, organizations allocate up to 5% of liquid assets into government bonds.
How is management organized?
The fund's income comes from renting and selling real estate. The licensed manager is responsible for internal policies. They serve as a liaison between the organization and shareholders, develop overall strategy, oversee administration, and make decisions.
They evaluate real estate in the fund's portfolio, list it for sale when favorable market conditions arise, and after pooling funds, invest in properties. After sales, they distribute dividends or reinvest them, receiving a share of the profits.
The manager delegates part of the work to the depository. The latter manages the escrow account at a bank in Hungary, protects investors' capital, manages accounts, supervises activities. Responsibilities also include buying and selling units, distributing profits.
Investment certificate
The relationship between the shareholders and the fund is of a legal nature. It involves the manager issuing certificates for investors to purchase. It represents a dematerialized security or a printed document from the issuer for asserting property claims against the fund:
- full information about the organization;
- operational form and type;
- owner's personal data;
- serial number;
- owner's rights;
- nominal capital;
- registration number.
The maturity period of the newly printed certificates is at least six months. This means that after investing in the fund, the investment lock-up period is 180 days. In the case of participation in the 'Guest Investor' program, the applicant must have acquired it five years ago.
For the purchase of apartments or houses, taking out a mortgage to cover the 'golden' visa of €500,000 is prohibited, but if funds are insufficient, the fund arranges a loan.
Risks and guarantees
Analysts at GR warn that before investing in a Hungarian fund, one should consider the pitfalls, mechanisms to protect foreign investors. Among the common risks mentioned by experts are the inability to exercise direct control over assets, lack of profitability guarantees. Attempting to quickly sell real estate in a rapidly changing market results in investors losing part of their capital due to decreased asset liquidity.
If a quick sale fails, the manager encounters difficulties in completing the redemption of shares, and therefore suspends the process. Considering that the fund's profit comes from leasing residential property, and the regulator earns from advantageous leases, it does not seek profitable sales opportunities.
Advantages
Global-Relocate auditors note that financial investments always carry the risk of loss. Insurance provides a guarantee of covering potential losses. The compensation mechanism aims to replace damage in case of force majeure circumstances and non-performance of commercial obligations by the fund. Risk insurance compensates for losses due to asset depreciation, incompetent management actions, and financially protects depositors.
Other fund preferences:
- Simple buying and selling of securities and shares: Compared to direct real estate investments, they offer greater liquidity.
- Control: The service provider regularly reports to the Central Bank on assets and client accounts. Depositors can monitor reports through the regulator's online application, verify information, and stay informed about business activities.
- Low risks during hyperinflation: Real estate investments allow shareholders to profit from rent regardless of market conditions.
Taxation
Despite its status as a legal entity, the fund is not subject to corporate taxes and does not pay interest on profits. However, investors bear personal financial responsibility for injecting personal capital during and after the certificate's expiration or sale. Dividends are subject to a 15% tax rate upon receipt of income by regulatory authorities. If a double taxation agreement exists between Hungary and the foreign investor's country of residence, the rate is adjusted downwards.
The previous project required the purchase of real estate for obtaining a residence permit for 155 euros. The comparatively low investment threshold attracted immigrants from China and Russia, sparking controversy in the media and among voters, which displeased the authorities. It is expected that for the extension of a residence permit after 10 years, foreign investors will again be required to contribute 250,000 euros to the fund.