Large Western institutional investors used to disregard the Latvian market for reasons of size. Typical pension funds or private equity arms of largest international banks are interested in allocating at least 500 million to 1 billion euros to any new region they are entering, with transaction volume exceeding 50 million euros. Major real estate investors such as Heitman and Europolis, GE Capital Real Estate and Deutsche Bank penetrated the markets in Poland, Czech Republic and Hungary, whose total population is 60 million, several years ago.
Indeed, Latvia is still waiting for the "big guys" to come. According to some estimates, West European and U.S. institutional investors have set the allocation targets for Central and Eastern Europe as of 10 's 12 billion euros in properties alone. What is CEE for them at the moment? The new markets include Romania, Bulgaria, Croatia, Ukraine and, of course, the vast Russian market. Facing this trend, many Latvian investment advisors are now positioning the Baltic state as a footstep to the more sizeable and lucrative Russian market in the hope of attracting the attention of large institutional investors towards our country.
Does Latvia have the potential of attracting funds from sizeable institutional investors? Which type of investor fits Latvia best? Are there any synergies for Western investors in beginning first in Latvia and moving eastward later? Should we expect the entrance of Western institutional investors in the near future?
Major privatization has been completed. Strategic investors, mostly Scandinavians, have already taken over market leaders in key industries in Latvia 's retail chains and shopping centers, banks, utilities, telecommunications and food manufacturers. We might expect a number of exits of strategic investors to take place soon; however, the small transaction sizes limit the interest of European or U.S. institutionals. Combining Baltic stock exchanges under the Scandinavian umbrella opened up greater opportunities for trading Baltic securities, although the move could do little given the low capitalization and low liquidity of local stocks. There are some real estate objects attracting large property investors 's property portfolios of major shopping centers and, possibly, of the largest pan-Baltic banks.
Historically Latvia has attracted a certain type of investor 's mostly Scandinavians who had the perception of the Baltic region as being part of the Nordic region. A new trend is growing interest in Latvian assets from neighboring Lithuania and Estonia, the Lithuanians being especially active. Recently, many mid-size investors from the U.K. and Ireland have also appeared. Unfortunately, many of these investors are still focusing on quick profits from the once-booming real estate market. However, property yields are steadily approaching those of mature markets and, additionally, attractive real estate projects in the market are now rare. Generally, the Latvian market is waiting for prudent and serious mid-size institutional investors to come from the UK, Scandinavia and Germany.
In spite of the common misperception, Western investors typically cannot learn "investing in Russia" by completing several deals in the Baltics. If investors eventually plan to go to Russia, they should go there directly. Despite the impact of the Soviet era on Latvia, the cultural and business climate in our country is closer to the Scandinavian one than to the Russian. It differs in many matters 's including dealing with authorities, decision-making, corporate governance and negotiation practices. In order to reach synergies in entering these two different markets, it is better to do this in parallel. The key advantages are the capability of Latvian professionals to speak Russian and understand the Russian mentality 's as a result, the Latvian and the Russian teams can complement each other. The geographical proximity of the two countries and historically strong connections of Latvian businessmen to Russia ensure the easier access to projects, while the presence of many Latvian banks in Russia including Scandinavian-owned banking groups may facilitate project financing.
Jekaterina Kolosova is senior analyst at Bridge Capital
