On the EU threshold

By Irina Syarki

For the last few years the real estate market in the Baltic states has made a big jump in development and today is considered as the most dynamic of all post Soviet countries

Photo: A.Kendenkov

It has been true in many respects, due to presence of the foreign capital, that the sphere of the real estate is one of the corner stones of the Baltic economy, with the countries now also understanding that real estate is one of the most stable and profitable ways of capital investment. Nevertheless, examining the real estate market of the Baltic states as a whole, the basic features and nuances of development in each separate state must be taken into account.

Pending large investors

Under expert forecasts, the potential EU membership of Estonia, Latvia and Lithuania is already causing big interest amongst large western investors. It is expected that in the near future these players will start gearing up for work in the Baltic territory. The matter is that the profitability expected from real estate objects makes up about 11-13%, this being a high enough figure. For example, in Warsaw, Prague or Budapest this figure is in the range of 9 – 10%. The principal cause of such high profitability is the small Baltic market on the European scale (even all three countries put together), and an insufficient degree of liquidity for real estate objects (the higher the risk, the higher the income). As usual, investors are interested in long-term investments, therefore this may include housing objects, offices and shopping centres -- the main thing is that the site should meet all necessary criteria and the given object should be in demand on the market.

Rough growth for supermarkets

For the last two or three years rough growth was observed on the retail space market in Riga. The obvious preference was given to large supermarkets located along the basic highways, and also in the centre of inhabited suburbs where a plenty of multi-storey buildings constantly provide the necessary number of consumers. Acceptable rent rates (in comparison to prices in the city centre and Old Riga), complex service, big parking lots – these are the basic components of success for supermarkets. This has resulted in many small shops closing down, and a number of new retail spaces, apparently in obviously successful places of the city centre not bringing the desirable profit to owners. At the end of 2002 the total floor space for shopping centres in the Latvian capital Riga and its nearest vicinities has exceeded 200,000 sq. meters, with all projects announced by today and expected to be completed by early 2005 set to bring another 140,000 sq. meters.

However, according to Ober-Haus, the retail space per inhabitant of Riga is less than in neighbouring countries: in Riga the figure is around 0.33 sq. meters, in Tallinn – 0.65 sq. meters, in Stockholm the figure exceeds 2 sq. meters. Lithuania on the given segment favourably differs from Latvia and Estonia, with active development in the retail business not only in the capital and its nearest suburbs, but also in other large cities - Kaunas, Klaipeda, Palanga where rent rates are lower than in Vilnius. Nevertheless This has not prevented the huge Akropolis shopping centre project in Kaunas.

Offices: offer exceeding demand

The office space market, having survived a boom in the mid-Nineties and then a crisis prior to the year 2000, has now again declared itself, only now in a much more civilized manner.

The Riga office market differs with the big market offer exceeding demand by approximately 20 – 30%. Local companies prefer to buy premises for a bureau in their property, and at present western companies have no such quantity of representations to fill the space offered on the market. The basic requirement for office centres recently changed from location to the presence of suitable parking places to satisfy not only all employees, but also customers. Until recently the highest rent rates were established on offices of A class and in the specially equipped centres, and also in the Old City and the prestigious centre. However, for the last 6 months rent has fallen almost by 20%, especially for empty offices of class A and B in the centre of Riga. Many consider, that essential changes will take place after the integration of Latvia into the EU when Riga is expected to really turn into a business centre for the Baltic states. But even under the most optimistic forecasts, this should happen no earlier than 2005.

Offices of class A in Estonia were always preferred better, as Scandinavian investors who were activating their operations in Tallinn put firstly high quality and excellent service in demand, and only then everything else. Besides, the centre of the Estonian capital (as opposed to Riga) had plenty of sites for construction of multi-storey top class office centres. Despite the fact that construction of new business centres considerably reduced last year, in 2003 Tallinn can brag a lot of outstanding projects bringing total floor space of about 15,000 sq. meters: City Plaza Building, Eurox Maja, some of the remarkable reconstructed buildings in the centre etc. Today the rent rate for Tallinn A class offices is approximately EUR 11 – 14 per square meter. As demand is high for the moment and will in the nearest future only increase, experts predict growth of 10 – 15%. For offices of B class the demand is lower, and rent goes from 5 to 7 EUR/sq.m. In Vilnius the demand for good offices is rather high, therefore office space is around 70 – 80% filled. The municipality welcomes business projects, therefore only by the middle of 2003 the market will have no less than 22,000 sq. meters of new office space, while about 70,000 sq. meters are in the process of reconstruction or construction.

In Vilnius the peak of development for the office space market fell on 1999 – 2000 when the general space of the objects handed over for use exceeded 90,000 sq. meters, and rent rates have risen up to 75 – 80 LTL per square meter. Today in Lithuania on the market of office premises the situation is the best among all Baltic republics: in Vilnius about 14% of class A offices are empty, in Tallinn – 20% and about 25% of offices are empty in Riga.

Tallinn in lead with new housing

In Latvia, compared to Estonia and Lithuania, the construction trend for new housing space is the lowest, however for the last two years this country has gone through an unseen rise in prices for the secondary apartment market: from autumn 2001 to winter 2003, prices for typical apartments in Soviet-era high-rise apartment buildings increased 2 or even 2.5 times, and in some cases even in tripled. Today the top boundary price for old apartments in good condition has almost reached the bottom level of prices for apartments in new buildings (550 - 600 USD/sq.m.). The prices have not changed only for apartments in the prestigious centre of Riga, and practically only because by 2001 they had reached their "ceiling" at (1,000 – 1,500 USD/ sq.m.). Builders of housing estates have also lowered their construction speeds, as for the moment the offer (of unfinished projects) has essentially exceeded the demand. All experts agree that for the housing market only mass construction of new houses and flats for the middle class can correct this situation.

In Vilnius the apartments in Stalin-era buildings and apartments in buildings previously for the communist party elite, located in the centre of the capital and in the Old city are in stable demand. The prices here reach from 500 – 700 USD per square meter for unreconstructed and up to 600 – 800 USD/sq. meter for reconstructed. Interest for typical apartments in Lithuania is much lower, than in Latvia, therefore prices are also lower (about 350 – 400 USD/square meter). First of all this is connected to the construction of new apartment houses constantly conducted in Vilnius and its vicinities. In opinion of constructors, consumers show greatest interest in housing estates with good accessibility and advanced infrastructure. Besides this an active state program for subsidizing construction of housing and external investments (for example, long-term loans from the World bank) have also helped the market get to where it’s at.

The quantity of new housing objects in Tallinn strikingly differs from Riga and Vilnius. Active construction of housing has resulted in prices for both old and new objects sinking rock bottom (at about 500 USD/sq. meter) by late 2001. Certainly, new buildings have set advantages, therefore the cost of new housing began to grow reaching not yet reaching the top in 2002 (850 USD/sq. meter, and in the city centre – 1,000 – 1,200 USD/sq. meter), with the prices for standard Soviet-era apartments falling 10 – 15% to about 450 USD/sq. meter today.

Globalisation at a local level

Whatever their size, the Baltic states still have significant problems for attracting large foreign capital, and the existing borders troubles the potential level of operation.  In expert opinion, with the EU tearing down these borders, market players in the three Baltic states could cooperate much closer and (as there is a small distance between capitals) for working together on construction and conducting profitable and mutually advantageous business.

This article was compiled by information provided by Ober-Haus real estate company.