Thousands of flats pour into the rental market - Hotel rooms are available for long term rent in Budapest

Following the collapse of the short-term accommodation market, how many property owners switched to long-term rentals? How do owners cope with the current situation?

By the middle of March previous bookings had practically run out, and no new guests had arrived. Accommodation booking sites consider the pandemic to be a case of force majeure. Airbnb, Booking.com and Szállás.hu all refunded the paid amounts after cancellations.

In response to the situation some owners left their apartments empty in case the crisis winds down by the summer months, though this proved to be a wrong concept.

Tourism in Budapest is expected to be the last to restart, as restrictions regarding foreign travel are still in place, and domestic tourism to Budapest is negligible for the airbnb-type accommodation market.

There are owners who offered health workers their vacant apartments, while others decided to try medium or long-term solutions and finally rented out their apartments for 3 or 4 months, hoping that tourism will pick up from July.

As a result of all this, thousands of homes poured into the market in March and April, forcing down rents considerably.These owners will be disappointed since tourism is not going to recover this summer, so they will have to either extend the short-term contracts or look for new tenants. Because many people are afraid of a second wave of the pandemic, they may also decide to rent out their properties, although originally intended for short-term rental, until next March. In light of this, the traditional rental market may continue to be oversupplied for another year.

How can rental prices change this year and next?

The market for short-term accommodation has completely collapsed, so these flats have appeared in the traditional, longer-term rental market.

In addition to this, with the complete shutdown of tourism, hotels also began to rent out rooms for a period of a few months quite cheaply. Currently, you can rent a hotel room for a month for up to 50-70 thousand forints. So, the competitive environment traditional homeowners have to compete in has become increasingly fierce.

All this caused the price of apartments for rent in the capital to fall by 20-40 thousand forints, depending on the price category. Many tenants are now deciding to move to another rented apartment which is cheaper, or move to a more central location from the outskirts as the rents are lower now.

If things go well, we can reach last year's tourist traffic again next summer. This scenario may also be supported by the fact that a number of events have been postponed until the next year, which can generate significant tourist traffic for 2021.

Therefore, in the short-term housing market rents can catch up with last year’s levels again in the middle of next summer.

However, there is now considerable uncertainty about how strong the competition will be, i.e. how many homeowners will return to the Airbnb market again.

In parallel with the subsequent resumption of short-term renting and the reorganization of supply, prices may also begin to normalize in the traditional rental market. In July and August, demand from students in higher education may also lead to a new increase in rents.

How about investor demand? To what extent are investors set back by the appearance of MÁP Plusz or the inconsistent regulations regarding short-term accommodation rentals? 

Even before the crisis there was a visible slowdown in the market. In addition to the intensifying competition, the appearance of MÁP Plusz and the anti-market measures taken by the municipalities in the city centre both contributed to the decline in investor demand.
As far as I see, the biggest problem is with the regulations. Municipalities of the downtown districts have made it virtually impossible for new players to enter the short-term rental market legally, so a lot of owners have chosen to operate illegally.

Before the crisis, an annual yield of around 10 percent could be achieved in the Airbnb category on larger homes in the centre.At present, however, new owners cannot meet the complicated and unclear regulatory requirements of the municipalities in districts 5, 6 or 8. As a result, investor demand may decrease significantly, most of which may land in MÁP Plus.

This phenomenon also has a negative effect on the renewal of the housing stock, as many investments will be cancelled because of this. It should not be forgotten that in the early 1990s, a significant part of the inner districts was rather dilapidated, and, among other things, it was the increase in tourism and investor activity that greatly contributed to an improvement in this regard.

How do government measures help homeowners?

Several of the government’s economy protection measures announced so far have had a very positive impact on the sector. The most important one is the moratorium on loan repayment.

On the other hand, the suspension of the tourism development contribution until the end of June does not help as there is no income from rentals. For homeowners in Budapest the fact that they are exempt from tourist tax does not mean a lot either, since tourism seems to restart in the countryside first. These two measures would be a real relief if they were extended until the second half of 2021.

In your opinion, what measures could be taken to curb illegal businesses?

The Association of Hungarian Apartment Owners fights to prevent illegal advertising on booking sites. Owners evade paying tax on 25-30% of the apartments for rent in the Airbnb market.Currently, all accommodation, from campsites to private accommodation to hotels, has to be registered at the National Tourist Information Centre. Occupancy data must be sent to this centre on a daily basis. The Hungarian Tourism Agency, the Tax Office and the Central Statistical Office can see this way how many guests are staying in which accommodation or how many tourists are visiting Hungary.

We recommend that the government require accommodation booking platforms to permit advertising on their platforms only for accommodation providers who are registered with the National Tourist Information Centre. In our view, this measure could be effective in curbing illegal operations.

At the same time, the local regulatory and reporting systems of municipalities related to short-term accommodation providers could be simplified and standardized. From this, the state, the market and municipalities would benefit as well.

How many apartments were involved in the short-term rental market before the crisis in Budapest and nationally?

The category of ’private and other accommodation’ counts 40,000 units nationwide. These include properties intended for short-term rent, as well as apartments in Hévíz or ’Zimmer Frei’ rooms in Balatonföldvár. In Budapest there are roughly 16,000 units in this category.

What yields could be realised on short-term apartment rentals so far?

Before the pandemic, flats in the city centre could be rented out for short-term accommodation at gradually declining yields. Although the number of guest nights in Budapest hit record numbers last year, the number of apartments for short-term rent expanded at an even faster rate. Competition has intensified considerably, which has curbed the rise in rental fees. Apart from this, real estate prices rose too fast and so rental fees could not be raised intensively enough to keep up with this surge.

All this made many owners consider whether the gap between short- and long-term accommodation rentals is still big enough so that it is worth the significantly more work needed.
For a 3-bedroom apartment (roughly 70 square metres), a 10% yield was realistic on the Airbnb market in the past few years. In the case of smaller studios this yield was typically lower.

This was so, because 80 percent of the Airbnb market is made up of smaller homes, so the competition is bigger among these.

In addition, in larger apartments the cost per guest is lower and operating costs are also more moderate.

For example, a one-room studio apartment in the city centre used to generate 300,000 forints per month in the short-term rental market.

This, of course, was before the overheads, the tourist tax, the tourism development contribution, the flat-rate room tax and, in some cases, the fees of external operators were deducted. At the end of the day, owners could make approximately 150,000 forints per month after tax.

Homes on the Airbnb market are rented out for 20 days per month on average under normal circumstances. This was the basis for the calculation of the above mentioned 300,000 forints monthly income for a studio apartment.

In contrast, in the traditional rental market, the monthly rent for a similar property before the pandemic could be around 150,000 forints, excluding overheads.

However, tax and depreciation costs have yet to be deducted from this amount, and the costs of vacant periods and estate agents’ fees also have to be taken into account.