Analytics, Financial Services, Investments, Latvia, Legislation, Real Estate

Actually, in this quarter the market does not cease to surprise us: an unprecedented surge in participants' activity in July, an unprecedented drop in this activity in September, sustained increase in optimism of Latvian residents about the prospects of the market development, as well as rumors of mass buying by foreigners in rural and forest land.

 

 No less surprising was the fact that, despite the optimism and the increasing of number of transactions, the market not only stopped the growth, but also showed for the first time during the year some tendency to decrease. In this period the market developed under the influence of two major events – the entry into force of amendments to the Immigration Act of Latvia, giving investors the right to obtain a temporary residence permit in EU and the elections in the 10th Latvian Saeima.

 

July 1, 2020 amendments to the Immigration Act of Latvia, which had high hopes both in Latvia and abroad, entered into force. According to these amendments, the temporary five year permission for residence in Latvia (read – in Schengen area), can be received by those foreign investors who will buy real estate in the country (for a sum, which is not less than 100’000 LVL – in Riga and Riga’s region or in Daugavpils, Jelgava, Jekabpils, Jurmala, Liepaja, Rezekne, Valmiera or Ventspils; for a sum, which is not less than 50’000 LVL – in other locations).  In addition to a property, which is bought till 1^st of July, this law does not apply.

 

The permission for settlement will be also given out to foreign entrepreneurs, who had invested in enterprise’s, which operates in Latvia, statutory capital not less than 25 thousand LVL and paid not less than 20 thousand LVL in taxes per year. In addition foreign investors can settle in Schengen area’s states, if they have subordinated deposits in Latvia’s credit institutions for a sum, which is not less than 200 thousand LVL.

 

Motive of legislators is completely understandable: by taking into account that in Latvia before the crisis remained the only sphere, which drew the whole economics towards it – operations with real estate and everything that is connected with it – beginning with commerce till maintenance and construction, then renewal of exactly this sphere, according to them is the magic stick that will rescue the state.

 

From the first sight it is like that – during 20 years of independence Latvia was able to get what unambiguously is valuable in Eastern markets – its EU member’s political status and status of a country, which has joined the Schengen area.

 

Thanks to it, the status of permanent Latvia’s inhabitant practically does not differ from other EU country’s permanent inhabitant’s status, in a sense, that it is given rights to freely migrate across Europe, be there as long as he wants to, gives rights to a job, education and health care in accordance with European standards etc. It seems that a daily demanded good showed up for a country and now, when it is competently attached to the real estate market, it should cause rain of gold all over the country.

 

Observers considered that due to the adoption of the amendments to the Act, the property market in Latvia in the near future is doomed to a sharp jump in prices. In connection with this many people who planned to buy property in the nearest future, hastened to make a deal in July. It was recorded also some interest from speculators.

 

 As a result, only in Riga in July was conducted 495 transactions with apartments – the highest figure as for 2010 and beyond 2009. For comparison – in June in the capital, there were only 309 transactions. Buyers of land were active a little earlier – in the Land Registry was recorded 42 deals in the land market in June 2010 – twice more than the month of May. We, of course, talking about Riga, as the most liquid market.

 

Approximately the same trend continued in August – 372 purchase of apartments – the second result in the current year.

 

The property was bought in July mostly by the local residents. Russian buyers preferring to buy in a summer the resort real estate, did not show the special activity in this month. In Jurmala, incidentally, was fixed in July, the minimum for the entire year number of deals on apartments – only 5 – and the usual number of house sales – 15. But in August, after an unprecedented in scale music festival "New Wave" structure of buyers have changed a bit in favor of the Russians. The same is said and statistics on the deals in Jurmala – 23 apartments and 21 houses.

 

However, the summer buyers, who sought to overtake the rise in prices, made a mistake this time – in July and August, prices in Riga practically did not grew up – they ranged at the level of EUR 580 per 1 sq.m.

 

In September, the number of deals fell in Riga to the minimum level for the entire period of crisis – 187! So low it was not even during the Great collapse of prices in 2008. In all likelihood, July and August took over the entire volume of transactions, which was supposed to happen in the coming months. Accordingly, in September there was a decline in activity. The volume of proposals remained high. Reaching a level of EUR 550/m2, the market became very attractive for the real estate acquired prior to 2003-2004. But to digest this volume at the diminished level of purchases, he could not. Prices have taken a step back. Small but still a step – square meter fell by 0,4% and amounted to over 578 euros. Thus the market has completed the annual progressive movement upwards.

 

However, there is nothing surprising nor why the market has grown so much since September last year, nor as to why this growth has stopped. Experts of "Century21Baltwest" noted in previous reviews, that a sharp decline during the crisis, the number of objects sold on the market will inevitably lead to sustained higher prices. Even though since 2008 the number of buyers did not exceed 3% of the total population. But in March 2010, when prices crossed a psychologically important mark in EUR550/m2, and the number of potential buyers has decreased to 2,5%, our experts have warned of a possible deceleration of growth, and even on rollback.

 

Rumors of a mass influx of investors from abroad and the consequent rise in prices sparked that those buyers who are wanted to buy the property before the end of the year, decided to buy it in July and August, leading to a real reduction of transactions in September. While maintaining the  offers at the same level as in previous months, the market showed a sideways trend and then the tendency to rollback.

 

And what about foreign investments, which for so long time wait by the market participants? Alas, his hopes for their early arrival did not materialize. In early September, according to the newspaper Latvijas Avīze it was only 5 applications filed by investors wishing to obtain a residence permit. At the end of September this figure had risen to 18.

 

September 13 "Rietumu banka", positioning itself as a market leader in products and services associated with obtaining a residence permit in Latvia, said that the first investor has received a corresponding note in his passport. It was a Russian citizen, who opened a subordinated deposit in that bank for the required amount.

 

This Bank claims that its database has a few dozen people who started with Rietumu to obtain a residence permit. But this information is not confirmed from other sources. And not dozens, but thousands of investors are needed today in Latvia in order to reverse the situation in the country's economy – exactly about this figures said the former vice-mayor of Riga, A. Slesers, campaigning a year ago for the adoption of this law. Thus, despite the fact that interest to this product in the world was and remains high enough, on the Latvian economy it is not affected. The mass of foreign investors, in contrast to the countries such as Canada, USA and Bulgaria, even has not yet come to Latvia, and hardly will come soon.

 

There are several reasons. First,  the most part of foreigners wants to get residence in EU not for life and work in Latvia, but to use it as a transit to other more prosperous countries of the Old World, or to move around Europe without to stand in queues for visas, etc. And for this it is quite possible to use the opportunities provided by immigration law of such countries as Italy, where the residence mark can be obtained by buying real estate for EUR300'000, or the same in Bulgaria, by paying to its government EUR150'000 or giving him an interest-free loan for five years in the amount of half a million euros.

 

Secondly, and most importantly, in these countries the investor immediately receives a permanent residence permit, and that is very crucial for him. But getting a permanent residence permit for foreigners from July 1 has become even more complicated. Moreover, it is only necessary to pass the Latvian language, you must still within the first five years of temporary residence to be in the Schengen zone in the aggregate not less than 4 years. I.e. an alien cannot be, for example, in Russia, China or Ukraine for more than two months per year (before that period was six months). Therefore, Latvia is not competitive in this market.

 

Nevertheless, the most popular on the market is just a permanent residence permit. By the way, Russians and other CIS citizens are not the main consumers of this product. Superiority keep the Chinese and Pakistanis. They really bring hundreds of millions of dollars to the budgets of countries receiving immigrants or giving them a legal opportunity to move around Europe. But for them is relevant only to a product called the permanent residence permit. And this is the main category, for which it made sense to fight.

 

Third, residence permits for foreigners in the EU or in North America – it is very profitable, but extremely complex business, providing for the presence of the extensive infrastructure.

 

The main element of this infrastructure is not the bank, real estate or law firms that are trying to engage in this business in Latvia, but a network of agents worldwide, provides marketing, consulting and other things without which the business will not develop.

 

Bankers, realtors, and lawyers connected to it only at certain stages, in general it is not their specialization.

 

Apparently, the members of the Latvian parliament brought the country to the market, which they did not know. Although in fairness it should be noted that the authors of amendments to the Immigration Act had to overcome hard resistance from the nationalist-minded deputies of the Saejm, who put all their efforts to derail their acceptance. And the modern amendments were the result of a complex compromise. Unfortunately, this compromise was achieved at the expense of economic efficiency.

 

And finally, fourth: there is not a special investment attractiveness of Latvia today, the country remains in deep crisis, domestic demand for property here is minimal, but the political risks remain high. That  demonstrated the last parliament elections – the extreme right nationalists are invited to the ruling coalition. Therefore, it is not the most attractive market for foreign speculators.

 

All this taken together led to that the amendments to the Immigration Law designed to attract to Latvia the foreign investments, did not give the effect to this time. And if the Latvian banking products opening the way for foreigners to the EU, may still be in demand in countries of the former Soviet Union, there is no possibility to say the same today about the property. The modern Immigration Law is only an additional incentive for those aliens who are already considering to buy the real estate in Latvia.

 

But what are the prospects of the real estate market in the near future?

 

Many people rightly linked the answer to this question with the elections in the X Saeima of Latvia, which took place October 2, 2010. The political bloc "Unity" which formed the basis for the government coalition in the past year, won the victory.

 

This bloc has already bound itself a year ago by obligations to the IMF and did not hide, even during the election campaign, that it intends to continue to tighten the belts on the body of the inhabitants of the country – to increase and introduce new taxes, to increase the retirement age, raise the cost of utilities, etc.

 

The end of the tourist season in Latvia will only exacerbate these trends. Projected growth in exports and an increase of income in some industries may significantly affect the reduction of unemployment, but not enough to affect the level of consumption. Latvian lat, firmly tied to the euro, will continue to be a "sacred cow" for the winning political power, which is firmly protect the interests of Swedish banks have invested their time billions of euros into the system of mortgage lending of Latvia. About any devaluation, which could revive the production nobody will remember today.

 

Therefore, it is impossible to expect the changes in the economy in the near future. The impoverishment of the people will continue, but its purchasing power will decline. And, as we already explained, the domestic demand will determine in the immediate future the development of the real estate market of Latvia. Future increase in tariffs for heat energy, which has already announced by utilities, will strengthen last year's trend of seasonal sales of the property, which will further increase the offerings on the market and to reduce demand.

 

For the resumption of growth speaks, perhaps, only optimistic people. According to the September SEB – an indicator of house prices, 32% of the population (29% a month earlier), agree to the allegation that in a year the prices will be higher than now. The number that favored lower prices, reached their lowest point for all time of polls – only 18% of Latvia's residents believe that prices of real estate market for the year will fall (a month earlier – 19%). Slightly decreased the number of moderates, now 32%, compared with 35% last month, believe that prices in a year will remain at current levels. And 19% of respondents were unable or unwilling to answer the questions of Indicator (previously – 16%).

 

Expert on the social economy, SEB Bank Edmund Rudzitis commented on poll results: "Despite the information about the rise in price of energy and food, the mood of the inhabitants of Latvia with regard to prices Real estate has not changed significantly. While new accounts for the heat is not obtained, and do not know which property taxes have to pay next year, people do not consider these factors important in assessing the potential of the property market. Even less impact on the forecasts have the interest rates that are at a relatively low-level and in the future can grow."

 

The mood of residents, as is well known, is an important factor in the development of markets, but not determinative. As we know, this mood can change quickly enough under the influence of objective reasons.

 

What will prevail: the mood of people or the objective conditions remains to be seen, but Century21 experts predict that square meter in Latvia in the short term is likely to become cheaper. This will not slump as two years ago, but rather a gradual decline in prices before the February level – EUR550/m2.

 

This is the threshold  where the market should leave the objects acquired in 2003-2004, and when, is likely will return those participants (0,5% of the population) who were unable to move beyond this psychologically important level and left the market in the early spring of this year. Then the market will have a chance to turn back toward growth. Further, as already long been a tradition in Latvia will depend on government action and the development of the general economic situation in the country.

 

The downward trend has already manifested itself in the market of resort real estate. If till September the price of Jurmala's new projects were kept at least at the level of EUR2'000 / m2, and even grew slightly in July and August, in September was recorded roll back to EUR1'800-1'700. The Vidzeme seaside (Carnikava-Saulkrasti, etc.) price dropped to EUR1'400-1'200 / m2. I.e. developers have finally realized that the Baltic coast – it's still not Cote d'Azur, descended from heaven to earth and resort real estate market has been gradually acquiring real. In all likelihood, enlightenment will come soon and in the secondary housing market.

 

Last summer was marked as an increase in consumers' interest to agricultural and forest land in Latvia. And not only an increase in interest, but the increasing by number of actual purchases. According to the Land Registry in August was concluded 240 deals for the land, and in October – 246. At first glance, nothing special – a little above average. Moreover, in January, February and March were held far more land transactions – 469, 267 and 302, respectively. But if you look at their structure, it becomes clear to the panic that swept the Minister of Agriculture Janis Duklavs: the land of the summer and early fall, bought mainly by foreigners.

 

In the first half of this year, they had already bought 15,000 hectares of arable land and other agricultural land (mainly in Ludza and Rezekne region). According to observers, in the late summer this trend was resumed with unprecedented force (although exact data on the volume of transactions are not called).

 

According to the Minister of Agriculture, whose words quotes the newspaper Neatkariga rita avize, if it goes on, the farmers will soon have to rent the land from foreign owners. This danger

is even greater because the 1 May 2011 will remove all restrictions on the purchase of land by foreigners – citizens of the European Union. In this regard, today the minister plans to ask the European Commission to increase for a three-year period the restrictions on the sale of agricultural holdings.

 

Meanwhile, after the dry summer and the death of the grain harvest in Europe and in Russia, agricultural land have become the object of interest from investors around the world. So there is nothing surprising in the above statistics in Latvia. However, the country has a different problem – huge in its scale of abandoned agricultural land – according to official figures – no less than 100 thousand hectares. Very often that lands are owned by banks (the former of collateral property), or simply thrown by owners who did not engage today in agricultural production because of its unprofitable in current conditions (mainly due to lack of credits and subsidies). These lands are primarily go on sale.

 

Consequently, the next year we have a chance to observe the revival of production, such as cereal, that actually creates more jobs. We can also predict the intensification of the land market and the attendant industries. All of this suggests that the crisis, albeit harshly, but still puts the Latvian economy from a head on feet.