Go with the flow of the Danube

The house market in Hungary's capital is both affordable and set for strong price growth, writes Graham Norwood

The feverish world of property investment in Eastern Europe has perhaps only one significant market boasting long-term stable price rises and reliable buy-to-let returns - Hungary.

While cheap mass-produced flats in Bulgaria and ever-more exotic places such as Estonia have attracted the headlines and speculators, Hungary's capital Budapest is attracting more serious investors.

"It's the most popular East European location for informed British buy-to-let purchasers," says Liz Symes of Connect IFA, a mortgage broker advising on homes in more than 30 countries.

Property prices rose from a low base in the early 1990s when Hungary held its first post-Communist elections. Even after 10 per cent-plus annual price rises in the past decade, typical Budapest homes remain half the price of comparable examples in London, Paris or Berlin. And, unlike Bulgaria, Hungary's corporate rental market is very strong.

Its economy liberalised long before EU accession in 2004, and the city council boasts that 44 per cent of multinational companies with central European subsidiaries use Budapest as their local base. There is widespread anticipation of big growth in house prices when Hungary adopts the euro in about 2010.

Shlomi Shlomovitz of Casaro Hungary, a Budapest lettings agency, says there has been a rise in student renters this year, as well record numbers of staff being brought in by multinational firms such as IBM, General Electric and Microsoft. "Returns should be between 6 and 15 per cent per year for buy-to-let investors," he says.

The freelance TV producer Liz Bunton, from Battersea in south London, has bought a flat in a new development in the 14th district, close to Budapest's financial area. Bunton, who also owns a property in Slovakia, says she chose Budapest for capital growth.

"I've invested in fast-moving economies where the GNP is forecast to grow at a strong rate. At about £60,000 per investment, I know I'm getting value for money and expect prices to rise substantially in three or four years," she says.

Many investors take a different route, and buy older homes for conversion. Most Budapest homes were built between the 1880s and the early 20th century, but due to subsidised rents and state ownership until the early 1990s, they have been roughly treated by tenants.

There are 800,000 flats in the city, but 25 per cent need renovation, estate agents claim. At best, these apartments are shabby-chic; at worst, just shabby. Typical flats needing work include a one-bedroom flat in the 9th district for just £41,380 (Central Homes, 00 36 1354 1254) and one in the 7th for £63,000 (GDSP, 00 36 1288 0985).

On the edge of Budapest are country houses with large apartments ripe for conversion; one is on sale through Heath Properties in Buckinghamshire for £96,500 (01296 395 800).

One specialist firm in the city, New Budapest Renovation, runs its website in English and has English-speaking site foremen.

For investors wanting work completed before they buy, there is no shortage of new-build and renovation schemes. The largest new-build development is Marina Part in the 13th district, where 4,000 homes will be built near the Danube. The largest regeneration scheme is the Corvin-Szigony project in the 8th district, which will see the conversion of 1,400 period homes and the building of 2,500 new ones.

Typical new-build properties being sold to Britons include City Home, a block of 96 mainly one-bedroom apartments over eight floors, with sauna, pool and 24-hour concierge, in downtown Pest (from £68,200, Savills, 020-7877 4700). Also in Pest is Istvan Park; 280 new flats, mostly small, starting at £45,000 (Letterstone, 020-7348 6065).

What new and older properties have in common is strong potential growth for investors because of Hungary's booming economy. Pricewaterhouse Coopers says the country should enjoy 4.5 per cent growth in 2005, and again next year, with the general housing market and the buy-to-let sectors both benefiting.