Journal Issue

Hungary: Selected Issues

International Monetary Fund. European Dept.
Published Date:
December 2019
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Hungary’s Public Debt Strategy: New Retail Government Security1

This note describes and discusses potential implications of recent changes in Hungary’s public debt strategy. Special attention is paid to the motivation for, and recent experiences with, the “Hungarian Government Security Plus Scheme” (MÁP+) for physical persons, introduced in June 2019. One of the main benefits of retail bonds is that they usually are perceived as more stable funding. However, it is argued that MÁP+ should be continuously monitored to ensure its objectives are achieved in the most cost-efficient manner and to avoid unintended distortions.

1. The note is organized as follows. It starts with a description of the general principles of public debt management and how Hungary is applying them. Second, it discusses recent developments in Hungary’s public debt The third part focuses on specific public debt management policies in Hungary. The fourth part briefly discusses experiences with the retail bond programs in other countries but focuses mainly on the MÁP+ bond, the initial experience with this bond, and elaborates on its potential implications. The last part concludes.

A. General Objectives for Public Debt Strategy

2. The stated mission of the Hungarian Government Debt Management Agency (ÁKK) is broadly in line with best practices.2 Public debt management is typically guided by a combination of objectives to ensure prompt payment of obligations at the lowest possible costs over the medium term.3 While low funding costs are important, they should also reflect risks and externalities. Costlier liabilities may thus be merited to ensure market presence, prompt access in case of need, and reduced vulnerabilities. While there should be separation of public debt management and monetary policy objectives and accountabilities, there should also be a shared understanding to limit mismatches.4 These may involve exchange rate, interest rate, maturity, and thus roll-over risks.

  • The choice between domestic and foreign currency denominated and external funding should strive to achieve a broad investor base with due regard for cost and risks, while treating investors equitably.5For instance, continued presence in international markets may facilitate access if suddenly needed. On the other hand, unhedged foreign exchange rate risks can be costly in case of volatile markets. Moreover, foreign investors may suddenly change behavior due to unrelated external events, which can be disruptive, particularly in case of illiquid markets. It can also be useful to consider a sovereign asset-liability management approach to gage the financial risk exposure of the public sector as a whole (Das et al., 2012). Attention to the external exposures of the private sector and its market access may also be warranted. Even if there is no immediate need from a public debt perspective, there could be other reasons, like the need to boost international reserves to influence the perceived sovereign risk, or if the government is able to raise foreign currency much cheaper than the private sector, depending on the private sector saving-investment balances.
  • The choice between retail—individuals with small transactions—and wholesale funding should, among other objectives, aim at developing an efficient government securities market. While some government securities may be designed to target certain groups to achieve better rates, other objectives may also be at play, including to encourage a savings culture as well as to increase financial literacy and inclusion. In contrast, a segmented domestic market makes such securities less liquid and thus more expensive compared to bonds with standardized features, which can facilitate a secondary market. Finally, market development is a germane externality, like developing a broad investor base with due regard to both cost and risks and establishing a yield-curve to nurture efficient domestic mortgage and commercial bond markets.

Strategies of Hungarian Public Debt Management

3. The global financial and euro debt crises elucidated the importance of: (i) lowering public debt levels; and (ii) reducing external debt vulnerabilities. This can be achieved by increasing domestic savings and the domestic financing of the debt by further developing the domestic investor base (ÁKK, 2019, page 12). According to the ÁKK’s annual “Debt Management Outlook” the primary objectives of Hungary’s public debt management can be summarized as follows:

  • Support a debt reduction. Basic Hungarian legislation prescribes that if the (cash) debt of the central government exceeds 50 percent of GDP, the Parliament is obliged to adopt a budget reducing this ratio. Furthermore, as an EU member, Hungary is also expected to reduce its (accrual) general government debt currently exceeding 60 percent of GDP by at least 1/20 each year of the difference between the actual debt and the aforementioned threshold.
  • Reduce external vulnerabilities. The global financial crisis proved to the Hungarian authorities that non-resident holdings of government securities were less stable (MNB, 2019, p. 66). Even if foreign investors hold HUF denominated bonds, if they sell, they will likely convert to foreign currency, hence also affect the size of international reserves and potentially influence the exchange rate. Specifically, Hungary experienced a situation where one large foreign investor, with a significant share of the Hungarian public debt, adversely affected the government securities market by suddenly changing its investment strategy. The reduction of this external vulnerability has been achieved by:
    • Reducing the share of foreign currency (FX) denominated public debt “to acceptable levels.” The share of FX denominated debt has been gradually reduced. According to Barcza (2018), the reduction of FX denominated was facilitated by reducing the reliance on external investors, who typically prefer FX denominated debt. Beginning 2019, the target range for the share of FX denominated central government debt was lowered to between 10 to 20 percent. In addition, ÁKK hedges its non-euro FX debt by swapping into euros, while allowing for 5 percent deviation of the actual FX denominated amount.
    • Enhancing the domestic investor base, particularly smaller retail investors. Only around three percent of retail securities are sold back to the retail primary dealers before maturity (Barcza, 2018).

B. Hungary’s Public Debt

4. Hungary’s public debt has been on a declining path but remains elevated compared to regional peers (Table 1). Hungarian general government debt peaked at 80.8 percent of GDP in 2011. It has been reduced to 70.2 percent of GDP by end-2018, and it is expected to further decline. This is due to both lower overall deficits and the negative differential between the real interest rate and potential growth. Nonetheless, the government’s 2018 gross financing needs remained high at 21.6 percent of GDP. But ample global and domestic liquidity make the high annual gross public financing needs easy to refinance.6

Table 1.Hungary: Selected Public Debt Indicators of Hungary and Peers
HungaryCzech RepublicPolandRomaniaSlovakia
2018Δ 2018–20142018Δ 2018–20142018Δ 2018–20142018Δ 2018–20142018Δ 2018–2014
(Percent of GDP, unless otherwise indicated)
General Government Public Debt70.2-6.632.6-9.648.9-1.535.0-4.249.4-4.1
o/w Long-term (loans and securities)57.6-8.631.5-7.848.4-1.833.8-2.747.9-5.2
o/w Residents:44.69.619.5-9.724.52.818.2-1.220.9-0.1
o/w held by financial institutions29.33.418.8-
o/w Long-term25.94.418.6-
o/w held by households14.46.80.2-
o/w Long-term6.63.20.2-
o/w Long-term24.6-15.812.20.024.5-4.316.7-2.927.8-4.6
o/w FX denominated16.1-14.23.9-3.815.1-2.617.6-5.12.5-1.8
Annual gross public financing needs 1/21.6-
Memorandum items:
Public foreign currency denominated debt in percent of gross international reserves77.210.665.2-19.772.8-13.696.81.7......
Sustainability (rreal – gpotential) percent 2/-4.9-4.5-3.2-0.3-1.8-1.7-5.1-5.2-4.2-4.5
Gen. government guarantees 3/5.1-0.70.2-0.21.4-0.22.2-0.3----
Sources: Eurostat, respective national Public Debt Offices, and Fund Staff calculations.

According to IMF staff estimates. In case of Poland, the 2018 figure is preliminary. In addition of change of budget deficit and interest rates, projections can change due to buy-backs, maturity extensions, etc.

Real interest rate of 10-year bond (r) minus potential growth (g). The stock of existing public debt in percent of GDP declines, all other things equal, when r-g is negative.

Most recent available data are from 2017.

Sources: Eurostat, respective national Public Debt Offices, and Fund Staff calculations.

According to IMF staff estimates. In case of Poland, the 2018 figure is preliminary. In addition of change of budget deficit and interest rates, projections can change due to buy-backs, maturity extensions, etc.

Real interest rate of 10-year bond (r) minus potential growth (g). The stock of existing public debt in percent of GDP declines, all other things equal, when r-g is negative.

Most recent available data are from 2017.

5. The external vulnerability of Hungarian public debt has been significantly reduced. The decline in the share of both FX denominated and nonresident held government securities is appreciable. When Hungarian public debt peaked in 2011, foreign currency denominated debt amounted to 48½ percent of central government debt (Figure 1). This share has since been more than halved to 18¼ percent by September 2019. The decline was facilitated by a decline of the share of government securities held by non-residents from about 40 percent to just below 25 percent during the same period. This has been mirrored by an increasing share of residents’ holding, particularly of retail government securities, mainly held by households, but also wholesale bonds held by financial institutions, primarily banks.

Figure 1.Characteristics of Hungarian Public Debt, 2010–2019

Sources: Eurostat, ÁKK, Barcza (2018), and IMF staff calculations.

1/ Share of central government debt.

6. Active public debt management has been instrumental in reducing vulnerabilities. While external demand for Hungarian public debt has remained strong during this period, generous excess liquidity in the domestic banking system and increasing savings of households, due to their deleveraging following the global financial crisis, opened opportunities for active debt management These were utilized by both the ÁKK and the Hungarian Central Bank (Magyar Nemzeti Bank, MNB) to increase the share of government securities: (i) denominated in local currency; (ii) held by residents; and (iii) with extended maturities.

C. Active Public Debt Management in Hungary

7. Two main policies have impacted the structure of public debt during the recent period:

  • ÁKK’sRetail Securities Program. Special retail securities tailored to various household needs were developed and offered at a premium. It was also made easier and cheaper to purchase these securities in the local treasury offices as well as banks.7 Initially, banks could purchase these securities in the secondary market. ÁKK has since introduced restrictions, limiting potential arbitrage and helping ÁKK’s cash management. Banks are now required to offer ÁKK such securities. The share of retail bonds of total central government debt thus increased from about 2⅓ percent in 2011 to almost 26¼ percent at end-2018. Households, however, began to pause their portfolio adjustment since 2016, among other reasons likely due to lower yields (MNB, 2019, p. 66).
  • MNB’sSelf-Financing Program combined with the ÁKK’sWholesale Program. In March 2014, the MNB initiated its “Self-Financing Program.” The primary objective of lowering foreign currency denominated and non-resident holdings of public debt seemed achievable, as Hungarian banks held substantial excess liquidity with the MNB.8 The MNB gradually adjusted its various monetary policy instruments—mainly by limiting how liquid they were—hence encouraging banks to place their excess liquidity in government securities instead of with the MNB. In addition, the MNB offered conditional interest rate swaps to entice purchases of government securities with longer maturities. Bank holdings of government securities increased from about 15 percent of GDP in March 2014, to 21 percent at end-2016. This ratio has declined to about 19 percent of GDP by mid-2019, but banks’ holdings still increased in nominal terms. Nagy and Kolozsi (2017) have estimated that the yields of government securities were lowered by 75–90 bp due to this program. It was part of a general easing-cycle that further lowered funding costs.

8. Within the limits prescribed by the overall debt objectives and strategy, ÁKK has continued to be very active in the market. Bonds with longer maturities have been issued and various retail bonds have been tailored to meet specific needs. The ÁKK has been skilled in using market opportunities to do buy-backs and bond-exchanges with a view to reduce refinance risk. The ÁKK, in order to maintain a targeted reserve with the single treasury account, uses a range of cash management tools, including repurchase agreements.

D. Government Securities Programs for Individuals

9. Several countries have promoted government securities for individuals, but some of them have been closed in recent years, mainly due to cost considerations. Such programs may be merited to compete with bank deposits and transaction fees. Government securities may be designed to target certain groups. Some retail borrowing programs are used to encourage a savings culture as well as to increase financial literacy and inclusion. Such securities are typically intended for buy-and-hold. To lower funding costs, securities should ideally be as liquid as possible to capture the “liquidity premium”.9 This should be evaluated against the premium from catering to special demands and market segmentation. Some countries have offered standard securities to individuals, but lowered fees and commissions, particularly if standard bank fees were prohibitive for small transactions, and/or offered tax incentives. Sale before maturity may still involve the assistance of a broker, as in the case of Treasury Direct in the USA, while other countries offer the possibility to directly sell back the security to the government, like in South Africa. Previously Canada, Germany, Sweden, and the UK had relatively large retail programs, but new issuances have since been sharply reduced or even stopped due to being more expensive, when including administration costs, than wholesale funding. Moreover, in a low interest environment such securities became less attractive compared to bank deposits with increased deposit insurance.

The New Hungarian Retail MÁP+

10. A new bond (Hungarian Government Security Plus Scheme (MÁP+)) was introduced to Hungary’s retail bond program in June 2019. The stock of outstanding retail securities amounted to just over 17½ percent of GDP at end-2018, the bulk of which (HUF 5,800 billion, or about 13½ percent of GDP) were held by individuals. In April 2019, the authorities announced their intention to increase households’ holdings of retail government securities to HUF 11,000 billion by 2023 (about 19 percent of projected 2023 GDP, including through issuing MÁP+).

11. The declared primary objectives of MÁP+ are to reduce external refinancing risk, sustain a high savings rate of households, and reduce cash hoarding. While the primary objective is to further reduce external vulnerabilities through domestic issuances, the authorities aim to support a continued high savings rate. The MÁP+ should help contain consumption, imports, and take the pressure off the real estate market in the near term. Furthermore, by offering higher yields, the authorities aim at activating part of the increasing cash holdings. Notwithstanding that the MÁP+ yield is higher than current wholesale funding, the authorities believe that given the aforementioned objectives “the decline in risk spreads supports a reduction in the interest expenditures of the budget” (MNB, 2019, p. 68). MÁP+ is intended to substitute some of the existing shorter maturity bonds, hence extending the average maturity.10

12. MÁP+ offers some very attractive features. MÁP+ has an initial yield of 3.5 percent the first half year, 4 percent in the second half year, whereupon it increases by 50 bp each year until it reaches 6 percent by the end of its 5-year maturity. The simple average annual yield amounts to 4.95 percent. The interest is automatically reinvested but can be redeemed without charges. Apart from the 5-day period when interest is paid, investors can redeem the securities at any time for a fee not exceeding 25 basis points. Last but not least, the interest income from retail government securities for households has been exempt from taxation since June 2019, while, interest income on bank deposits remains taxable. In case the securities are sold before maturity, the ÁKK has the right to buy them back to avoid arbitrage. Hungarian physical persons can open an account with the treasury and purchase MÁP+ free of charge, and there is no lower or upper limit for amounts purchased. If purchased via a bank, there may be additional fees and commissions.

Initial Experiences with MÁP+

13. It is too early to assess whether the objectives are being achieved, but the initial demand has exceeded expectations. As of end-September 2019, about HUF 2.1 trillion (just over 4½ percent of GDP) MÁP+ had been issued, while total retail government securities amounted to about 19 percent of projected GDP. Almost half of purchases appear to be funded from roll-overs and sales of other retail government securities. Another 10–15 percent are from investment funds, including property funds.11 It is estimated that around 10 percent of the funding has come from bank deposits. Market observers estimate that up to 10 percent of the funding has come from a smaller increase in currency in circulation. The remaining part reflects increased savings. According to some market observers, many new accounts for these securities have been established, but about 70 percent of the sales have been to account holders with addresses in the capital area. Anecdotal evidence suggests that the interest for residential housing for investment purposes in Budapest has eased after the introduction of MÁP+.

Potential Implications of MÁP+

  • The return on MÁP+. The return on this security is above the market but the authorities consider it a fair price to pay for the aforementioned objectives. MÁP+ are nominally costlier for the budget than current domestic wholesale or external funding (Figure 2). Although the initial interest rate on the MÁP+ is 3.5 percent, the simple average annual yield is, as previously noted, 4.95 percent. The latter should be compared to the yield on the domestic 5-year domestic wholesale benchmark, which has declined from 1.7 to a record low 1.0 percent between mid-June and September. The Hungarian government has not recently issued a Eurobond, but with the current CDS spreads and swap rates, this alternative also seems cheaper. However, when the interest rate on MÁP+ was originally determined, it was only about 20 bp higher than the yield of a 5-year inflation-linked retail bond (PMÁP), based on the MNB’s inflation projections at that time.
  • Opportunity cost. A few market observers are of the view that the same demand could have been achieved by a lower yield. If they were to be right—which is a strong assumption— perhaps, it would have been possible to achieve similar sales by an effective yield of 3 percent. The excess pricing solely due to the MÁP+ issued during Q3 2019 would have cost the budget an extra HUF 41 billion, or about 0.1 percent of GDP. However, compared to the 5-year wholesale benchmark interest rate (1.01 in September 2019), the additional budget expense is larger (almost 0.2 percent of GDP). For illustrative purposes only, if the current difference between the annual average MÁP+ yield and the current annual interest rate of the 5-year wholesale benchmark bond (1.01 percent in September) is applied to the half the declared retail bond target sales by 2023 (HUF 11,000 billion) and this half would be issued solely as MÁP+, the additional expense would, all other things equal, amount to almost ½ percent of GDP. This amount would obviously be smaller if: (i) other types of less expensive retail bonds continue to be purchased by retail investors; and, (ii) the interest rate on larger wholesale funding increases over time. The latter is likely given the current record low interest rate and in the case of higher demand. Potential savings from the lower interest rate could be used to further reduce public debt or invested to boost potential growth and sustain faster convergence. Finally—albeit a theoretical issue—higher funding costs at the margin should in principle reduce the expected net present value of some public investment projects, which should therefore be revisited.
  • Arbitrage opportunities. The authorities are trying to contain potential arbitrage opportunities. Some dealers were initially promoting MÁP+ to foreign individuals. ÁKK has since encouraged those dealers to focus their sale efforts on residents. Nevertheless, according to market observers, it is still possible for individuals with good credit rating to borrow abroad in euros, convert to HUF, buy MÁP+, and swap the return in HUF back into euros, and still make a profit— which partially reflects the sovereign risk. Another opportunity initially limited but explicitly prohibited effective October 14, 2019, was to use MÁP+ as collateral for loans with Hungarian banks, for instance to buy additional bonds.
  • Yield curve effect. MÁP+ pricing will affect the relative prices of other funding sources. Currently, banks’ loan-to-deposit ratio is well below 100 and they generally have a comfortable LCR. Hence retail government securities do not appear to crowd-out bank deposits to an extent that would affect new bank lending. Nevertheless, over time more expensive government retail debt could potentially increase the funding costs of banks, hence making borrowing more expensive.
  • External risk reduction considerations. The shadow price of external vulnerability is affected by the already reduced external exposure as well as by the fact that Hungary’s net external debt position is projected to improve. The presence in the international markets and additional rating upgrades could further lower financing costs. Moreover, Hungary’s net international debt position is projected to become positive in late 2021. It means that the cost of external financing could perhaps be smaller than currently perceived. However, it may still not be attractive if there is low tolerance to foreign exposure due to a perceived or real concern that the probability of new global shocks is increasing.
  • Other fiscal and market considerations. In addition to borrowing costs, there are other fiscal considerations. The higher funding costs of MÁP+ will increase the budget deficit, but the extension of maturities could reduce the annual gross financing needs in the near term. The average maturity of the retail portfolio has already increased from 18 to 30 months. MÁP+, however, is akin to a reduction of the personal income tax on savings. While it has been designed to be accessible to all individuals, the wealthier individuals are likely to benefit the most. In addition, the bond may be effective in reducing spending and the demand for real estate of the middle class, it is less convincing that the wealthy individuals would behave in the same way. Instead, they might move their investments from riskier investments to the safer MÁP+. The impact of exempting interest earnings of government securities from taxation seems ambiguous, as it may influence the distribution of savings toward government bonds and away from other financial assets. Finally, while tax revenue can increase somewhat due to the higher interest income generated by MÁP+, this would be moderate since interest income of government securities for individuals is no longer taxed. The additional tax revenue would only come from VAT on any increased spending generated by the bonds.
  • Monetary and credit policy implications. MÁP+ mitigates the adverse impact of negative real interest rates on households—a consequence of the accommodating monetary policy. Arguably, MÁP+ could even enable prolonging the accommodative monetary stance: the adverse impact on private consumption and housing investment of the very accommodative monetary stance is now contained and would thus be less likely to necessitate an early tightening. Generally, the accommodating monetary policy contributes to aggregate demand, including private consumption and investment of households, while the objective of MÁP+ is to boost savings of households and curtail aggregate demand. Finally, some recalibrations of day-to-day liquidity management by the MNB are needed to account for the share of bank deposits and cash in circulation used to buy MÁP+.

Figure 2.MÁP+ and Selected Wholesale Benchmark Bond Yields


Sources: Haver; Magyar Nemzeti Bank (MNB); and IMF staff calculations.

E. Conclusion

14. A key objective of public debt management is to strike balances between reducing the cost of funding and limiting vulnerabilities. MÁP+ has many reasonable objectives, although some of them, such as higher a savings rate of households and reduced external indebtedness, are to a major extent driven by macroeconomic policies. Going forward, the question remains whether these objectives can be achieved by appreciably lower cost to the budget given less expensive alternative funding sources and policy options. Ultimately, it is a political decision how to weigh the opportunity cost of reducing external vulnerabilities, refinancing risks, maintaining a high savings rate of households, reducing cash hoarding, and how to redistribute budgetary resources. However, a few market observers believe that the same objectives could be achieved at less cost and with fewer distortions. Some presence in and continued access to diversified markets—including international markets—are also important and appear to be much cheaper than the MÁP+ given current market conditions. All other things equal, during Q3 alone, MÁP+ has cost the budget almost 0.2 percent of GDP extra per year compared to the similar domestic wholesale benchmark bond. Hungary’s external vulnerabilities have declined significantly since the global financial crisis due to active public debt management and external debt is projected to decline even without MÁP+. The shadow price of further reducing foreign currency denominated and external funding risks thus reveals the authorities’ perceived risks of new external shocks.

15. Public debt management also needs to respond to changing market conditions. A good example in this regard is the ÁKK’s decision, announced late October 2019, to lower the interest rate on some retail bonds beginning early November 2019, as well as to cut the distribution fees to banks beginning 2020. As the authorities continue to issue retail bonds, they may want to continue to review their programs, including MÁP+—ranging from pricing, maturities, to sales channels—as market conditions continue to change. Consideration should also continue to be given to diversification and presence in international markets.


    ÁKK, 2019, Government Debt Management Report 2018, Hungarian Government Debt Management Agency, Budapest. (

    Barcza, Győrgy,2018, “Is Retail Debt Too Expensive? The Case of Hungary,” Presentation at the International Retail Debt Management Symposium, April 26, 2018, World Bank, Washington DC.

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    Das,UdaibirS.;YinqiuLu;Michael G.Papaioannou; andIvaPetrova,2012, “Sovereign Risk and Asset Liability Management—Conceptual Issues,” IMF Working Paper WP/12/241, International Monetary Fund, Washington DC.

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    MNB, 2019, Inflation Report June 2019, Magyar Central Nemzeti, Budapest.

    Nagy, Márton andPálPéter Kolozsi,2017, “The Reduction of External Vulnerability and Easing of Monetary Conditions with a Targeted Non-Conventional Programme: The Self-Financing Programme of the Magyar Nemzeti Bank,” Civic Review, Vol. 13, Special Issues, pp. 99–118.

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Prepared by Kamil Dybczak and Tonny Lybek.


According to ÁKK’s website: “The mission of ÁKK is to finance the government debt and the central government deficit at the lowest costs in the long run taking account of risks, at a high professional level and by using sophisticated methods.”


According to the IMF’s 2014Revised Guidelines for Public Debt Management (page 7): “The main objective of public debt management is to ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.”


Ibid, guideline 1.3 on policy coordination. Paragraph 16 (ibid) elaborates: “… A goal of cost minimization over time for the government’s debt, subject to a prudent level of risk, should not be viewed as a mandate to reduce policy interest rates or to otherwise influence domestic monetary conditions. Neither should the cost/risk objective be seen as a justification for the extension of low-cost central bank credit to the government, nor should monetary policy decision be driven by debt management policy considerations.”


Ibid, guideline 6.1 on diversification of instruments and portfolios.


See Annex I on public debt sustainability in the 2019 IMF Staff Report on Hungary.


The ÁKK pays banks a commission to encourage such sales. Banks may still charge their clients additional fees. Nevertheless, many individuals prefer to use their bank, although it is cheaper for them to use the Treasury.


In early 2014, monetary and financial institutions held MNB securities of about 13 percent of GDP.


For different approaches on how to calculate the liquidity premium, see, for instance, Sarr and Lybek (2002).


The following retail bonds are being phased out: FMÁP (half-year government security); 2MÁP (2-year government security); BMÁP (bonus security); and KTJ+ (treasury savings bill plus).


Property funds have thus far offered comfortably returns given the booming real estate market, but they are taxable and not risk-free. With a view to enhance financial stability, new investors in property funds have since June 2019 only been able to redeem these securities within 180 days compared to previously 2 days.

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