Real Estate investment opportunities in 2022

Is real estate still a profitable investment opportunity in 2022? This question is on the minds of many, especially as the geopolitical processes around us and their economic consequences remain uncertain. What is already clear is that the inflationary processes, which have been with us since last year, will strengthen and accelerate. The rise in energy and raw material prices caused by the war and their ripple effects intensify the inflationary impact. For those seeking investment opportunities with available capital, real estate is still an excellent option.

Real Estate Investment

Real estate investment is capital-intensive. Some buyers are looking for reliable, stable, and predictable returns on their liquid capital, while others embark on similar goals with some need for credit. If someone takes out a loan for real estate purchase, they must always consider whether the interest on the loan will eat up a significant portion of the return.

It is important to note that real estate is not considered a liquid investment. This means that the invested capital cannot be withdrawn or reallocated from one moment to the next. The property must be sold to access the capital, and depending on whether the seller is firm on the selling price, it may take weeks or even months to find the right buyer.

Real estate is not liquid, but it provides reliable, stable, and predictable returns.

A significant portion of properties purchased for investment purposes are rented out. This can be either short-term or long-term. The most popular short-term rental method is through platforms like Airbnb, although in 2020, the government amended commercial laws, with some Airbnb regulations being transferred to local municipalities.

“Short-term rentals are most commonly found in the inner districts of Budapest, with the highest rates in Districts V, VI, and VII. (An interesting finding of the study is that the rise in rental prices is most closely tied to districts (II, XII, XIV) where Airbnb apartments are almost nonexistent. The study also suggests that rental price changes are strongly influenced by the percentage of apartments in a given district that are offered for long-term rentals.” (Source: Index)

Some municipalities have introduced stricter rules, such as tying parking space requirements to the number of rooms in an Airbnb apartment.

The COVID-19 pandemic significantly impacted tourism, leading to oversupply in the Airbnb market in 2020. Some property owners switched to long-term rentals, while others sold their Airbnb rental apartments.

Those Airbnb landlords who survived the tough period caused by the pandemic can now continue short-term rentals with fewer competitors.

Long-term rental contracts provide the advantage of a steady and stable income for the property owner throughout the rental period.

In Budapest, in 2022, tenants are not only tourists but also university students, Netflix production actors and crew members, foreign businesspeople on assignments, workers, or athletes who enjoy the city’s vibrant atmosphere.

Real Estate Investment Against Inflation

In 2022, inflation expectations continue to rise. To protect against inflation, investments should be made in real assets like agricultural land, precious metals, or real estate.

Real estate investment is an excellent alternative to protect against inflation.

Real estate can bring profit not only through sales but also through rental income. Rental contracts usually include periodic adjustments to rental rates in line with inflation.

Those with savings are turning to real estate investments (among other options) to guard against higher inflation, which is expected to push property prices up. This could be somewhat countered by rising mortgage interest rates, as not all property purchases are made with equity alone.

Many are moving up their plans to purchase property because of expected price hikes in mortgage loans, a result of the interest rate increases used to curb inflation.

A good indicator of the current situation is that those fleeing to real estate investments for protection against inflation are making decisions much faster:

“While last year, it took an average of 144 days for a family house to find a new owner in Budapest, by early March, it only took 65 days.” (Source: www.penzcentrum.hu)

Construction Cost Changes

Construction work is heavily dependent on materials and skilled labor, both of which have seen continuous price increases, which could result in further price hikes for newly built properties. This trend will also affect the market for used homes, potentially increasing demand and home prices as well. According to the Hungarian National Association of Construction Entrepreneurs, there are many challenges in the construction industry, including a shortage of skilled labor, and material prices could rise by 10-15% by the end of the first quarter of 2022 compared to the end of 2021.

When construction prices rise, this increase is reflected in the price of new apartments, which also drives up the prices of used apartments.

In the optimal scenario, real estate investors can keep pace with inflation through the property’s value appreciation.

Wage Changes

The increase in the minimum wage can lead to a rise in average salaries. This wage increase can affect the housing market as well, with the key question being whether the rise in average salaries will keep pace with the increase in the prices of used properties and mortgage repayments.

Results of Real Estate Market Changes

In recent years, many people have been hesitating to proceed with property purchases due to rising property prices. A correction was expected due to high prices, but instead, further price increases are visible in the market. Before making a decision, several factors must be considered:

• How will property prices evolve?
• How will interest rates and conditions for loans evolve?
• How will wages develop?
• What level of uncertainty or risk is there in the market?

Regarding real estate price increases, prices have been generally rising in recent years, and the effects of the coronavirus pandemic caused a temporary slowdown, but now the increase is continuing.

With regard to home loans, significant price hikes are expected in the coming months, which will reflect in the loan repayments.

According to Bankmonitor’s analysis, the following table illustrates the current and future trends in monthly mortgage repayments for a 20 million HUF loan:

(Source: www.bankmonitor.hu)

In recent years, according to KSH data, the average income has increased by 8-10%, but due to the expected slowdown in economic performance and significant uncertainty, wage growth may be more moderate.

Due to general uncertainty and inflation fears, a larger number of real estate investors could push property prices up. This uncertainty is not limited to the Hungarian market but is felt globally, making it uncertain whether buyers will hold off or proceed with property purchases.

Long-Term Property Value Growth

Real estate is a stable investment, and it is important to emphasize that, in addition to the available rental income, long-term property value appreciation is also a significant factor in return calculations.

Between 2010-2021, data from the Hungarian National Bank clearly shows the extent of property price increases:

(Source: MNB)

Hungarian Property Prices – Real Estate Investment Consideration

In return calculations, it is essential to account for both rental income and the long-term appreciation of property prices!

Is Real Estate Investment Worth It in 2022?

If you have available capital and do not need to worry about expected rising mortgage rates, it is definitely worth considering real estate purchase for investment purposes in the current market situation.

In recent months, the number of property buyers purchasing for investment purposes has increased significantly in Budapest, and inflation protection has become a notable factor in the real estate market.

According to a Portfolio article from October 2021: “The calculation shows that with a 3% expected property price increase, yields of 4.9-6.7% can be expected on the used property market in Budapest. For new properties, yields ranged from 4% to 6% in Budapest.” (Source: www.portfolio.hu)

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Our colleagues have remarkable professional experience, enabling them to provide complex and exclusive services to our clients.

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