Due to its geographical and geopolitical characteristics, Hungary has become an attractive destination for industrial, commercial, and logistics developments in recent years. The government is also encouraging large developments with a number of measures, and remarkable industrial investments have been realized with government support. These investments require growing supplier and storage capacity, and making development sites in favorable locations (uncultivated lands with appropriate zoning, available infrastructure, and traffic approach) is expensive.
At the same time, there is an increasing resistance from the public and civil (green) organizations against the expansion of economic areas, uncultivation of agricultural lands, and introduction of environmentally harmful technologies. As a striking example, social intolerance against battery manufacturing has prompted many local governments to restrict activities related to the production and storage of any kind of battery components, regardless of their potential environmental impact.
To meet the above social demands, the Parliament – while maintaining the possibility of almost unhindered implementation of government-supported investments – has fundamentally changed the rules for designating new development areas and for releasing agricultural lands from cultivation. The effective building and land protection rules form several new restrictions for the development of areas not yet classified as building zones and agricultural areas. Although this is justified on the grounds of sustainability and quality of life, as well as the preservation of agricultural land, it poses a significant challenge for developers.
To designate new building zones, the local government must reclassify its own development lands to forest or green space, and if it does not own such property, such properties must be handed over to the municipality by the developer. Forests and other green areas may only be classified for a development area if the new forest or green area is 1.25 times the size of the planned development site, so the developer must purchase 2.25 times the actual area required and transfer more than half of it to the municipality for the purpose of new green areas. In addition, no development areas can be designated within 250 meters of the settlement boundary, settlements must be separated from each other by a 500-meter green belt, and detailed regulations have been introduced for the protection of municipal green infrastructure.
The release of agricultural lands from cultivation has also become more difficult and costly. As the most general cost element, the land protection contribution has tripled, resulting in an obvious increase in the costs of greenfield investments. In addition to the usual complexity of the ownership structures, it is still a challenge that developers may not acquire the ownership of the land until the investment is implemented on the basis of the withdrawal permit (only exceptions are the urban zone and the designation of an investment target area). Reclassification of the land in the land registry is subject to the realization of the project and the payment of the land protection contribution. This workflow requires the implementation of the project on land owned by a third party (mostly private individuals), generating a high risk for the developer. As another restriction, lands of above-average quality may be released from cultivation for the purpose of location-bound investment, which in practice corresponds almost exclusively to the expansion of existing facilities or investment target areas designated by the government. If there is above-average quality land within the planned development area, the release of the land requires a step-by-step procedure, entailing high transaction risks, such as changes in the ownership structure of the sellers.
With the increase in the volume of investments, the development of traffic and public utility infrastructure has not been able to keep up at many locations, while in the capital’s agglomeration, the explosive population growth alone generates a supply shortage. Due to the government’s withdrawal of the local business tax from the municipalities, industrial and commercial investments alone do not necessarily represent an advantage for wealthier municipalities, and investors have to assume a larger share of the development of local infrastructure (roads, public utilities).
Considering the above trends and legislative changes, preparation of a greenfield investment requires even more thorough planning than before, both in terms of the legal structure (interdependent agreements) and the compilation of the budget. Selecting a suitable development site is perhaps the most complex task, requiring the involvement of architects, public utility and transport engineers, lawyers, and financial experts with complex expertise, experience, and local knowledge, while a successful investment cannot be achieved without close cooperation with the local government, which can also effectively promote the social acceptance of the investment.
By Levente Kalman, Partner, Andersen Legal
This article was originally published in Issue 12.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
