Unlocking Value: A Deep Dive into Hungarian Real Estate vs. European Bonds

Unlocking Value: A Deep Dive into Hungarian Real Estate vs. European Bonds

Just last week, a student who had attended one of my training sessions came to me, asking for my support in exploring the possibility of buying a flat for rental purposes. What an exciting opportunity to dive into!

We then started an analysis that delves into a fascinating comparison: investing in a Hungarian rental apartment versus a 20-year zero-coupon European government bond. The results highlight the crucial role that currency movements play in international investing.

The Steady Performer: European Government Bond

Our baseline is clear: a €100,000 investment in a 20-year zero-coupon European government bond consistently yields an Internal Rate of Return (IRR) of 3.20%. This option offers predictable, low-risk returns, making it a solid choice for capital preservation and risk mitigation.

The Dynamic Contender: Hungarian Rental Apartment (with HUF Depreciation)

The Hungarian apartment investment, while promising, presents a dynamic picture when considering the Forint's performance against the Euro. Let's look at a specific scenario based on the following assumptions:

In this scenario, where the Hungarian Forint gradually weakens against the Euro (meaning the EUR/HUF exchange rate increases by 2.5% annually, reaching approximately 655.45 HUF/€ in 20 years), the apartment's performance looks considerably different:

• Apartment IRR (with 2.5% HUF Depreciation): 1.91%

Here, the bond clearly outperforms the apartment. Despite local property appreciation and rental income in HUF, the depreciation of the Forint against the Euro significantly erodes your Euro-denominated returns. This illustrates the critical impact currency risk can have on international investments.

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Key Takeaway for Savvy Investors

This analysis highlights a crucial lesson: currency movements are a dominant factor in cross-border real estate investments.

• Risk-Averse Investors: The government bond remains your safest bet for guaranteed, albeit lower, returns, free from currency fluctuations and the complexities of real estate management.

• Considering Hungarian Real Estate: This scenario illustrates that even with favourable local market factors, such as property appreciation and rental yield, a consistent depreciation of the local currency against your base currency (the Euro) can significantly reduce your overall returns. The higher risks associated with real estate (e.g., liquidity, tenant issues, management) are not adequately compensated if the currency is depreciating.

Before you dive into international real estate, please carefully assess your currency outlook and risk tolerance.