Coming home after the wilderness years

"The Baltic countries have seen a strong economic recovery recently and are expected to keep on growing," claims Newsec's chief economist Arvid Lindqvist. According to Newsec, the revival of the residential market is also boosted by the fact that there is a shortage of other attractive asset classes in these markets. However, Ober-Haus is rather more cautious: "The Baltic states' markets remain sensitive to external factors. Negative news from abroad influences the expectations of consumers and investors," warns Raimondas Reginis, senior market analyst at Ober-Haus Lithuania; but he does add that after the drastic changes of 2008/2009 the market now has a sufficiently solid basis from which it can grow.
Slightly higher demand
"The recovery at the start of 2011 was halted due to problems in the overall economy and the bankruptcy of two banks in Lithuania and Latvia. This spring is showing high activity in terms of client interest in projects, but we have yet to see an increase in sales so far," explains Mindaugas Valuckas, a member of the board of developer Hanner AB, which has projects in both Latvia and Lithuania as well as other CEE countries. Mr Valuckas adds that this could be to do with the prevailing mood of potential customers. "People are still rather pessimistic. They are looking for apartments but are postponing their decisions to buy, as they are still expecting bargains that according to them could become available if things get worse," adds Mr Valuckas. This is why uniquely Latvia is experiencing the phenomenon of significantly increased interest in apartment rentals. Before the crisis nobody wanted to rent, everyone preferred to buy.
During the crisis years the demand on the market changed. People are now looking for much smaller flats and the cheapest homes sell the fastest. In Lithuania 45-50 sqm flats in Soviet-era blocks are very popular purchases, due to their low prices, but as the average living space per person in Lithuania (25 sqm) is 40 pct lower than in Western European countries, there is still great demand for new residential space. "It is both the need to move out of old Soviet flats into new apartments and the shortage of living space in Lithuania that is driving the market right now," claims Mindaugas Čiuplys of Lithuanian developer UAB Realco. "Developers will still have to decide where to invest in the coming years," argues Mr Valuckas of Hanner AB. He adds that "while there is a need for new residential projects in the Baltics, so far they have been very limited and focused in specific areas." Mr Čiuplys is of the opinion that "sales in the next few years will remain stable."
Searching for bargains
Developers in Lithuania are currently focusing on cheaper, economy and also medium-class apartments in residential districts or near city centres. At the moment, 17 projects are under constructionin Vilnius, 48 pct of which will be medium-class apartments sold at EUR 1,300-1,700 per sqm. According to Realco, its main customers are domestic buyers who are mainly interested in two-room apartments. Mr Čiuplys feels that it is not a good idea to launch luxury projects at the moment, as there is no demand for such homes, even from foreigners who want to buy apartments to rent. Due to low residential yields of around 4-5 pct, "it is hard to attract foreign investors who would consider buy-to-let transactions. The development of any new luxury projects seems to be hardly justifiable," declares Raimondas Reginis of Ober-Haus, adding that "although investment profitability continues to remain low, some investors are considering the long-term prospects and expect rents and prices to rise."
In Latvia, one of the drivers of the demand for residential space is rather unique: "Here the luxury market is moving quite well - thanks to the Russians," reveals Mindaugas Valuckas. In 2010, a law came into force that gives people who have bought a property for over EUR 145,000 a five-year Schengen visa. Since then, hundreds of buyers, mostly from Russia and other CIS countries, have taken advantage of the programme. "They are looking to buy more luxurious apartments, so the market is starting to experience a shortage of good luxury units in central Riga," adds Mr Valuckas, explaining that these are mainly larger apartments, of around 80-100 sqm, in very good locations, but still at attractive prices. "They want to earn on the apartments they purchased now before selling them on in a few years. Luxury units are also being bought by people coming back from abroad, and there are also customers who buy apartments for rent, as they see this as a very good investment, since home prices are the lowest they have been for the last eight years."
Local buyers in Latvia are mostly interested in newly built two- and three-room apartments of 60-80 sqm in the suburbs, priced at up to EUR 80,000, as well as in three- to four-room apartments of 80-140 sqm in city centres of up to EUR 250,000 - in both cases, fully-furnished. One important criterion is the heating system, which should be autonomous gas heating. It is also important whether the apartment is in a building where the majority of units are already sold or inhabited. In Tallinn, people are mainly looking for flats in the city centre, in a good condition in modern or fully renovated buildings, with prices in the region of EUR 1,100-1,600 per sqm.
Developers find their courage
Developers seem to have become a little more bold recently, at least in Lithuania and Latvia, where more apartments will be built this year than in 2011, such as a 15-apartment redevelopment on Tallinn's Saue tänav. Estonia, however, is not a good example of market recovery - no larger projects were started last year and will probably not be started in 2012, either. At the moment it is mainly small projects with 10-30 apartments that are being built in Estonia. The reason for such a situation is the sharp increase of construction prices and the fall in consumer confidence in the second half of 2011. In Vilnius, on the other hand, twice as many residential projects will be completed in 2012 in comparison to the 15 apartment blocks with 737 apartments in 2011, according to the estimates of residential agency Ober-Haus Real Estate Advisors. Nevertheless, these numbers still look miserable compared to the 2005-2008 boom period, when developers were adding 4,000-6,000 new apartments to the market per year. At the start of 2012, 21 apartment blocks in 17 different projects with almost 1,500 units were under construction in Vilnius. It is likely that 90 pct of these will be completed by the end of the year. "The increasing competition and rising construction costs may once again limit investment in this sector. Yet if new players are able to evaluate how competitive the environment is and the demand for certain products correctly, they will certainly be able to operate on the market," argues Mr Reginis of Ober-Haus.
"The recovery is visible, but it remains at a very low level, with a continuing weak economy, high unemployment and tighter bank lending conditions," explains Mindaugas Čiuplys of Realco, who however assures us that "there is still a need for new residential projects in the Baltic countries." UAB Realco is now developing two stages of the Ozo Parkas residential project in Vilnius, which "will be completed in October and in February 2013. The projects will offer around 275 new flats and we are planning many more," reveals Mr Čiuplys. Hanner also has "some projects under construction now in Lithuania and plans to start some new ones in Latvia within a year," says Mindaugas Valuckas.
The situation looks somewhat worse in other Lithuanian cities, where prices keep on falling and almost no projects are to be completed or even started this year.
The market in Latvia is also moving more modestly. Riga can expect at least 930 new apartments to be completed in 2012, almost twice as many as in the previous year, but still seven times fewer than in pre-crisis 2007. Last year developers sold 547 apartments - a few more than they completed over the year, so there is a chance than this trend will continue, although the secondary market has seen a slight fall with 476 flats sold, and a significant percentage of these were apartments auctioned in bank foreclosures.
Prices still low, but on the rise
When it comes to the prices of apartments, Lithuania is the worst performer of all the Baltic states. Prices in Vilnius last year grew by only 0.7 pct. while in the other major Lithuanian cities apartment prices actually fell by 2-4 pct, according to Ober-Haus' figures. The agency forecasts that in 2012 housing prices will remain unchanged due to a combination of market and economic conditions, such as rising supply and stricter conditions for obtaining mortgages. At the moment the cheapest homes to buy are unrenovated flats in Soviet-era blocks. Such an apartment can even be purchased for EUR 600 per sqm. In the city centre and Old Town secondary market, prices for renovated apartments can even reach EUR 3,200 per sqm. These are extreme prices, but when it comes to newly-built apartments in the surrounding dormitory districts of Vilnius, prices range from EUR 850 to EUR 1,600 per sqm, and around EUR 2,900 in the city centre or Old Town without finishing. In contrast to the other Baltic states, in Lithuania new apartments are generally sold without any fit-out at all. A fit-out costs another EUR 100-150 per sqm.
In Latvia, prices are rising much faster. Newly-developed apartments in central Riga were 6 pct more expensive than in 2011, while those in the city's suburbs have grown by 15 pct; but still prices remain well below the pre-crisis peak in 2007. New apartments in the city centre and Old Town were generally being sold at between EUR 1,400 and EUR 3,800 per sqm at the start of 2012, and very exclusive projects for as much as EUR 4,800 per sqm. In the suburbs, the cheapest units in new buildings could be found for as little as EUR 950, while the lowest prices on the secondary market prices were to be found in Soviet-era buildings - EUR 575 per sqm on average.
The need to move out of old Soviet flats into new apartments is also "one of the biggest market drivers," says Mindaugas Valuckas. "A lot of people still have their old apartments without mortgages, but by putting together some savings or taking out a small mortgage loan, they can now buy new apartments - but we still have to work actively to convince such people to take such decisions," he points out.
In Tallinn prices are rising even faster than in Latvia - at an average of almost 16 pct in 2011. At the same time, the total volume of transactions increased by 18 pct thanks to the fact that more new and better quality units were being sold. At the beginning of the year, new apartments cost EUR 1,700-2,600 per sqm in the city centre and EUR 1,100-1,500 per sqm in the suburbs. In the Old Town, prices reached as much as EUR 3,000 per sqm, while the cheapest - one- or two-room Soviet era flats in need of renovation - could be bought for as little as EUR 600 per sqm. According to Ober-Haus, prices will continue to rise this year, although the growth will be more modest.