Onshore, Nearshore,

Offshore: Unsure? A 2012 Hungarian Perspective

2 Advance • Onshore, Nearshore, Offshore: Unsure? • October 2012

Hungary: a maturing

European BPO and SSC

location

Executive Summary

Economics • Reducing budget deficit, boosting domestic consumption

and increasing employment are the main targets of the government

• Extended stagnation and slow recovery are expected between 2012-2014, economic results depend largely on foreign markets especially Germany’s performance

• Consumer Price Index is predicted to remain high while weak Forint supports exports

Business Environment • Governmental incentives and tax reliefs granted to foreign

companies • Hungarian Outsourcing Association supports Business

Process Outsourcing (BPO) and Shared Service Center (SSC) companies

• Transparent business environment with international compliance

• Hungary ranks 26th in the world according to Jones Lang LaSalle’s Transparency Index

Labour Markets • High quality,skilled labour pool with strong language skills • 20-40% lower wages than in Western Europe • Stable interest for multinational working environment • Current high unemployment guarantees no shortage of

workforce in the short and medium term

Real Estate • High availability of modern, good quality office buildings in

Budapest • Office developments: • Ongoing speculative projects • Opportunities for Built-to-suit projects • Flexible leasing conditions, competitive rents • Limited regional city availability, but future development

potentials

Introduction

Business Process Outsourcing (BPO) is a form of business service provided to companies located in different markets than the service provider who operates the service centre. A Shared Service Centre (SSC) can be operated by a company itself but, often shored (On-, Near- or Off-) to a lower cost location. In the last 10 years Hungary has gained a rising profile among international companies as a BPO and SSC location.

Hungary Hungary is located in Central & Eastern Europe and shares borders with seven countries: Slovakia, the Ukraine, Romania, Serbia, Croatia, Slovenia and Austria. Due to its location and developed infrastructure the country is an important industrial transit hub between Western and Eastern Europe and occupies an area of 93,030 sq km.

Hungary has had a Parliamentary democratic political system since 1990 and has been a European Union member since 2004. According to the latest census, the county’s population was slightly below 10 million in 2011.

Hungary is divided into 19 counties, while the capital, Budapest, represents a separate region for public administration purposes. The counties are divided into 7 regions for development and statistical purposes.

The industrial sector (automotive industry, telecommunications, computer sciences) accounts for around one quarter of the country's GDP but the service sector (especially trade, finance, communication and tourism) represent the largest share of GDP.

Economy

The Hungarian economy is a medium-sized, open economy, which is largely exposed to deteriorations in the economic and financial environment of the Eurozone. The main macroeconomic problems of the country are: relatively high levels of public and external debt, lack of investments, and Swiss franc-denominated mortgage debt

Due to these reasons, Hungary has been hit by the global crisis harder than other members of the European Union, yet, still managed to produce a 1.7% growth in 2011. This was mainly driven by exports which counterbalanced the significant drop in domestic consumption. Hungarian political stability is one of the strongest in Europe as the centre-right Fidesz party won a two-thirds majority in the Parliament in 2010. The government’s main aims are boosting domestic consumption by reducing personal income tax and creating jobs; reducing bureaucracy and decreasing public debt. To reach these goals unorthodox economic policies were introduced, often criticized by foreign market players, however, they are necessary to fulfill the debt service obligations set forth in the Maastricht Treaty, which the government is keen to meet.

Due to the strict austerity measures, economic growth is unlikely in the upcoming year, however, it should return in 2014. The government is keen on boosting employment and announced an employment protection plan to improve the current high unemployment rate (cca. 11%). In the short term we expect CPI to remain high (cca. 6%) as the result of tax and excise hikes and increased fuel prices.

Advance • Onshore, Nearshore, Offshore: Unsure? •October 2012 3

Key economic indicators

2009 2010 2011 2012 F 2013 F

GDP growth (%) -6.7 1.2 1.7 -1.8 -0.3

CPI (%) 4.2 4.9 4.0 6.0 6.6

Unemployment rate (%) 10.0 11.1 10.9 11.1 11.5

Fiscal balance (% of GDP)

-4,5 -4,3 4,2 -3,1 -2,6

Source: IHS Global Insight

Foreign Direct Investments (FDI)

Since Hungary joined the EU, FDI rose to a higher level and have been playing an important part in the open Hungarian economy. Similar to European trends, the volume of FDI dropped significantly after 2008 however, by 2011 an improving investor sentiment was witnessed. This was reflected in the sharply increasing volume of FDI in 2011, which doubled year on year and recorded the highest growth in the CEE region. Over the course of 2011, FDI reached USD 4.7 billion compared to USD 2.3 billion in 2010.

Foreign direct investment volumes in Hungary

Demographics

Budapest plays a crucial role in the Hungarian economy. It is by far the largest city and is the political, administrative, financial and cultural hub of the country. With 2 million inhabitants (density of 3,240 inhabitants per km2), Budapest accounts for 20% of the Hungarian population but is responsible for 40% of the country’s economic output. Moreover, as the administrative, political and cultural centre of the country, the city is home to all the state apparel and the main universities of the country. Thanks to the dense public transport network a high proportion of the population commutes to the capital on a daily basis. Due to these reasons, the services industry is concentrated in Budapest and large, multinational companies operate here, such as; British Telecom, Exxon Mobil, GE Finance, Infosys, Morgan Stanley, Vodafone, Air France/KLM and BP to name just a few.

The main secondary cities, popular among BPO/SSC firms include: Debrecen, Szeged, Győr, Pécs, Kecskemét, Miskolc and Székesfehérvár. Although these cities have relatively low

population compared to Budapest (between 100,000-200,000 inhabitants), all of them are county seats and have colleges or universitites, therefore, are able to provide a highly educated and young workforce. They are easily accessibly via Hungary’s highway system and are connected to both Budapest and the neighbouring countries, therefore attracting workforce with multiple language skills even outside of Hungary. Similar to Budapest, the regional cities are well suppliedwith shopping centres and retail parks, therefore providing a comfortable living environment.

An sample of large multinational companies operating SSCs in secondary cities include: Vodafone, Raiffesien, Sykes, EDS and GE Money.

Infrastructure and Transport

Hungary lies in the heart of Europe which is also reflected by the fact that four main European transportation corridors cross the country. The country has an excellent transportation system with more than 7,600 km of railway tracks connecting all major cities and international destinations. The country has 9 motorways with a total length of more than 1,100 km, being important transit roads for international logistics and transit companies, ensuring the connection between Western Europe, the Balkans and the Middle East. The Hungarian motorway infrastructure has been continuously improving over the past few years, therefore it is in excellent condition, providing a quick and comfortable way of transport. Further development of the highway system is also in the pipeline with 2,900 km of paved roads to be constructed by 2027, out of which, the highway system is to be expanded by an additional 500 km.

Hungary has two full-service international airports serving public and commercial requirements; Liszt Ferenc Airport and Debrecen Airport. Three secondary airports, located in Győr, Sármellék and Pécs, are serving passengers and air cargo in the regions. The Hungarian national airline, MALÉV, went baktrupt

at the beginning of 2012 after sever financial difficulties. Other budget airlines such as Ryanair, however, have moved in to fill the void and increased their scheduled flights to Budapest. The Danube, flowing north to south through Budapest, also provides a low-cost means of transport with navigable waterways.

Budapest has an extensive and efficient public transport system. A wide variety of trams, buses, trolleys and metro trains connect every part of the city. There are more than 30 tram lines, 14 trolley buses, a complex bus network and the outskirts are reachable via suburban rails as well. The metro system has been recently upgraded after several stops were refurbished and new cars were purchased. Currently, there are three metro lines, while the fourth is under construction and due to be handed over in 2014, according to current plans.

Hungary has top quality telecommunication services with easy access to 3T, xDSL, a new generation IP network, expanding 3G coverage., a growing number of data centres such as the largest data centre in CEE, Dataplex. This industry is fully controlled by international providers (Telenor, Vodafone, T-System, BT, Invitel, UPC).

-

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Foreign direct investments (mill.USD)

Source: Hungarian Central Statistic Office

4 Advance • Onshore, Nearshore, Offshore: Unsure? • October 2012

Business Environment Every two years Jones Lang LaSalle and LaSalle Investment Management publish a global Transparency Index report, analysing market fundamentals, property valuations, debt financing, legal and regulatory environment, and transaction processes of each country. The index aims to help investors and occupiers anticipate challenges while transacting, owning or operating in foreign countries.

Hungary currently ranks 26th in the world with a classification of Transparent and belongs to the same group as Poland and the Czech Republic. According to the study, the virtual elimination of the gap in transparency between Western Europe and core CEE markets is experienced, while Hungary continues to keep its high position.

Taxation

The most wide spread company types are Limited Liability Companies (Kft.) and Joint Stock Venture (Zrt.). Companies registered in Hungary and foreign companies having a permanent establishment in Hungary are subject to corportate income tax (CIT), which has a tax rate of 19%, however, if certain conditions are fulfilled, tax may be reduced to 10% on a tax base not exceeding HUF 500 million. The tax base of the CIT is the pre-tax accounting profit modified by certain decreasing and increasing items (e.g. tax and accounting depreciation, dividends received, etc.). The CIT payable can be decreased by tax credits (e.g. development tax credit).

As a general rule, no withholding taxes are to be paid for dividend, interest or royalty payments made to companies, while tax treaties may reduce tax rates applicable to individuals. Capital gains, deriving from the sale of certain investments are exempt from corporate income tax.

Local municipalities generally impose local business tax (LBT) on entrepreneurial activity carried out in their territory. The LBT base is determined as the net sales revenue (excluding royalty revenue) less cost of goods sold; mediated services; material costs and direct R&D costs. The maximum rate of the LBT is 2% but, municipalities can also determine a lower rate. The standard VAT rate is 27%. In addition to the standard rate, there are two reduced rates, 18% and 5%. Milk and certain foodstuffs manufactured from milk and cereals and commercial accommodation services are subject to 18% VAT. The 5% rate applies to certain pharmaceutical products, medical equipment, books, newspapers and on the supply of district heating.

Hungary's taxation of an individual's income is flat. In 2012, the tax rate in Hungary for an individual is 16% for income of up to HUF 2,424,000. The 16% rate is imposed on a wider tax basis of 1.27 for income exceeding HUF 2,424,000, bringing the effective tax rate to 20.3%. Hungarian companies have to pay a social security contribution at a rate of 27% of the gross salary of the employee. The employee is subject to 18.5% social security contribution on wages from the employer.

Incentives

The Hungarian Government provides different types of incentives for foreign investors setting up business in Hungary. All subsidies granted are in line with EU incentive standards.

The maximum amount of subsidies differs based on the location of the investment. The maximum amount of subsidies achievable, until 2013, are according to the following:

Region Maximum amount of subsidy

Budapest 10%

Central Hungary 30%

Central Transdanubia 40%

Western Transdanubia 30%

Southern Transdanubia 50%

Southern Great Plain 50%

Northern Great Plain 50%

Northern Hungary 50%

Source: Ernst & Young

There are special types of grants available for BPOs/SSCs:

VIP cash grant

The grant is available tostrategic investors for the establishment or expansion of SSCs and BPOs in Hungary. The subsidy amount is based on individual Government decisions. The base of the grant is the personnel cost of the newly hired employees for the first 24 months of their employment. The minimum investment value must reach EUR 10 million. At least 100 new jobs should be created (or 50 in underdeveloped regions).

Advance • Onshore, Nearshore, Offshore: Unsure? •October 2012 5

Corporate tax credit

Tax credit can be utilized within a ten year period, decreasing the company’s annual corporate income tax liability by a maximum 80% of the corporate income tax payable. Based on the location of the investment, the amount of the tax credit may reach 50% of the investment costs. It can be combined with cash grants (e.g. the VIP cash grant) to achieve optimum financing. There is no minimum job creation and no minimum investment value criteria. Eligible investment costs are the personnel costs of the newly hired employees for the first 24 months of their employment.

Companies may also receive a cash grant for their training related activities to develop the knowledge and skills of their own employees. The subsidy amount is calculated as 25% of the training costs if special skills are developed, 60% of the training costs if general skills are developed (e.g. language skills). However, the training grant amount is capped:

The maximum amount of subsidy is EUR 1 million,

if 50 - 500 new jobs are created.

The maximum amount of subsidy is EUR 2 million,

if creating more than 500 new jobs.

Selecting the optimum business location: a short Guide

Data

Determine what to evaluate by focussing on data which is germane to the location decision. Identify reliable data sources and means of procuring the information. Avoid the pitfalls of conflating extraneous and relevant datasets - this will not produce an optimal outcome.

Analytical Framework

Develop and apply an analytical framework that aids and promotes informed decision-making. Key challenges include: achieving data integrity and comparability across multiple geographies in different countries; applying appropriate weighting, scales and data ranges to define best and worst business conditions.

Interpretation

Understanding the meaning and implications of the differences in scores between candidate locations can be challenging. Fixating on location ranking, at the expense of overall location scores (and vice versa) is inadequate. Context is critical to understanding what may be skewing the results and achieving a complete understanding of the assessment results.

Jones Lang LaSalle’s Location Evaluation Framework

When examining a set of competing business locations for an operational investment, corporates should consider a range of indicators which fall broadly into 3 buckets: Business/Operating Environment, Cost and Risk. JLL’s Location Evaluation Framework has been carefully designed to select and synthesize these factors thereby promoting informed and objective corporate decision-making.

Source: Jones Lang LaSalle, EMEA Location Consulting Services

6 Advance • Onshore, Nearshore, Offshore: Unsure? • October 2012

Labour Market Since the late 90’s, Hungary has been a popular European

destination of BPO/SSCs. The first centers opened before 2000

and after the country’s European Union accession, their number

started to increase rapidly. To date, more than 70 operations are

present, employing a total of 30,000 – 35,000 people. The main

concentration of SSCs is in Budapest, where the majority of

service centres are located. However, about 20-25% of SSCs

are situated in the regions, mostly in county capitals such as

Győr, Debrecen or Miskolc. Typical outsourced activities include:

finance, operations & cost accounting, IT desktop support, HR

administration. Besides traditional outsourced activities some

companies perform complex, high added value activities such

as: marketing, procurement or modelling.

“Morgan Stanley opened its first office in Budapest in 2005, but

has partnered with Hungarian Institutional organisations since

1993.

In Autumn 2005, Morgan Stanley established the Mathematical

Modeling Centre in Budapest to provide quantitative analysis to

support the Firm’s global fixed income trading business. The

decision to locate the centre in Budapest was based on

the outstanding mathematical traditions in Hungary and the

availability of high-quality talent.

In July 2006, Morgan Stanley furthered its presence in the

region by opening the Business Services and Technology Centre

in Budapest to support its global business activities in North

America, Europe and Asia. The office is located on the Danube

in the new state-of-the-art Millennium City Centre and provides

support across a variety of services including Information

Technology, Financial Control, Operations, Credit Risk and

Documentation.”

Source: www.morganstanley.com

When setting up new operations the most important objectives of

BPO/SSCs are: cost reduction and quality workforce. Besides

these, the infrastructure, the real estate market, the living

environment, business costs, incentives, taxation and the

regulatory framework are also taken into account during the

decision making process.

Due to its low operating cost environment, skilled labour pool,

extensive IT and communication infrastructure, Hungary is

considered as a favourite destination. Budapest is especially

beloved due to its mature and high quality real estate market,

with international developers quickly understanding and fulfilling

the requirements of BPO/SSCs. Between 2004-2008 numerous

new BPOs and SSCs entered the Hungarian market. Compared

to that period, the number of new entries fell back in recent

years, however, it is important to note that existing companies

are continuously expanding their operations (including Celanese,

IT Services, EDS or KCI). This reflects their long term prospects,

as well as their satisfaction with the quality of services

achievable in Hungary.

The service industry started to mature in Hungary, which goes

hand in hand with a growing lobbying power of the sector. An

independant professional organisation, the Hungarian

Outsourcing Association (www.hoa.hu) promotes and supports

opportunities in the area of services and outsourcing for

companies already present in Hungary and for those planning to

set up business there. Their mission is to support the

development of the outsourcing services sector and improve its

competitiveness in the region. Besides holding regular

conferences for their members, they organize specialised

training programs based on Service Science, Management and

Engineering,to provide the next generation of workforce with

those skills which are necessary for the service sector. To raise

the interest of the right type of workforce as early as possible,

HOA promotes the service industry to high school students as

well. By introducing them to the wide range of career options

within the sector and arranging company visits, their aim is to

make sure that a continuous, skilled pool of employees will be

secured over the long term.

Education and Workforce

The number of tertiary education institutes in Hungary is around

70, with more than 316,000 students enrolled in the 2011/2012

academic year. The main faculties are Finance and Accounting,

Economics, IT, Engineering and Marketing. In the 2010/2011

academic year, the total number of students enrolled in all types

of accounting and finance specializations were around 12,180,

while the number of graduates in such specializations (earning

an economics diploma) were around 1,500.

The largest academic centers in the country, with the oldest and

most prestigious tertiary institutions are: Budapest (approx.

180,000 students annually), Debrecen (approx. 35,000 students

annually), and Pécs and Szeged (each with approx. 30,000

students annually).

Over two dozen academic centers and universities offering

various forms of linguistic studies ensure a constant and large

pool of well-educated talent with an excellent command of

languages. On average, 90% of students speak English

confidently.

Multilingual professionals in various fields are highly attractive for

investors who already have established centres alike; with

Italian, Spanish, Norwegian, Dutch, Polish, Portuguese, Russian,

and Finnish language knowledge – in order of demand.

From the candidate side, complex tasks are considered more

attractive nowadays when gauging employment opportunities in

the SSC sector – e.g. roles in Customer Service, Order Desk,

Cash Collection, or (Junior) Key Account Management.

Hays carried out a recent search of candidates with certain

language skills. The results below are based on findings in Hays’

database and the two market leading local databases. Please,

note that these results show currently registered candidates (i.e.

active jobseekers).

Advance • Onshore, Nearshore, Offshore: Unsure? •October 2012 7

Spoken languages Number of candidates

English, Hungarian 90,000<

German 30,000<

French, Italian, Spanish 4,000<

Spanish 800<

Polish, Czech, Slovakian 300<

Dutch 250<

Finnish, Swedish 130<

Norwegian 50<

Danish 10<

Source: Hays Hungary

Hungarian Labour Code

Undetermined term labour contracts are more typical than fixed

term contracts. Early termination of a fixed term labour contract

is possible with:

mutual agreement,

with immediate effect with a well based reason

with immediate effect without a reason, the employer

has to pay the whole compensation to the employee.

The trial period cannot be longer than 3 months from the date of

commencement of the employment relationship, which may be

terminated by any of the parties with immediate effect without

cost.

Paid holidays are compulsory within the actual calendar year.

The number of days depends on age and/or number of children.

The current work time limit is: 40 hours / week. Employees shall

be entitled to a 50% salary supplement, or to time off, related to

over-work time.

“Tata Consultancy Services has been present in Hungary since

2001. Our Hungary branch is a special entity and one of the

pillars of company’s strategic services delivery concept, known

as the GNDM™ (Global Delivery Network Model). TCS invested

in Hungary for a variety of compelling reasons, notably the

excellent quality of talent available, strong technology

infrastructure, stable business environment and very attractive

cost structures.

The primary objective of the Budapest delivery center is to

provide services to a variety of customers based across Europe.

The world class office environment, the linguistically and

technically skilled workforce that we have managed to find in

Budapest has helped realize this potential, with the Budapest

centers emerging as one of our largest service locations

worldwide.”

DineshP. Thampi

Vice President & Delivery Center Head - TATA Consultancy

Services

Wages in the BPO/SSC sector

With regards to salary ranges and the salary expectation of

candidates, the market has become fairly mature now and thus

salaries have stabilised. Although salaries are still attractive and

have to be given at market level within this industry to attract the

right talent, they are still 20-40% below the Western European

average. Below is a table with typical positions and associated

gross salary levels within the SSC sector, broken down by seniority

(work experience) in EUR/month.

Salary levels are also influenced by language requirements. Each

additional language increases salary by EUR 72-107/month (gross).

Seniority level

Role Assistant

(0-1 yr) Senior

(3-5 yrs) Manager

Collection Specialist

922 - 1,003 1,254 - 1,612 1,970 - 2,328

Cash Application Agent

967 - 1,074 1,254 - 1,468 1,791 - 2,149

Customer Service Agent

922 - 1,003 1,254 - 1,612 2,328 - 3,223

Accounts Payable Specialist

967 - 1,074 1,254 - 1,970 2,328 - 3,582

Accounts Receivable Specialist

967 - 1,074 1,254 - 1,970 2,328 - 3,582

General Ledger Expert

1,074 - 1,254 1,970 - 2,149 2,686 - 3,582

Credit Analyst

1,074 - 1,182 1,504 - 1,970 2,507 - 3,223

Purchasing Specialist

1,074 - 1,182 1,970 - 2,507 3,582 - 4,656

Master Data Expert

922 - 1,074 1,432 - 1,970 2,686 - 3,582

Market Research Analyst

260 - 1,074 1,361 - 1,791 2,149 - 2,507

HR Associate / HR Support

922 - 1,003 1,361 - 1,970 2,328 - 2,686

Source: Hays Hungary; Exchange rate: 1 EUR=279.21 HUF

(2011 average FX rate published by the Hungarian National Bank)

Labour costs in Hungary, as in other CEE countries are low compared to the Western European standards. The government introduced a flat personal income tax rate in Jan 2011 so as to make taxation more favourable for most of the employees. Contributions to be paid by employees or the employers

Contributions Employer % Employee %

State pension contribution 24 10

Health care contribution 2 7

Labour market contribution 1 1.5

Training fund contribution 1.5 0

Personal income tax 0 16-20.32

Source: Hays Hungary

8 Advance • Onshore, Nearshore, Offshore: Unsure? • October 2012

Real Estate The development of Budapest’s modern office market began at

the end of the 1990’s. International and local real estate

developers set their feet and progressively developed a modern

stock of Class A and Class B buildings, which currently totals

3.18 million m2. Most of this space consists of high quality,

modern office buildings suitable for the requirements of

BPO/SSCs in terms of fresh air suppy, ventilation cable and IT.

A strong development boom was experienced between 2005-

2009, therefore most of the Budapest office stock is relatively

young.

Nearly 50% of it comprises buildings constructed after 2005 with

similarly high technical specifications of Western-European office

buildings.

Due to the crisis the volume of new demand fell back

significantly while the weak occupier activity could not absorb

new supply, which resulted in a rapidly increasing availability.

The average office market vacancy rate started to increase

rapidly and by Q2 2012 it stood above 21%. Due to the high

availability a tough competition evolved among property owners

and headline rents started to shrink. Although the pace of

headline rent decline has significantly slowed down since 2010-

2011, it is still witnessed parallel with the increase of various

tenant incentives.

Although the overall availability is high in the market, there is a

lack of new speculative office developments currently under

construction due to completion in the upcoming 2-3 years, which

means that the vacancy rate is likely to drop steadily in the short

term. Opposite to the 2006-2009 construction booms, the

Budapest office market is likely to face weak development

prospects between 2012-2014. Due to the strict financing

conditions most developers are able to start constructions only

with larger preleases and the number of projects under active

construction is limited. There are more than eighty strategically

located office projects in the pipeline, many with valid building

permits, which could start straight off in case there is a need for

them. Budapest is an attractive location both for existing and

future (built-to-suit) office premises.

Optimal Timing for Occupiers in Budapest 2012-2016

2012 2013 2014 2015 2016

Tenant-favourable market conditions

Relatively balanced market conditions between landlord and tenant

Rents in Budapest

Rents were under strong pressure between 2009-2011 and which is still experienced in the most oversupplied submarkets. However, the pace of the rental decline is slowing.

Prime rent stands at 20 EUR/m2/month, but it is only achievable in a few selected buildings in the CBD. Average headline rents vary between 11-13 EUR/m2/month, but the typical rents offered for BPO/SSCs are rather between 10-12 EUR/m2/month. To attract more tenants, landlords usually offer generous incentive packages including rental free period (1-1.5 month/year), fit-out contributions (100-150 EUR/m2), moving contribution or cash contribution, which is expendable based on the occupier’s requirements.

Due to the high availability tenants are in a strong negotiating position currently. On top of the favourable rental conditions landlords offer competitive lease terms to secure long-term agreements. However, it is important to note that parallel with the absorption of vacant office spaces, we expect a slow shift in rental terms. On the long term, as competition is getting weaker, landlords will not be forced to keep their rents at the bottom anymore. That said, we do not expect a significant change in pricing in the upcoming 2-3 years.

Parking spaces are offered at € 90-120/month/spacewhile. Service charges range between EUR 3.5–5/month/ m2. Both are subject to a 27% VAT.

General Market Practice

A definite 5 year lease term is the norm on the Budapest market, but shorter lease period is also achievable for smaller areas. In case of headquarters 7 or 10 year lease terms are required by landlords.

The new office buildings are strictly developed according to Class-A standards (raised floors, suspended ceilings, 4-pipe fan-coils and gypsum walls) with flexible layouts and large floor plates suitable for SCCs. Sustainability also plays an important factor in new developments, which usually apply for LEED or BREEAM qualifications. To remain competitive, many existing buildings are also applying for certifications or execute large scale refurbishments and use “green” technologies to become environment friendly.

In line with the requirements of larger occupiers, premises are usually delivered turn-key with a split 20/80 or 30/70 partition areas (individual offices, meeting rooms) and open space areas.

Rents and service charge are denominated in EUR and paid on a monthly (rarely quarterly) basis.

Market Trends

Competitive rental levels with generous incentive packages

High amount of modern, Class-A quality office space

Subdued development market with very few projects under construction

Healthy amount of strategically located, readied office projects in the pipeline waiting for prelease agreement to kick off

Large floor plates, efficient layouts

Green solutions: BREEAM and LEED certificates

Advance • Onshore, Nearshore, Offshore: Unsure? •October 2012 9

“IMMOFINANZ Group as a significant player of the Hungarian commercial real estate market has one of the biggest shared service

centers of Budapest among their tenants in Haller Gardens office building. We are aware of the main requirements of an SSC and

have several office buildings in the city which can meet such special needs.

We believe that Haller Gardens is a perfect site for a shared service center due to its excellent location and accessibility both by car

and public transport and also due to its high technical standards. Besides, relaxing areas such as roof terraces and gardens make this

property to an attractive working place.

As SSCs are operating mainly in open space offices it is especially important to offer efficient spaces where most of the work stations

can be fitted out in the smallest space possible. With a HVAC system with an above-average capacity and extended internal height

Haller Gardens can offer efficient and comfortable spaces to employees on smaller surface than an average class ’A’ office building

in Budapest. Beside the reasonable rents and operating costs this is another building-feature the tenant can save costs with.

From the aspect of security for 24/7 operation the double-independent electrical backup, secure and hi-tech IT connections and

possibility for installing an own generator within the building make Haller Gardens even more suitable for SSCs.”

Eduard Zehetner-CEO Immofinanz Group

Office Markets in Regional Cities

Office supply is very limited in the regional cities, which means a

big obstacle for companies considering to set up operations in

secondary locations. International property developers rather

concentrate on the capital, where demand is more predicatble,

than taking risks elsewhere. However, in recent years several

smaller, but local developers started new office projects in larger

cities like Győr, Debrecen and Székesfehérvár after realizing the

growing need for quality office space in those locations. Local

municipalities are also keen on expanding the office stock to

attract foreign companies and provide suitable headquarter

options. There is a relatively high amount of secondary office

space outside of Budapest; however, new developments are

constructed according to the A Class technical specifications, in

line with standards found in Budapest.

Although competition among property owners in the regions is

not as fierce as in Budapest, offices are rented with a significant

discount compared to the capital. The average rental range is

between EUR 7-10 /m2/month and rent free periods are also

achievable depending on the lease terms.

Although the immediate office availability is rather limited in the

regions, there are several development potentials in the pipeline,

which would meet the requirements of BPO/SSCs. Most of these

options are less known or marketed, so the help of an expert is

absolutely necessary to find them.That said, it is clear that to

maximize the potential of secondary Hungarian cities, a more

dynamic approach is required from developers in the future.

Summary

The aim of this paper is to provide a detailed overview of the principle drivers of BPO/SSC’s location selection process -business environment, infrastructure, labour and real estate market.

According to our findings. Hungary has remained a popular location among such companies and has managed to keep its appeal due to its highly skilled, multi-lingual workforce, excellent infrastructure and wide supply of modern office stock.

The concentration of BPO/SSCs is the highest in Budapest, however we see companies opening new branches in regional locations as well. Usually these companies are already active in Budapest and as part of their expansion strategies, they try to utilise the advantages of secondary cities including: higher incentives and lower operating costs. That said, the office stock is very limited outside of Budapest and the development of new, modern office buildings should pick up to satisfy demand.

BPO and SSC openings were especially frequent during the early 2000 in Hungary. Around this period mainly traditional mass transactions were migrated here, such as accounting or treasury services. Ever since the service sector started maturing and nowadays complex and higher added value activities are also performed in Hungary.

Those companies which opened branches in the country 5-10 years ago, continuously expanded by number of staff, offered services and leased premises, some of them opened new units in secondary cities as well.

Hungary still offers highly qualified workforce for a lower price than Western Europe and various incentive packages granted by the government. Since the early 2000 the infrastructure and the real estate market developed rapidly further on, while a professional organization supporting the service sector gained stronger lobby power. The business environment became more favourable therefore we believe that Hungary remains an attractive and suitable location for BPO/SScs in the upcoming years as well.

10 Advance • Onshore, Nearshore, Offshore: Unsure? • October 2012

Major Shared Service locations and number of

graduates in tertiary education in 2010

Jones Lang LaSalle EMEA Location Consulting Services

Our leading edge Location Consulting team helps direct corporate decision-makers to informed and accurate decisions relating to location and business configuration, helping achieve revenue, margin and efficiency targets.

Utilising unique management consulting methods to drive solutions from a business perspective, we offer comprehensive advice on the “why”, “where” and “how” of business rationalisation, expansion, and new market access.

Our multilingual and multidisciplinary consultants bring to clients a wealth of skills, global field experience and expertise in the fields of economics, politics, supply chain, management consulting, real estate, business process configuration, demographics, GIS, international relations, engineering and infrastructure.

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Business Incentives Advisory Our team of Incentives specialists provides detailed technical advice and guidance on availability of and eligibility to government incentives across EMEA. Our one-stop Incentives service spans facilitation and negotiation through to completion and administration of incentives applications to government authorities to secure promised awards.

Advance • Onshore, Nearshore, Offshore: Unsure? •October 2012 11

Information on Content Providers

Jones Lang LaSalle (NYSE: JLL) is a financial and professional

services firm specializing in real estate. The firm offers integrated

services delivered by expert teams worldwide to clients seeking

increased value by owning, occupying or investing in real estate. With

2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in

70 countries from more than 1,000 locations worldwide, including 200

corporate offices. The firm is an industry leader in property and

corporate facility management services, with a portfolio of approximately

195 million square meters worldwide. LaSalle Investment Management,

the company’s investment management business, is one of the world’s

largest and most diverse in real estate with $ 47 billion of assets under

management. For further information, please visit

www.joneslanglasalle.com

Hays Specialist Recruitment is the world’s leading company in

recruiting qualified, professional and skilled work. Today, with more than

40 years of recruitment experience, the Group operates out over 245

offices in 33 countries, employing around 7800 staff worldwide across

20 specialisms. We offer tailor-made recruitment services on

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Recruitment Process Outsourcing (RPO) and Employer Branding

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need to develop their businesses and helping our candidates find the

best new role for themselves. Our customers benefit from the specialist

sector knowledge, extensive office network, industry contacts and

consultants experienced in recruiting staff for various SSC/BPO centres

across the CEE region. To find out more about Hays please visit

www.hays.com

The Hungarian Investment and Trade Agency (HITA), was set up by

the Government of Hungary in 2011 in order to support the foreign

trading activities of Hungarian small and medium-sized enterprises and

to encourage and help foreign enterprises invest in Hungary. The

Agency is a central office operating under the management of the

Minister for National Economy, a separate budgetary institution with its

own budget. Launched on 1 January 2011, the 150 employees of the

Agency are providing assistance to the preparations of investments in

Hungary of foreign investors and to the exports of Hungarian SMEs. In

addition to its central office the HITA has opened six local offices in

large towns across the country awaiting those intending to make

investments as well as enterprises intending to enter foreign markets,

local governments wishing to attract investments, industrial parks and

clusters, with advice and help.

Ernst & Young is a global leader in assurance, tax, transaction and

advisory services. Worldwide, our 152,000 people are united by our

shared values and an unwavering commitment to quality. We make a

difference by helping our people, our clients and our wider communities

achieve their potential. Ernst & Young refers to the global organization

of member firms of Ernst & Young Global Limited, each of which is a

separate legal entity. Ernst & Young Global Limited, a UK company

limited by guarantee, does not provide services to clients. For more

information about our organization, please visit www.ey.com.

Jones Lang LaSalle Ferenc Furulyas Managing Director Jones Lang LaSalle Hungary +36 1 489 0202 Ferenc.Furulyas@eu.jll.com www.joneslanglasalle.hu Rita Tuza Head of Research Jones Lang LaSalle Hungary +36 1 489 0223 Rita.Tuza@eu.jll.com www.joneslanglasalle.huz

Alex Ash

Director – EMEA Location Consulting Services

Jones Lang LaSalle

UK

+44 (0)207 852 4848 alex.ash@eu.jll.com www.joneslanglasalle.com

Content Partners Orsolya Ignácz Senior Manager I Tax Services Ernst&Young Hungary +36 1 451 8625 Orsolya.ignacz@hu.ey.com Tammy Nagy-Stellini Managing Director Hays Specialist Recruitment Hungary +36 70 866 2309 stellini@hays.hu www.hays.hu Katalin Németh Investment Director Investment Promotion Directorate Hungarian Investment and Trade Agency (HITA) Hungary +36 1 872 6530 Katalin.Nemeth@hita.hu www.hita.hu

October 2012

Advance publications are topic-driven white papers from Jones Lang LaSalle that focus on key real estate and business issues.

www.joneslanglasalle.hu

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