Analytics, Baltic States – CIS, Investments, Latvia, Legislation, Real Estate

In general, starting in August-September 2009, when the cost of one square meter in the mass produced apartments fell to their lowest point – EUR 455[1], the market grew to the end of March by 20.8%. Typically, those investments in the Latvian real estate, traditionally nominated in euros, were more profitable than investments in the US dollar[2] by 12%.

In January-February, buyers and sellers showed the low activity – the number of sales contracts in January was only 405, which is about 30% less than the usually committed transactions in the preceding months. This is due not only to traditionally low activity of the population after the Christmas and New Year holidays, but because of the tax innovations. Now, selling property, the seller must submit a certificate of tax payment for housing, imposed since the beginning of 2010. Consequently, it was necessary to pre-pay this tax, as sellers, of course, not taken care of beforehand. The deal greatly stretched in time – until a few weeks. Therefore, a significant increase in sales in February – almost twice – was the result of these stretched in time January deals.

Nevertheless, in January and February we had been seen a decrease in sales, to about 600-650 transactions per month, with an average number of contracts in 2009 – 790 pcs. per month. This indicates a further narrowing of the market, what was predicted by analysts of Century21Baltwest earlier this year. Narrowing the market provokes a further gradual increase in prices, especially in the most liquid sectors. For example, the rising prices of standard small studio apartments made up nearly 10% in three months. The cost of 1 square. m. of mass produced apartment in this sector today exceeds the cost of 1 sq.m. in the sector of 2-3- bed-room apartments.

In March, the activity of customers has grown up and, although we don’t have today the statistical evidence, it is possible to say that the number of transactions in general has increased in comparison with the winter months of the last year. But, given that it does not affect on the price movements, we can suggest that we reached in March the average volume of sales in 2009. As a result, by April 1, the average cost of standard-type apartments reached the level of EUR550/1m2, while in the district of the Vecmilgravis prices still fluctuate at the level of EUR 460-510/m2, and Teika apartments have sold for EUR 700-760/m2. As mentioned in previous reviews of Century21Baltwest, the main reasons of sustained growth of the prices are the reduction of good offers in the market of mass housing, as well as the mood of the participants.

According to the former prime minister, leader of the “People’s Party” A. Skele, there is 1 billion LVL (about 2 billion U.S. dollars) is frozen on the Latvian real estate market. These items were purchased mainly in the period from 2004 to 2007 for the speculative sales and today stand idle while waiting for better times. A significant portion of such real estate is concentrated in the hands of banks that have received them as collateral for loans of insolvent debtors. Typically the banks have large margin of safety and can afford to postpone such an asset and not hasten to sell  it on the market. Naturally, the reduction in liquidity  offers causes the excitement, which leads to higher prices. More and more potential buyers are beginning to think that the best time to enter the market has already gone and they must hurry with their purchases.

Above all, there is a general strengthening of positivism: by the assessment of SEB – an indicator of housing prices, 32% of Latvia’s residents are ready to consider the possibility of buying housing, taking into account the factor of price. I.e. we can say that about 32% of the population believe that the market will grow (otherwise, why to buy on a downtrend?). This is exactly 2 times higher than in December of the last year.

Another new (!) reason for the growth of prices was the gradual recovery of the mortgage market. Since July 2007, Latvia has a law prohibiting the issuing loans to borrowers who do not have documented legal income. But even for the conscientious borrowers, it was very difficult since 2008 to get a mortgage – most banks de facto simply turned off their mortgage programs. So the past two years the market grew almost exclusively with the own money to it’s participants. Earlier this year, several Latvian banks, primarily DNB Nord resumed their mortgage programs, which allowed entering the market to new participants.

Foreign investments

Interestingly, by the evaluation of the same SEB-indicator, in Sweden, for example, the indicator of housing prices is falling, which inspires some optimism with regard to foreign investment in the real estate in Latvia. According to the agency Lursoft, the foreign direct investment to the fixed capital of Latvian enterprises in 2009 grew by 780 million LVL, or 32.12%. And most investors have invested in the industries, which crisis has hit hardest – banking, real estate, etc.

A good background for foreign investment is the increase in Latvia’s exports by 4,4%, which left in December 2009 for the first time in two years the “red zone”, as well as increase in March 2010 by the international credit ratings of the agency Moody’s Investors Service (Moody’s) the ratings prospects for Latvia’s credit rating from negative to stable in the preservation of the ranking at around Baa3. From the negative to stable was changed the future evaluation of deposits in foreign currency. Moody’s believes that the worst of the economic recession in Latvia has already passed, but it will take several years to the economy out of crisis. The agency noted a number of positive indicators, such as the growth of foreign reserves of the central bank, reduced of the interest rates, a positive balance of foreign trade, which ensures the stability of the currency.

The activity of foreign investors in the real estate market is beginning to be felt, however, are largely not in the residential real estate. The main interest of the foreign investors focused on the commercial real estate – related to trade and tourism. Suddenly, quickly find their buyers the unproductive during the years and decade’s objects of the resort infrastructure of the Soviet period. There are the orders for the purchase of the old boarding houses for renovation. But there are not much foreign investors willing to invest in residential property, including the construction of new homes. Such investments can still be described as ad hoc, and they concern mainly small houses, intended for reconstruction.

The event of the March 2010 was the adoption by the Latvian Saeima amendments to the Immigration Law of the Republic of Latvia. The market participants associate with this law high hopes. According to the amendments, foreign investors can obtain a residence permit for up to 5 years without having to stay in Latvia[1] in the case of buying real estate, the cadastral value of which reaches 100’000 LVL (about $ 200’000) in Riga or 50’000 LVL if the object is in another area of Latvia. According to the main ideologue of amendments the vice-mayor of Riga and the leader of the political party LPP / LC Ainars Slesers, adoption of this law will lead to thousands of new deals and will reduce the time to restore the real estate market.

However, President Valdis Zatlers sent the law for revision, citing the fact that it is not made clear the economic benefits that will be able to get the country’s economy after its adoption. Experts of Century21 evaluate such an effect with the great skepticism, given that in the Western world there are other, cheaper models to provide a residence permit for the foreigners. However, it is clear that the adoption of such a law will make the positive impact on the market sentiment and lead to the price increases even for the sort period of time, because some foreigners, first of all from Russia will buy the Latvian property for this aim.

Obstacles to recovery

However, foreign money, with rare exceptions, can only be a part (albeit a very important part) in the development of any national real estate market. The basis of this system is almost always a local capital, i.e. the local demand. But here we have the big problem. The price of EUR 500 per sqm. meter in the mass produced housing has become the “Rubicon”, which is ready to cross today, only 2.5% of the population of the country. This is the part of population in Latvia, according to the SEB-indicator of housing prices, who is ready to buy now the property at prices above this psychologically important mark.

It is quite understandable, because no one macroeconomic indicator indicates an increase in material well-being of Latvians. The numbers just indicate the contrary. Since January 1, 2010:

– 3% increased income tax, which now amount to 26%;

– introduced a new 10% tax on income from dividends and the new 15% tax on capital gains;

– 1.5% tax imposed on the cadastral value of real estate used by economic activity;

–  introduced a new tax on residential property in the amount of 0,1% to 0,3% in depending on the sq. meters of the residential area;

–  excise taxes on cigarettes and wine were increased, from May 1 will increase excise taxes on the natural gas.

The official unemployment rate has reached in the end of March 17.4%, which is 0.3% higher than in February and by almost 3% – than in December 2009. The real unemployment rate is approaching 25%. Thus, there is the mass impoverishment of the population, that in itself does not involve the active development of markets in general and the real estate market in particular. Therefore, the increase in the number of optimists in a few months at 16% should not mislead anyone. 32% of the population believes, in principle, in the growth of the market. Their feelings based on the pattern of recent months, the improvement of macroeconomic indicators and, in general, on the belief that after such a low incidence, the market must necessarily play up. But the actual number of customers today fell by 0,5% compared with the second half of 2009, when it has been a steady 3% of the population.

And that is associated with higher prices per square meter in mass produced housing. Therefore, logic dictates that in April the rate of growth should slow down and perhaps we may even see the small rollback – to the sacred mark of EUR 500 / m2. However, if the mortgage market would grow at least as it developed in March, and then this can be avoided.

But will the return of the mortgage lead to a sharp rise in prices? Many analysts predict just such a scenario – a sharp increase in the number of transactions and the rapid rise in the cost per square meter, subject to intensification of  the credit market. It seems that today this development is not possible. According to the same study of SEB, demand for loans in the current economic situation remains very low: only 3% of the residents are willing to take a mortgage today. People have become much more cautious than three years ago.

As stated by an expert on the social economy of the bank SEB Edmunds Rudzitis, “while the maintaining of the modern demand for loans in 2010 may occur the old trend of the providing majority of transactions by the buyer’s own funds and the influence of the limited supply at prices. More explicitly, these trends – he said – can occur for a small housing area, as well as for housing in high-quality projects. However, in the near future growth in property prices will not be swift. In the economic situation where is the high unemployment and a significant decrease in household incomes, population covers uncertainty about the future and they are reserved about the prospects of investment and long-term commitments. The situation will improve after the improvement of general economic background. When the level of unemployment will reduce and the income levels will rise, residents will be more lively interest in the loans, and banks – to take an active lending”. Perhaps today it is the most correct assessment of the situation in the Latvian real estate market.

Thus, most likely in April-June, we will see continued steady upward movement by the small pace, with the possibility of small setbacks and weak jerks. The dynamics of the market will continue to be determined by its narrowness, by the number of issued new mortgages and by the political decisions of the authorities. курорт

New building, elite residence and the resort properties

Following the general trend in the secondary market of the mass produced apartments, the new buildings also rose in price. They traded at EUR 1’000 per square meter, although there are the offers, particularly in the secondary market, up to EUR 1’500. However, the buyer is not ready to buy housing at that price today.

In general, this accommodation has demonstrated the most active growth over the past three months, because its quantity of the new housing is reduced. Largely reduced artificially. New homes today are not built, but according to analysts of NIRA Fonds, more than 20 new houses only in Riga are empty. Trafficking is not conducted, because the cost of their construction (and hence the cost of credit) is an amount that does not pay off in the sale at today’s prices. In some cases, banks are encouraged sales of new buildings at low prices, in order to get at least some money, but quantity of unsold new buildings remains very significant. And it is at the presence in Riga only of more than 8’000 families in the queue for Municipal housing!

A similar situation with the new buildings exists in Jurmala and the Vidzeme coast. Sales of new homes in these resorts is carried out today on the price EUR1’500 – 2’500 per square meter. But the real estate websites still offer here the mansions and apartments for EUR 3’000 – 6’000 / m2, but these proposals have no prospects. Why?

 If we talk about the local inhabitants, only 1% of the population, by the estimating of the same SEB-indicator of housing prices, is ready today to buy housing at a price above EUR 1’500 / m2. Price of the level more than three thousand euros does not even appear in the poll. As for the Russians and other foreigners, they could not be convinced that the apartment or house in Jurmala can cost more than similar housing at the best resorts in the Mediterranean. Until this is understood  by the owners of selling villas and apartments, the difference between supply and demand in this Baltic resort will remain at the same tremendous level.

By the price at EUR 1’000 – 2’000 it is possible to buy housing in the sector of Riga luxury real estate. This level lasts for three months. The quantity of transactions at these prices is extremely small. Also this sector have the same problem as in Jurmala – owners persist in offer of their apartments at the price of EUR 3’000-4’000 / m2, while the buyers at these prices either in Riga, or abroad is not there.

The rent: no end of the crisis

The market of rent retail space:  the advantage still enjoyed by small shops Sq. up to 200 m2 in the main shopping streets of Riga (Audeju, Valnu, Brivibas, Kr. Baron, Terbatas, Elizabetes Dzirnavu, etc.). The rates range here from EUR 8 to EUR 25 per sqm. meter per month. However, the quantity of such offers is very small. The  more large areas that are not in demand are vacant.

In office buildings there is stabilization of rates at the level of EUR 3 – EUR 8 per square meters. And there is demand only for a lower price boundary. Over 30% of all office space in Riga is still unclaimed.

A strong blow to the rent market of commercial real estate in the coming time will be done by the project DUKA, which is involved also the Riga City Council. The purpose of this project is very noble – help to solve the problem of vacant commercial space and the development of new business projects in Riga. However, in reality it translates into delivery of commercial space for rent at the price of utilities, which may eventually drop the rental market in this sector. Although the owners of these objects can be understood – they pay a monthly big sum for the maintenance of their property in the proper form and, consequently, suffer losses. If the project DUKA will develop, it would mean only one thing – the owners of commercial real estate had reached an extreme point where their property has lost all liquidity, including in the rental market.

The abundance of unclaimed, including “speculative” apartments and low economic activity of population resulted to surplus of offers in the Riga’s market rent of residential premises.

The rates are here still at the lowest level. On average, they are 1-2 LVL per sq. meter of high standard-type apartment in a month. The yield from the leasing of such apartments does not exceed 7% per annum today. Not uncommon for renting the apartments for the cost of utility bills.

Thus, the rental market as a whole has today the most difficult times. In contrast to the sales market, it is characterized by a catastrophic excess of supply over demand, and this ratio depends on the state of the Latvian economy. Consequently, some significant changes we have to wait in this sector for a long time.

So, the first three months of 2010 the real estate market in Latvia has developed without any surprises. Let’s see whether this trend will continue in the next quarter.

http://baltwest.century21.lv