Hungarian Investment Fund

A Hungarian Investment Fund, among other options, can assist third-country citizens in obtaining a residence permit. Explore the exact requirements and benefits this opportunity offers to learn more.

Hungarian investment fund: a path to residency?

A Hungarian guest investor residence permit can be obtained by a third-country citizen whose stay is in the national economic interest of Hungary. It is considered to be in the national economic interest – among other options – if the foreign investor invests in a unit, i.e. purchases an investment certificate issued by a real estate investment fund registered by the Central Bank of Hungary (CBH) with a value of at least EUR 250,000. Different countries have different rules for real estate funds, so in the following, we will review the characteristics of Hungarian real estate investment funds, and we will also cover the guarantees that protect investors.

What should I know about Hungarian real estate funds?

Basic characteristics

The Hungarian real estate fund is considered a legal entity. The special feature of this mass of assets with legal personality is that it does not have an organization or membership, so it is not capable of independent operation and decision-making.

It is represented by the licensed fund manager, as a result of which the fund cannot function without the fund manager. The investment fund therefore has legal capacity, and the fund manager provides it with the capacity to act. The legal personality of the investment fund is not created by registration in the register of the Commercial Court but in the register of the CBH.

Different categories of Hungarian real estate funds

Funds can be grouped in several ways:

• Term: Based on the term, it is possible to create a fixed- or indefinite-term fund.
• Operating form: The investment fund can also be typified based on its operating form. This classification is based on the method of marketing, i.e. whether the investment units are offered to a closed group of investors, a predetermined circle, or to the entire public, i.e. to anyone. A public investment fund is considered to be a fund for which at least one series of investment units has been placed on the market through a public offering.
• Exchangeability: There are open-end and closed-end funds in terms of the exchangeability of investment units. With open-ended funds, investment units can be bought and redeemed continuously. Redemption is therefore mandatory on the part of the fund. In the case of closed-end funds, the unit can only be redeemed when the fund is terminated or at the end of the term.
• Primary asset allocation: In business life, the investment policy followed by the fund managers is taken into account, that is, what the fund’s money is primarily invested in. According to the primary asset category, we distinguish securities funds (bonds, shares), real estate funds, venture capital funds, and private equity funds.
• Legal distinction: Finally, taking into account the European legal sources, a distinction can be made between the collective investment fund dealing with transferable securities and the alternative investment fund (hereinafter: AIF).

The real estate fund also belongs to the AIF category. The real estate fund can be open-ended or closed-ended. Investment certificates of open-end funds can be continuously redeemed during the term, while investment certificates of closed-end investment funds cannot normally be redeemed during the term. The real estate fund can be created both as a private and public fund, and as such its investment certificates can be distributed to both professional and retail investors.

Converted from Hungarian forints, the smallest starting equity of the public real estate fund is approximately EUR 2,600,000, while in the case of a privately established real estate fund, even half of this amount is sufficient.

In what assets can a Hungarian real estate fund invest?

A Hungarian real estate fund is restricted to investing in assets that are legally defined, which may include the following:

• domestic or foreign real estate, including components related to the real estate;
• shares in a real estate company;
• property rights related to real estate;
• securities, money market instruments, foreign currency, deposits;
• derivative transactions;
• movables that are necessary for or facilitate the intended use, operation, or maintenance of the given property.

Requirements for participants in the Hungarian Guest Investor Program

In the case of the Guest Investor Program, it is also a requirement that at least 40% of the net asset value of the real estate fund be made up of investments in residential real estate in Hungary. This means that the real estate investment fund is allowed to invest in commercial real estate but 40% of the assets shall be constituted by residential property.

The equity capital of the fund is the capital equal to the product of the nominal value and the number of units at the time of its inception, which is the same as the net asset value of the investment fund during the operation of the fund. The part of the assets per investment unit is shown by the daily exchange rate of the investment unit.

Asset allocation criteria and income sources for real estate funds in Hungary

Real estate funds must hold at least 15% of their assets in quickly accessible assets (e.g. cash in a bank account, time deposits, government securities), i.e. liquid assets. Real estate funds must hold at least 20% of their liquid assets in Discount Treasury Bills issued by the Hungarian state. If the investment fund has bond investments, it must hold at least 95% in government securities.

The income of the real estate fund typically comes from the sale and rental of real estate. The fund manager must prepare a management policy for the given capital fund, which includes the most important rules for the management and operation of the investment fund and lays down the investment principles.

What is the role of the real estate fund manager?

In the investment legal relationship, the fund manager is the most important factor in the relationship between the investor and the fund. Before starting its operation, it must obtain a license from the CBH. The task of the fund manager is to represent the fund to investors, the CBH, and third parties, and to invest the assets in the fund within the framework of legal regulations. During the investment activity, the fund manager therefore acts on behalf of the fund. The fund manager creates a fund by investing capital and then manages it. A fund manager can even manage several funds.

Only those fund managers who are on the list of qualified market operators will be eligible to participate
in the Program. This list of qualified market operators is maintained by the Contitution Protection Office
(CPO) and the CPO will include in this list the fund managers who apply for inclusion on a basis of a
successful prior national security screening.

The preliminary qualification consists of a company check, a personal check and an examination of the economic operator’s field of activity.

Furthermore, in order to participate in the Program, alternative investment fund managers must be authorised to manage at least the following asset values:

• EUR 100 000 000
• EUR 500 000 000, where the AIF’s portfolios consist of AIFs which are not leveraged and for
  which redemption rights cannot be exercised within five years of the date of initial investment in
  certain AIFs.

In an additional case, non-alternative investment fund managers may also participate in the Program,
provided that they manage a real estate fund with an asset value exceeding EUR 600 000 000.

Fund management and regulations in real estate investment

After the fund manager has collected the appropriate amount of capital, he decides (independently of the investors, but based on the fund management regulations accepted by the investors) what to invest in, then supervises the investment, and in the event of a successful investment, pays the investor a yield or reinvests the yield. The fund manager is entitled to remuneration for the fund management activity, which is typically a predetermined share of the fund’s profit, thus the fund manager becomes interested in the fact that the investments made by him result in a profit.

The fund manager of the real estate fund must have a starting capital of at least EUR 300,000. If the value of the assets it manages exceeds EUR 250,000,000, it must increase its capital by 0.02% of the amount exceeding EUR 250,000,000 (up to a maximum of EUR 10,000,000).

In connection with the guest investor program, only a fund manager who has a premise security certificate or is on the list of the Office for the Protection of the Constitution is allowed to act.

The fund manager is obliged to appoint an independent custodian to carry out tasks related to the fund. Deposit management is usually carried out by a bank or a specialized financial institution, but it must have a special license for this activity. The custodian’s task is to safeguard and manage the securities owned by the fund, to manage the fund’s bank account/securities account, to supervise the fund manager, and to perform technical tasks related to the sale and purchase of investment units and the payment of yields. The custodian is organizationally separate from the fund manager and an investment fund can only be managed by a custodian.

The role of investment certificates in Hungarian real estate funds

Each investor’s share of the given wealth is embodied in the investment units. At the beginning of the legal relationship between the investor and the fund, the placing on the market and the subscription procedure are the most important steps. The essence of the process is that an investment certificate is put on the market, which the investor acquires and subscribes to.

The investment certificate is a transferable security issued in a series by the issuer in a specified manner and form, securing a claim against the investment fund and other rights specified in the management regulations of the investment fund.

The following contents are essential for the investment certificate to be valid:

• the name, the registered office, the operating form, and the allowed investors of the investment fund;
• type of investment fund (closed-end, open-end), type (public or private), term;
• nominal value, security code (ISIN identifier) ​​, and serial number of the unit;
• the owner’s name;
• the rights of the owner or the holder of the investment unit, defined in the management regulations of the investment fund;
• date of issue, register number, and date of registration of the investment fund.

The investor is obliged to pay the nominal value of the investment certificate when acquiring the security for the first time.

KELER: securities production and management

KELER is a key player involved in the production of securities. KELER is a specialized credit institution that also performs a central securities depository function, within the framework of which it facilitates the dematerialized creation of securities issued in Hungary, the issuance of the securities code (ISIN identifier), and the registration and management of central securities accounts.

The investment certificate can be produced in two ways, as a printed document or as a dematerialized security. Before the production of the investment certificate, it is necessary to request an ISIN identifier for the given securities series. Printing can only be done by a printing house licensed to produce securities, the CBH keeps a register of these printing houses.

As a general rule, the investment certificate can be regarded as a security embodying a debt relationship, but at the same time, due to the property service obligation, it also partly carries the characteristics of securities embodying a membership relationship. Due to the characteristics of the former, the transfer of the investment certificate can be carried out by assigning the claim to the fund.

What rights do investors hold in Hungarian Real Estate Funds?

The investor is the holder of the security. Based on investment units, the most important right of the investor is that he is entitled to his part of the fund’s assets based on his proportional unit in the fund. The goal of the investor is to increase the invested property while taking risks, that is, he wants to achieve a yield on his investment. In practice, this is realized in such a way that the investor is paid a yield from the fund on the investment units (distributed yield). The yield payment can be made from the capital increase of the fund, as well as from the capital represented by the nominal value of the investment units (in case of capital transfer).

Investors also have the right to request information about the operation of the fund and the fund manager. At the same time, the investor does not have the right to vote either about the fund or the fund manager. Based on this, it is clear that the investment certificate provides the investor with only limited rights, primarily of a financial nature. At the same time, it is appropriate to point out that in other European countries, investors can have more ownership rights, even those of a shareholder nature.

In the case of a public, open-ended real estate fund, it is also expected that at least 15% of the value of the assets considered to be owned by the real estate must be invested in investment certificates with a long redemption period, i.e. series with a redemption period of at least 180 days. The redemption period for newly issued investment units is at least T+180 days. This means that anyone who has invested in a new real estate fund and later redeems it, will have to wait 6 months for their investment.

In the case of the Guest Investor Program, the applicant must hold the investment certificate of the real estate fund for at least 5 years from the date of acquisition.

What are the key benefits of opting for a real estate fund in Hungary?

Buying a Hungarian real estate fund’s investment certificate instead of real estate has many advantages, it takes a lot of administrative and investment decision burden off the investor’s shoulders. In the case of investment funds, it can generally be said that the investment decisions are made by the fund manager instead of the investor – which the fund manager must make for the benefit of the investor – so the investor only needs to enjoy the return on his investment, the associated professional decisions are made instead by a team of experts.

It is worth investing in a real estate fund for the following reasons, among others.

• The properties included in the real estate fund’s portfolio are continuously evaluated by a real estate appraiser commissioned by the fund manager.
• To acquire the property, the investor does not have to take out a loan, but the real estate fund takes out a loan if necessary.
• The selection of properties to be included in the fund’s portfolio is not the responsibility of the investor but is carried out by the team of experts working at the fund manager, just as the utilization (renting, operation) and sale of the properties owned by the fund is handled by the fund manager and not by the investor.

What are the risks of Hungarian mutual funds?

Liquidity risk

Liquidity risk is related to the harder sell ability of real estate. In the event of a sale, it may be more difficult for the fund manager to complete the redemption of the investment units and may therefore suspend it. For this reason, the rule presented above was introduced, according to which a redemption period of at least T+180 days is expected.

Rental risk

Considering that the profit of real estate funds can come not only from the sale of real estate but also from their utilization and rental, it is therefore a kind of risk whether the real estate in the portfolio can be properly rented out by the fund manager. Fund managers usually try to minimize this risk by using safeguards built into lease and operating contracts.

Valuation risk

Considering that in the case of real estate funds, the net asset value per share is established by the real estate appraiser based on the value of the real estate in the fund’s portfolio, the difficulty of the current valuation of the real estate in the ever-changing market conditions is, therefore, a kind of risk. For this reason, the real estate fund must commission a real estate appraiser who converted from Hungarian forints to approx. has a property guarantee of at least EUR 650,000.

Privacy risk

The availability of investment certificates and deposit amounts is a priority. Investment service providers are obliged to send the CBH the balance of securities and customer accounts, as well as the list of securities, every month. In the online application operated by the CBH, account holders have the opportunity to check the statement sent to them with the data reported to the CBH.

Investor Protection Fund: a tool for risk reduction

The institution of compensation is meant to mitigate the damages that investors may suffer as a result of the inability of the member of the Investor Protection Fund (IPF) with which securities or money have been deposited to issue their rightful claim. This insurance covers commission, commercial, and portfolio management activities, as well as securities custody, custody, securities account, and customer account management services. IPF pays compensation up to a maximum of EUR 100,000 per investor and in aggregate.

How are Hungarian real investment funds taxed?

The fund is a legal entity, but it is not subject to corporate tax, therefore the fund is not liable to pay taxes on the profits generated in the fund. The profit only “flows through” the fund, since the purpose of the fund is to pay a yield to investors. In this way, after the profit generated in the fund, the investors will be liable for tax payment based on the yields received, but only if a payment is made to them.

The investor can typically receive income thanks to his investment certificate in three cases: the investment certificate can be paid a yield during the term, in addition, a yield can also be paid at the end of the term, and finally, income can also be generated in connection with the sale of the investment certificate.

If a yield payment is made based on the investment certificate issued by the real estate fund. In such cases, the yield is classified as a dividend according to Hungarian tax rules. Hungary applies a withholding tax of 15% to dividends paid to foreign individuals, but this rate can be reduced if there is an agreement between the investor’s state and Hungary on the avoidance of double taxation. According to Hungarian tax rules, the profit realized on the sale of the ABA investment unit is considered interest income. A 15% withholding tax is also applicable to this, which can be overridden by tax treaties.

Get expert assistance for your Hungarian real estate fund investment!

Considering investing in a Hungarian real estate fund or joining the guest investor program? Do not navigate it alone. Considering investing in a Hungarian real estate fund or joining the guest investor program? Do not navigate it alone. Most foreign investors prefer seeking professional assistance for real estate funds and a Golden Visa in Hungary. Crystal Worldwide’s team of investment fund and immigration experts will help you with related tax, financial, and legal information. Through our office in Budapest, we will prepare a personalized offer for you and assist you in investing into the proper Hungarian real estate fund and obtaining a guest investor residence permit. Contact us using the form below!