It is important to understand that Hungary, unlike other former Eastern Bloc countries, never entirely eliminated private ownership of real property. Individual persons were permitted to own residential property even during the Communist era, when it was regarded as a form of "personal" rather than "private" property.
Large scale transfers of real property to private owners began in 1990 when the Parliament enacted a law on the transfer of state-owned properties to local governments.1 This law basically had the effect of dividing up all state-owned properties among the national government, the City of Budapest and the various local governments throughout the country.
Local governments were given the mandate to privatize real property, primarily residential property. In addition, local governments acquired a large proportion of the retail properties in towns and cities, however, these have tended to be leased to businesses rather than sold. The local governments also received shares in state-owned enterprises that were transformed into companies for privatization. These shares were intended to reflect the value of the real properties used by such companies in the local governments' jurisdictions. Such real properties thus came into the ownership of the transformed company.
One of the peculiar outcomes of this scheme of privatization has been that many of the significant title issues in Hungary have arisen between competing interests at the various levels of government, as opposed to competing claims of former, pre-Communist era owners and existing owners or users of property.
Although most of the planned privatizations have already been carried out, the national governmental authority responsible for privatization, the State Privatization and Asset Handling Company (or "APV Rt." as its known by its Hungarian acronym), the City of Budapest and local municipal governments continue to hold portfolios of property, and these properties from time to time are put up for sale.
Real properties to be sold by the APV Rt. are put up for competitive tender.2 Such tenders are published on a fairly regular basis. Properties put up for sale by the APV Rt. (or its predecessor agencies) are sometimes sold outright, and in other cases sold through holding companies organized especially for the purpose of transferring ownership of the property and related assets, such as fixtures and furnishings.
The APV Rt. should not be regarded as the most important source of properties for potential acquisition. Recently privatized companies, in particular those that need to raise cash or wish to dispose of non-core assets, as well as local governments, tend to be better sources of properties for acquisition.
Agricultural Land
Agricultural land is important for new development, and the legal situation regarding the privatization of agricultural land is complex. The Parliament enacted a law in mid-1994 that essentially placed a moratorium on all agricultural land sales except for parcels of 300 hectares or less, and only then if sold to Hungarian natural persons. Foreign companies and persons as well as Hungarian companies, even if owned by Hungarians, are forbidden from acquiring any agricultural land.
The law has not completely put a stop to the trade in agricultural land, however as many agricultural land assets are held by companies, and there is still active trading in the shares of these companies, as such transactions are not explicitly covered by the moratorium.
With the prospect of European Union accession within a few years time, Hungarian agricultural land has become an attractive (although speculative) investment opportunity for many in Western Europe, in particular for farming interests.
Dealing With Authorities
The local municipal governments are the principal authorities responsible for development and regulation of the use of property. The local municipal governments (of which there are 23 in Budapest), and the municipal governments of towns and outlying cities have responsibility for a large range of matters concerning property. Their authority includes the granting of building permits, consenting to proposed changes in usage designation, and approving applications for direct foreign ownership. Local governments also possess the power to tax property.
As previously mentioned, the local municipal governments continue to hold and manage portfolios of properties, and thus are participants in the real property market as well. Many have formed property management subsidiaries which generate substantial income.
Local governments were only recently granted the authority to approve foreign ownership applications. Direct foreign ownership of land in Hungary has been possible since 1990, however, Ministry of Finance approval was previously required. Beginning in 1996, this approval authority was transferred to the local governments.3
Under the system adopted in 1996, local governments may approve proposed acquisitions of real property by foreign natural persons provided that such acquisitions do not violate municipal or other public interests. During the first two years of this system, approvals were routinely granted. However, during the past year - perhaps because of rapidly increasing real estate prices - a number of local governments have begun to refuse to approve acquisitions by foreigners.
In order to avoid foreign ownership limitations and delays in government approval, a preferred method for real property acquisition by foreign investors has been, and continues to be, through the use of an acquisition vehicle, such as a Hungarian limited liability company. The property to be acquired is first contributed to a Hungarian company, and the shares of such company are then transferred to the acquirer. No special approvals are required for such acquisitions.