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01 February 2021

New residential projects in rust zones: the hero the Hungarian residential construction industry deserves after COVID?

Thanks to numerous governmental measures, such as the introduction of the 5 % VAT rate, favourable conversion of foreign currency loans, baby waiting loans and VAT refunds, the number of Hungarian residential construction projects increased by the end of 2019. 

Then the VAT rate was again increased to 27% for new residential projects, leading to a decline, and from February 2020 the COVID-19 pandemic caused a further downturn. To stop this trend, in July 2020 the Government of Hungary announced new measures to boost the residential sector.

Rust zones ("rozsdaövezet") are former industrial areas that have not been used since the 1980s. These areas have good connections to public roads and infrastructure and are equipped with public utilities, meaning that their redevelopment into residential areas comes with a high investment potential and can be beneficial for the population.

The desire is for new residential developments to be completed as brownfield investments within the new Hungarian city home building scheme ("Városi Otthonteremtés Program"). The goals are threefold: (i) stimulate the residential market and support real estate developers and new homeowners; (ii) retain blue-collar workplaces; and (iii) redevelop rust zones in line with eco-design and sustainable city planning policies.

The new act adopted by the Hungarian legislator in July 2020 introduced many changes to the construction industry, chief among them to rust zones, i.e. areas typically consisting of government designated brownfields equipped with infrastructure, public utilities and roads, or where such features may be developed in a sustainable way and the property redeveloped into residential, office or retail buildings.

What will increase the attractiveness of this programme for real estate developers? Real estate developments in a rust zone will be automatically deemed an investment important for the national economy, which will significantly reduce red tape and provide unique opportunities outside the standard regulations. Under this exception, authorities may derogate from national town planning, construction, fire safety, environmental and monument protection regulations, leading to more flexibility for the development project. Embracing technological innovations (e.g. new methods of communication, building information modelling, drone technology, augmented and virtual reality) will also help the construction industry reduce costs, which have been rising quickly due to stricter health and safety regulations.

And what are the financial advantages? The magic word is 5 % VAT without any time limitation, which will ensure the real estate developers' interest and predictability in all rust zone projects. The 5 % VAT rate will apply to the sale of any apartment with useable floor space of less than 150 m2 in a residential building erected on a rust zone. Furthermore, the apartment must be new, meaning that either it has yet to be used or two years have yet to elapse from the date of the final and binding occupancy permit. The rental of such apartments will also be exempted from VAT.

The new economic programme will boost the construction industry and increase the number of residential developments in rust zone areas. This could be an interesting investment alternative for Hungarian or foreign real estate investors.

authors: László Krüpl, Adrián Menczelesz


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