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

If we will speak about residential real estate, in fact, the sector of serial secondary housing turned into market “of internal consumption” and the sector of elite estate of business class housing proposes the subject of sale nearly exceptional for external demand.

In this case, the market of serial housing continues insignificant variations in a price range of 550-580 euro for 1 m2, while new elite housing added in price about 15%.

But, everything will be presented in order.

Standard apartments in Riga

As it was earlier specified in the previous overview, when has reached the mark in spring 2010 of 550 EUR/m2, real estate in this sector got to a new quality level, where it is being present till now, customers number balanced in fact the number of salespeople. By the way, the number of both does not exceed more than 3 years of 3-5% from total country population.

But for previous quarter, the number of transactions in this sector seriously decreased, that occurred as an unpleasant signal for the marketers. So, according to data of Land registration book, if it was fixed maximal transactions number in this year – 435 in April of current year, in May we had seen the number close to annual minimum – 267, and in June it was record low number – 82 transactions!

So, the market practically froze (the variations on the level 1-2% for a month are equal in such illiquid market of individual error).

This can be explained by two factors: at first, by decline of customer count, who do not assure in tomorrow and that’s why do not hurry to do high-priced sells (it is especially felt after increasing of tariffs on gas from 1 of July at the average for 15-18%); at the second, by decline of the quote of quality repaired housing, which is generally demanded today.

In other words, statistically average immiserization of population is proceeded, that objectively does not assume the run-up. Those one, who has money, prefer the quality housing today at price, cheaper than present-one.

Such situation usually occurs before the market disruption, when those, who really need to sell, begin to offer prices, which correspond to the Customer’s attitude. And today, he namely sets the pace at the market of serial housing.

However, it is not worth to rely on the scale break earth, there are no objective and no subjective supposition, that will be noted below.

Elite housing

There is principally another position in this sector. The salesmen set the pace here more and more. The reason is clear – the changes in Immigration law, accepted exactly a year ago and giving to the real estate customers from abroad, the right for getting a residence permit in Latvia (RP).

According to the data for the middle of June t.y., in the State Board of citizenship and migration (SBOCM) – authority, which deals with advisement and issue to foreigners residence permit in LR – for 7 of July 2011 was filed 339 applications (272 – in current year) for getting RP from foreign investors. Among them, 285 applications concerned getting a residence permit because of real estate acquisition. Together with members of families – these are 669 people. To the indicated period, 191 applications were satisfied. RP got 479 people. Other claims are being considered now.

It is known, that in the early autumn, new wave of claims is in prospect, from those people, who bought the real estate, but have not passed yet the documents for RP in the form of vacation summer season, well according to existing practice, earlier issued Schengen visas (if they are issued by Latvia) for the period of claims advisement (60 days) are annulated and it is undesirable for many families in summer period.

Total volume of investments into the real estate since July 2010 is 38 million 594 thousand 901 lats. or a bit more than 77 million dollars USA.

77 million dollars is a large amount for the Latvian market. And taking into account, that the whole sum was directed in fact to the housing market of business class of Riga and Jurmala (more than a half of all bought objects), that was quite huge.

The case is that there is a lack of such real estate in Latvia: at first, there was less of such real estate, than standard apartments built in soviet years, and at the second, such housing was not built, beginning with the middle of 2007, when there was a hardest   mortgage crisis and then also an economical crisis.

The lack of such housing we can feel just today but, especially rough we will feel it in the end of the year, when practically all attractive objects in Jurmala will be out of sale.

One one hand, this has already occurred to price increase, the objects on the average got up to 15% and there are good reasons to think, that to the end of the year they will become more expensive for 5-10%. Average price for 1 m² in elite new building or in apartments in Old town or in “calm” center in Riga was for the end of June from 1,800 to 3,000 euro, and in Jurmala – from 2,500 to 6,000. Such trading range is explained in a such way, that, at first, the market is not structured, and at the second, the salesmen are governed by not only correspondence of demand and quotation, but by their credit histories – they are glad to sell cheaper, but the banks, where this real estate put in pawn for many years, they do not give.

On other hand, the deficiency of called-up housing has already animated building and developing business. According to unconfirmed data for the beginning of June 2011, city council of Jurmala issued the permissions on the building of 14 new houses with few apartments of luxe class. But, taking into account rates of additions of people, who want to get RP (by the way, Russians lead here – 310 claims), this will be enough maximum for 6 months. But this housing should be built and it will take minimum 1,5-2 years.

All this tells us that at an early date we will see the activation of the secondary market of elite real estate in Jurmala and the transfer of customer activity to Riga, where remain relatively many new unreleased object of business class.

Probably, the market of private houses activates, which remains inanimate and unclaimed, most of investors do not plan to live here all the time and the acquisition of a house seems onerous for them – heavy expenses for keeping and guard, it is problematically to let on hire and so on.

Certainly, it can be suspected, that when having nothing else, the investors will buy also the housing of economy class, but now such cases are very seldom, such housing is good for next following letting on hire, but the mentality of Russians is different, so, the new objects are needed, that correspond to high comfort level.

Similar tendencies are developing also at the market of commercial real estate. The interest for not large objects for internal demand is practically absent, it can be said, that this factor has lost its liquidity again. But the objects in Old town and in the center of Riga are quite called-up.

There is a market for office and trade-official lodgments. For all this there is a customer and this customer is a foreigner. It is interesting, that a lot of investors express interest to such buildings, situated in the center of Riga, with only one aim of reconstruction and following next transfer to the sector of dwellings, because the stockout of quality housing in the town center increases with every month.

In Old town sales and restaurant areas are bought for the price of 3,5-4 thous. euro for 1 m². Out of the range of Old town the prices are essentially lower. Here can be discussed the sale of square meter at the price of two and may be one and a half thousand euro. However, the interest for sales areas in these districts is not big, so the return  from their letting on hire is not attractive.

As for commercial real estate, which is situated at outskirts, so it is in most cases illiquid.

Rent market

The rent market is divided into some sectors: the sector of trade commercial areas, official lodgings and the sector of housing rent.

In comparison with the first quarter of 2011 only rent market added essentially, but only in resort area, above all in Jurmala. The increasing has seasonal character, but not only. In comparison with the last year, rental rates have increased. Practically it can be said, that they turned to before crisis level. The apartments of good quality in the center (Dzintari-Majori) can be hired for the price of 3,000-4000 euro for the month, by the way, for a month it can hardly be hired – the preference for renters, who prefer to rent the housing for a season and better for a year (it is clear, that in winter period the rates will be essentially lower). Further from the center the prices give way to 1,800-2,000 EUR in Bulduri and Dubulty. The apartments without European-style remodeling can be rented in the same district for a day and the rates will be not less than 150 euro.

The reasons are the same: a lot of foreigners look narrowly to Latvia and prefer to pass one or two weeks on the seaside to get acquainted with a country and sometimes to see the real estate.

The rent market of town housing practically remains without changes for some months. The demand persists for furnished 2-3 –room apartments in the center, in reconstructed houses for the average price of 400-500 euro in a month for 2-room apartment and 500-600 euro in a month for 3-room apartment. The most called-up is “calm center”, where the rent price of 2-room apartment reaches 800-1,200 euro in a month for 4-room apartment. As always in summer period the apartments in Old town are required – here the rates hesitate from 1,500 to 3,000 EUR in a month.

In dormitory suburbs the renters take interest to the rent of quality housing, here recoils the lack of offers. The prices for the rent of housing in building estates is at the average 100 euro in a month for 1-room apartment, 150 euro in a month – for 2-room one, 200 euro in a month – for 3-room one.

The rent market of office places also remains stable already several months in succession. In segment of A class office places the average rental was 8-10 Euro per square meter per month. The average rental in B class office places was 6-8 Euro.

According to experts’ estimates, the principal demand on retail space make victuallers. But, however, the called-up remain only the places in the centre of Riga and in the Old town. The demand for small shops in large shopping centers also has increased – such as SPICE, MOLLS, GALERIJA CENTRS (that is, however specific for all seasons). But the demand for separate rooms for clothes trade and other industrial goods keeps only in the Old town. The floor space owners even in such traditionally business streets in the Riga’s centre as Terbatas and Brivibas experience certain difficulties with lease.

The rent rates in the centre have increased for 10-15% in comparison with the beginning of the year. The most expensive are the floor spaces in the Old town, placed in the first floor and having windows. The square meter costs 20-25 Euro/m² here. It should be noted that rent rates at these areas have actually doubly increased.

In dormitory suburbs the situation with renting of commercial places still remains hard – at the level of 3-5 Euro per 1 sq. meter. As that the demand is minimal as 3 months before. минимальный.

What comes next?

The perspectives are misty as often happens in Latvia in these latter days. At first they depend on economical and political factors and secondly depend on country citizens. At that in Latvia the second exponent is not always correlated with the first.

But now neither one thing nor the other suggests the optimism.

In economics in spite of victorious government reports there is catalepsy and the further reduction of consumer demands. Properly it is noticeable by unprecedented reduction of numbers of bargains on property market.

Really, the country’s GDP per the first quarter of current year have increased for 3,4% at that it has been increasing 9 months already successively after catastrophic fall in 2008, 2009 and first half of 2010. By what means? Solely at cost of export industries and introduction of new taxes and excises, e.g. gas taxes. What are the export industries in Latvia? They are the food industry and, partially, the agriculture including coal-oil production, pharmaceutics; plastic industry and its produces; wood substance and its produces; charcoal; straw, alpha and other materials for plaiting produces; production of textiles; metallurgy and metal products; furniture, bedding, mattresses, pillows and analogous printed furniture materials, lamps and lighting equipment.

In general they are average and small businesses although occur giants of national scales, such as Liepaja steel works that besides produces rolled stock and rod.

Such businesses, in spite of unprecedented tax hike in 2010-11 could survive and partially even improve their market power. In particular, in May, 2010 volume of business of oriented on export businesses increased for 10% but in comparison with the very period of 2010 – for 35,4%.

However it is not practically reflected on home consumption. There are not so many such businesses but Government not only does nothing for stimulating of apparent demand but conversely increases taxes, excises and fees[1], breaks social sphere and even scares by the total fall of pension system. Reduction of unemployment (officially to 13,5% at the and of May, really – about 18%) happens solely at spring-summer season works cost and at migration of able-bodied citizens abroad cost. The volume of migration from Latvia got 12,2% in this year from the total number of citizens, that larger than 4 times exceeds the worldwide rate.

Appositely, just at labor migrant cost a great part of Latvian families survive. Migrants transferred to Latvia 643 millions US dollars last year and it is a great number for a country which consolidated budget incomes are planned this year at the level of 5,1 billions lats.

The oriented on apparent demand business as a consequence twists, the inflation increases, the citizen expenditures on accommodation service increase (about gas introduction it has told), the pensions are not notated. The Government which cannot really repay to International Monetary Fund is afraid of tax reduction so there is no stimulating of investments to production. At that Latvia remains the only country in Baltic which did not go to devaluation of its national currency – lat which makes additional difficulties for its surmounting the crisis. All this don’t suggest an optimism concerning to the increase of apparent demand and correspondingly to estate prices. And that in turn forbids predicting of some increases to the end of the year both in the sector of serial apartments and in the sector of commercial real estate intended for a small business.

The indexes of consumer expectations say about it being made by two Latvian banks: SEB banka and DNB Nord. On their evidence 73% of country citizens find the situation in economics bad. On indicator of prices on accommodation SEB evidence the most of respondents find that the prices during the next year won’t change (32,7%) or go down (16,9%). 29,8 % remain optimistic. I.e. the pessimistic estimations in society relative to prices on real estate grow although they have not got the critical level yet.

On another hand it doesn’t worth expectation and collapse. The Latvian market of economic class real estate couldn’t be named as overestimated and there are still not so many suggestions. Probably the price volatility in this sector will continue at the level 550-600 EUR/m². At that we can entirely expect the corridor fall to the lowest level at the last summer months and then the corrections at the beginning of autumn when money in the market appear, earned by natives at generally successful summer tourist season.

The foreign investments add the optimism which really still make weather in the market. But even there all is not so easy. From the one hand the corrections to Immigration law evidently work that resulted in the real moment by SEB Bank’s experts’ estimate, to increase of interest from the side of investors from CIS and primarly from Russia for 50% (in compasion with the same period of last year). Indeed as quizzes show Latvia got to the ten of countries whom the Russian real estate customers trust along with Great Britain, France, Germany, USA and Israel.

In this sector present not only the market factors but political and social factors – residence permit in Europe remains the attractive tool for potential investors in this sector. Economical factors such as undervaluation of purchased real estate, a desire to earn on the future increase of prices and renting – all this still play the second part, although it is noticeable that it won’t be always.

But namely political moments show the hazard for that in general positive for Latvian economics investment process. From the moment of amendments acceptance, e.g. per year in the Latvian parliament there were 2 attempts of innovations amendments– the first was directed to innovation cancellation at all (it has fallen) the second was successful and touched the new conditions while receiving residence permits on the base of investments into real estate.

Mostly there are two new conditions: now in order to receive residence permit it should buy real estate only from the country resident. They are Latvian citizen, non-citizen, the citizen of EC and the persons which already have residence permit in Latvian Republic. The second – while purchasing of real estate with denoted aim it should take into account not only market price but cadastral values of procuratory object. Here is a certain problem. The trouble is that most objects with values of 100-110 thousands lats which usually buy investors have cadastral values lower than required limit (30 thousands LVL in the big towns and 10 thousands – in the district centers). It hesitates at the level of 17-25 thousands lats.

The innovation directed on struggle with swindling when a brother sells to a sister 10 square meters in his garage for sought 100 thousands. But now the problem of discrepancy of referred and real object cadastral value should decide with the appraiser help. I.e. when purchasing an object a discrepancy between market price and cadastral value appears you should refer to appraiser which will confirm or cancel the real object cost. But, for the first this procedure costs little but money (about 100 lats) and for the the second it will take more time.

Evidently that given correction was accepted on behalf of appraisers but in general it doesn’t hurt the interests of investors. A different matter that frequent corrections of game rules harm to any of investment process but it is a question of global Latvian politics.

But the global Latvian policy can give different surprises. As is known in September, 2011 in Latvia probably parliament election will take place. The fate of foreign investments into real estate will directly connected with its results. The success of national-radicals may result in their inclusion into government and attempts to cancel those amendments to Immigration law which now are just beginning to work for the benefit of Latvian economics.

So the marketers may rely on common sense of Latvian electors and that the new Government finally will engage in real economical reforms in the country.