High Financing Costs in Latvia: A Roadblock or a Strategic Opening for Real Estate Investment?

The Latvian housing real estate market is currently undergoing significant transformation as economic pressures and evolving market conditions reshape the landscape. The Financial Accessibility Report 2024 by Latvijas Banka highlights the financial challenges facing both developers and buyers in this shifting environment. Latvia continues to experience some of the lowest lending activity in the Eurozone, largely due to high-interest rates and strict collateral requirements, making financing difficult. These issues, compounded by a 37% drop in housing transaction volumes reported by Colliers Latvia, underscore the slow pace of residential development in Riga, especially when compared to its Baltic neighbors, Vilnius and Tallinn, which have developed approximately 2.5 times more real estate in the past decade.

One key reason for this disparity is the high cost of borrowing in Latvia. The recent decision by the European Central Bank (ECB) on September 12, 2024, to cut interest rates by 25 basis points offered a small measure of relief to the real estate sector. However, according to the Financial Accessibility Report, Latvia’s interest rates remain among the highest in the Eurozone, particularly for housing loans, which are still 2% higher than the Eurozone average. This continues to create significant barriers for both developers seeking to finance new projects and homebuyers trying to secure mortgages.

Arturs Miezis, Managing Partner of Hanseatic Alternative Investments AIFP, commented on these challenges:
“We’re seeing a very difficult financing environment, especially for those trying to develop economic-class housing. The high cost of borrowing is forcing developers to delay or even abandon projects. This situation will have a ripple effect—down the road, in the next two to three years, we’ll see a shortage of new housing supply, as it takes time to develop new projects. This could lead to upward pressure on housing prices due to constrained supply.”

The Financial Accessibility Report also highlights the growing impact of high borrowing costs on homebuyers. While recent regulatory changes have made refinancing more affordable, these reforms have not fully compensated for the ongoing high costs of borrowing. Latvia’s reliance on variable-rate loans—rather than the fixed-rate loans more common in other parts of the Eurozone—continues to expose borrowers to interest rate fluctuations, making long-term financial planning uncertain and risky. This dynamic affects both developers and homebuyers, leading to stalled projects and delayed purchasing decisions.

Despite these difficulties, opportunities are emerging for those who can navigate the challenges. According to the Financial Accessibility Report, the housing credit market in Latvia, particularly in suburban areas, still holds untapped potential. While high borrowing costs have dampened overall demand, this has also created opportunities for well-positioned investors. Investment Funds like Hanseatic are taking advantage of the situation by acquiring high-quality properties at competitive prices in a market with fewer active buyers. This allows them to secure valuable assets that may appreciate significantly once market conditions stabilize.

Arturs Miezis shared Hanseatic’s investment strategy:
“In times like these, when the market is under pressure, we see opportunities where others might hesitate. Fewer buyers in the market mean less competition, and that gives us the chance to acquire properties with strong long-term return potential. We’re not just focused on current market conditions—we’re thinking several years ahead, positioning ourselves to capitalize when the market rebounds.”

One area where the Latvian market continues to offer strong growth potential is the rental sector. As the high cost of borrowing makes homeownership increasingly unattainable for many Latvians, demand for rental housing is expected to rise. Latvia’s rental market remains underdeveloped compared to other OECD countries, making it a prime area for real estate investment. With more people opting to rent rather than buy, especially in urban and suburban areas, funds that focus on residential real estate, like Hanseatic, are well-positioned to meet this growing demand. This shift in consumer preferences toward renting creates a steady stream of rental income, providing investors with stable returns in an otherwise uncertain market.

Arturs Miezis discussed this growing trend:
“The rising demand for rental housing is one of the key trends we’re watching closely. As homeownership becomes more expensive due to high borrowing costs, more Latvians are turning to renting as a long-term solution. For us, this is a clear opportunity to provide much-needed rental units while securing stable income streams. The rental market may be underdeveloped now, but we believe it will grow significantly in the coming years.”

Looking ahead, Latvia’s real estate sector remains complex and challenging, marked by cautious optimism. The Financial Accessibility Report suggests that while the ECB’s recent rate cut offers some short-term relief, high borrowing costs are likely to persist for the foreseeable future. For developers and investors, this means navigating a market with limited financing options while capitalizing on long-term opportunities in areas such as rental properties and sustainable real estate.

In conclusion, while Latvia’s real estate market faces significant headwinds—ranging from high interest rates to sluggish new developments—the growing demand for rental housing and sustainable properties presents a clear opportunity for forward-thinking investors. As Arturs Miezis summarized:
“The key to success in this market is resilience and foresight. We’re positioning ourselves for long-term growth by focusing on sectors like sustainability and rentals, where we see the greatest potential. The market may be tough right now, but those who can adapt and invest strategically will be the ones to thrive in the years ahead.”