Experts: Foreign demand will keep real estate prices afloat

  • 2006-07-05
  • By Dorian Ziedonis
RIGA - "All real estate is local," says property manager and developer David DeRousse of RB Management.

Yet driven by the search for higher yields, investors have been straying far from home for a piece of property. Many choose to buy an apartment to lease and thereby secure additional monthly income. This "buy-to-let" approach can lead almost anywhere 's it could be a flat in China, a vacation property in sunny Bulgaria, a two-bedroom in Poland. All carry the promise of high returns through rental income and a steep increase in value.

In Riga, claims of up to 300 percent expected returns for investments have attracted buyers from the U.K., Spain and elsewhere. Foreigners visiting Riga first notice the real estate prices, up to three times lower than in their home countries. They miss the fact that average wage levels are at a similar multiple, with a local economy that can't support higher prices.
With aggressive bank lending, buying a flat and a dream has never been easier.

"Most buyers will sell into the local market upon completion of the project. Capital gains are the most important consideration 's rental yields are not the deciding factor," says David Rice, regional director at Ober-Haus real estate brokerage.
Many of these flats are sold "off-plan," where construction hasn't begun. The buyer pays a small deposit upon signing, say 10 percent of the purchase price, with the balance due upon completion, or some 2 years away. The idea is that prices will increase while waiting, and the flat can be sold at a good profit.

The sales pitch centers around the explosive market growth, several years of 30 's 40 percent annual price increases, which have left many with the impression that the trend will continue indefinitely.
Not everyone's buying just a second home. "Serious investors take up to 10 flats," says Rice. "They're buying mid-sized flats, from 40 's 60 square meters, in new buildings in the suburbs, what the local market wants."
Rice mentions that investment properties in Latvia should yield 5 's 6 percent, before taxes, which beats similar schemes in Spain, for instance, where returns are around 3 percent.

Rent levels, says Kristaps Jankovskis of real estate company Balsts, "range from 8 's 10 euros per square meter for the average new project, and up to 13 euros per square meter for the best projects." Successful examples include Tomsona Terrace, one of the first high level projects in Riga and which is fully rented out, says Inara Grinberga of real estate company Latio.
Nonetheless, high returns through rental income aren't always the case. Factor in expenses, capital costs, management fees, vacancies and taxes, then the mortgage. Even with easy credit, high purchase prices, from 2,300 euros per square meter in the downtown area, result in situations where the rental income "doesn't cover the mortgage," warns Jankovskis.

Though there is a shortage of flats at the luxury level, rental prices are declining for middle level properties in the Old Town due to oversupply, says Grinberga.
DeRousse says the local population prefers to buy, not rent, and will rent only as a last resort, and then at the lowest price possible. This comes from Soviet upbringing during which people learned to squeeze everything out of the last santime.
Foreigners constitute almost 20 percent of the buyers in the center, less in the suburbs, says Emils Daujats at Latio. As companies escape to the lower cost suburbs, new housing projects there should pull foreigners along, says Jankovskis.

Some of these announced projects won't be completed on schedule, predicts Daujats. DeRousse agrees, saying that in addition to the tight labor supply, rapidly rising cost of materials due to high commodity prices are an even more important limiting factor.
"As prices continue to rise, more and more locals will be priced out of the market," says Rice. He's confident, though, that as growth moderates, prices will still be "up by 15 percent a year, with local wage growth supporting the increase."

"The lending boom has fuelled prices through the availability of credit," says Martins Kazaks, chief economist at Hansabanka. Longer maturity mortgages, which are widespread, "have a higher sensitivity to interest rate changes, and with interest rates heading up, borrowers may increasingly view this as an important risk and may reduce their willingness to borrow, hence reducing demand."

In the face of increasing risks, banks are "lending more to developers with a track record on quality and successfully completed projects," says Daujats. There is stricter supervision over the construction process as well, adds Daniels Golubevs at Ober-Haus.
Aleksei Avanessov at RB Management recommends "properties in the suburbs, at close proximity to the downtown area, as most likely to hold their value 's those up to five stories offer the most popular living spaces."

DeRousse stresses that real estate ultimately needs an "end user," an element lacking to some degree in today's market.
Despite anxieties about rising prices and interest rates, long-term confidence is widespread. Latvia's growing middle class will gradually push aside the large number of speculators as the market moves more in line with matching users' needs and affordability.

Worries about a sharp price correction are overblown, says Grinberga, "There is a strong base under these prices, such that they will not fall." Exceptional growth and an expanding economy will increasingly support higher valuations.