In the search for a new home – would it be better to postpone the purchase?

  • 2019-08-26
  • Olga Rudzika, Managing Director of real-estate developer Pro Kapital Latvia

It is no secret that renting an apartment in the centre of Riga has become an almost impossible mission – in mid-August Latvian Television broadcasted that the demand exceeds the supply by far, which is causing a significant increase in rental prices. Growing demand in indeed a one aspect of it, but there is another side to the story - stagnating supply. Such imbalance can be observed in both the rental and the sales market. Namely, due to several hindering circumstances, not enough apartments are built or renovated in Riga.

The growing real estate market – the development of new projects and debates over the changes of urban environment – usually indicates that the country’s economy is growing. People choose larger living areas, moving from so-called block houses to apartments in new development projects with higher quality. The exclusive apartment market is growing, and buyers are willing to spend money as an investment.

Currently the Riga’s real-estate market is in a vicious circle. Construction prices continue to rise exponentially, often even above the level appropriate to the project in question. As a result, the real estate projects either compromise in quality or increase the prices due to rising construction and material costs. On the other hand, in many cases, solvency has reached the "psychological ceiling", meaning that people believe that even greater price increases are not justified. In both cases, either compromising in quality or continuing to raise the prices, the risk that the real-estate developer will have trouble selling the property increases significantly. Therefore, many new development projects are put on a hold. As a result, there is not a sufficient number of new projects in the market that would be able to meet the demand as well as the acceptable price level for the buyer.

One of the most accurate and timely indicators of the development of the real estate market is so-called exclusive segment in which Pro Kapital is developing projects in Riga, Tallinn and Vilnius. For example, the River Breeze Residence project alongside Daugava was developed at a time, when construction prices were just starting their climb. This means that today’s sale price includes a very good architectural and technical solution, high quality materials and construction that was carried out by professional builders.

Could we include all that in today’s square meter prices or even slightly higher? Definitely not, because the costs of materials and construction process have increased by 30% and in some cases as much as 50%.

These circumstances have, in fact, indefinitely frozen the exclusive real-estate segment. While some projects try to position themselves in this category because of the good location, the project’s technical solutions are often simplified to a minimum. Prices continue to rise even during the development process, which is why some components are often removed. This already means compromising in the quality. It is quite possible to end up in rather absurd situations where, for example, the staircase of an exclusive residential building has no roof. There is a risk that a buyer of an exclusive property who entered into a contract, for example, in early 2019, will end up receiving a pale imitation of the original design, without adequate engineering (e.g. ventilation and heating, communications, etc.) solutions.

Growing demand and rising construction and material costs are two strong factors driving up property prices. The third is the shortage of qualified labor at all stages of the development project, from technical design to construction and landscape architecture. Thus, even after the inflow of EU funds has ended, prices continue to rise, and an increasing number of buyers are thinking about postponing the purchase of an apartment or construction of a home. Is this decision justified? It largely this depends on the actuality of the need and the quality of the specific property. If the house has been built or renovated during the past few years and the project includes rather expensive, high quality built-in solutions, the purchase decision may turn out to be the right one. As explained previously, many projects are frozen indefinitely, whereas in other cases, quality is compromised to offer a lower price. In any case, when considering the purchase of real estate, it has become more important than ever to become thoroughly acquainted with the project and its execution, and to evaluate the experience and reputation of all the parties involved – including the designers and builders, but perhaps most importantly the developer.