Real estate prices have bottomed out, now inching up

KLAIPEDA - According to the data from the public institution Center of Registers, the results of the first quarter of 2010 bring a good deal of cautious optimism, as increased activity in Lithuania’s real estate market is reported. Thus, comparing the first quarter of the year to the previous year, a 10 percent increase in the overall buy-sell transactions has been recorded.

Vytas Zabilius, director of one of the largest real estate companies, Ober-haus, attributes this to improving real estate lending conditions, which, regarding loan interest rates, have decreased within the last two years. Other factors, according to him, include attractive real estate prices, which have plummeted approximately 40 percent, even more in some segments of the market. The slump is leveling off in the largest cities.

“Though real estate prices still continue slowly inching downwards, the process is slowing and is expected to slowly bottom out. The prices of apartments in the first quarter of 2009 receded 11.2 percent, however, in the same period in 2010, the drop-off was quite insignificant, down 2.8 percent,” Zabilius told The Baltic Times.

According to him, potential real estate buyers eyeing the considerably stabilized prices, and given better lending conditions, make up their mind easier in deciding whether to buy. He says that further real estate market developments will show a slow recovery in the market. Some industry insiders compare the shaping up trends to those that outlined the market after the Russian crisis, in the beginning of the millennium. The real estate expert admits that, though there is more activity in the market, different developments are expected in its separate segments and regions. The worst expectations are voiced out regarding the buildings of old construction, as its disadvantageous factors, such as relatively big supply, large heating expenses and less attractive lending conditions, scare off many potential buyers. It is widely expected that the prices of the old real estate will continue descending in all towns.

According to the Ober-haus chief, similar trends are being observed in commercial property as well.
“We have been seeing a shaping up of stability in this segment of the market, as there is considerably less supply for this kind of real estate. The stabilization is largely due not to increasing demand, but to diminishing supply of modern offices, new construction of this kind is on hold, or frozen,” pointed out Zabilius.

He asserts that though all three Baltic countries - Latvia, Estonia and Lithuania - have endured a massive tumble, certain distinctions could be drawn. “The three countries largely share the same trends, however, the decline in the Latvian and Estonian real estate market was recorded quite earlier than in Lithuania. Having bottomed out, it has been steadily rising. In Lithuania, we witnessed a relatively later slump; however, it has not bottomed out yet. These differences have been caused by separate tax systems, different lending approaches, uneven levels of debt, uneven developments of separate segments of the market and the general economic situation,” Zabilius concluded.

Asked about the factors that could determine the pace of the appearing trends in the market, he emphasizes the importance of the policy of the major lending companies. He points out that “the period of 2008-2009, notorious for the biggest fall in the real estate market as a result of frozen lending, has clearly shown the cohesion of the processes. Further developments in the market depend on the lending possibilities.”
In order to handle the outcomes of the crisis, Ober-haus has reviewed its expenses in its main activity, as well as has revised the staff and has reconsidered the principles of provided services. This has helped not just to stay afloat, but to strengthen considerably its position on the market.

According to Mindaugas Kazlauskas, president of Lithuania’s Association of Real Estate Agencies, the Association’s survey, performed by Macroscope, shows that in 2010, in Vilnius, there are registered 26 real estate agencies employing five or more real estate brokers. That is a big decline compared to the data of 2008, which reported over 300 real estate brokerage companies in the Lithuanian capital.
“It draws the conclusion that the market of the real estate agencies has shrunk tenfold. The shrinkage was determined by the quite suddenly petered out demand for property, forcing the agencies to lay off several brokers or simply close down. Others, seeking a way to stay afloat, switched to other activities, not necessarily related to the real estate market,” Kazlauskas explained.

Zabilius expects that the market shake-up will work out well for the serious players. “Earlier, everyone could be engaged in the real estate business. Real estate agencies were popping up, abundantly and uncontrollably, all in chase of rapid profits. The crisis has sifted out the market, knocking out the weakest players and leaving the most serious players. It is obvious that the upcoming years will be not be about expansion and the profit chase, but rather about a cautious approach, making the real professionals of the market reconsider every step,” Zabilius maintains.

Kazlauskas, who also is director of real estate brokerage company RE/MAX,  is convinced that the downturn has not just sifted out the market. It also has encouraged real estate brokers to work more professionally, which means meeting clients’ requests and demands more attentively,  improving their skills and working more effectively. “Talking about real estate developers, in Western European countries, they entrust sales to real estate brokers. However in Lithuania, only a few construction companies practice this, and are mostly themselves engaged in the sales. I hope that, in the near future, the companies will get rid of their high-cost sales departments and will use the real estate brokerage firms that specialize in this,” asserts Kazlauskas.

In giving a forecast for the upcoming months, the Ober-haus chief remains hopeful. “If we keep seeing signs of economic recovery, the real estate market will bounce back rapidly as it remains one of the most flexible segments of the market. I believe that, having bottomed out, the real estate prices will start steadily growing as early as the third quarter of the year. Bank lending policies will likely continue showing slight signs of optimism, resulting in lower interest rates. However, it will be a slow process, as most banks will wait for clear signs of the global recovery,” said Zabilius.

The slowly increasing demand for modern and recently built apartments decreases the supply of new apartments. Thus, in the largest Lithuanian cities - Vilnius, Kaunas, Klaipeda, Siauliai and Panevezys – supply dropped from 4,100 to 3,700 apartments. At present, there are 1,900 recently built apartments in Vilnius, approximately 750 in Kaunas, 950 in Klaipeda and about one hundred apartments in Siauliai and Panevezys. With the size of the cities in mind, it is obvious that Klaipeda remains the leader in unsold new apartments. It is followed by Vilnius and Kaunas.

The lingering meltdown has dramatically altered the needs of potential real estate buyers. As a survey by Aruodas.lt shows, until 2008, most buyers were interested in buying large, more than 200 square meter houses. However, with the crisis, demand switched to smaller houses. Half of the respondents would like to buy a 100 - 150 square meter house, while 24 percent of the respondents would prefer a less than 100 square meter house; 21 percent gave a pass to 150-200 square meter houses; it appeared that only 4 percent of the respondents would like to buy a larger than 200 square meter house.

According to the survey, 43 percent would buy a house if it cost less than 150,000 litas (43,400 euros), while 34 percent would do so if the price of the house were less than 250,000 litas; only 18 percent of the survey participants would buy a house that costs approximately half of million litas. The survey revealed that most of the respondents rather prefer having a house outside town, while 37 percent would choose a house in town, but not in the center. Only 8 percent of the respondents would prefer owning a house in the center of town, as 4 percent said they do not care about the location.

The crisis-hit real estate market offers a wide range of properties, varying in finish - partly finished apartments and houses, fully finished and even those which are far from being finished. As the aforementioned survey shows, most of the customers do not pay much attention to their completeness, as the price remains the most important factor. One third of the respondents would prefer only a fully finished property, while 24 percent would rather choose a partly finished one, reasoning that it is cheaper this way. Besides, the latter reckon it is necessary to finish their living place according to their liking. The market is favorable to the disposition, as, according to Aruodas.lt, there are as many as three times more finished apartments and houses than unfinished or partly finished ones on the market.

With cautious optimism, potential buyers show more exuberance while trying to take advantage of the record-low prices. Psychologist Vaidas Kuniauskas, from Kupiskis, a tiny town in the northeast, having made up his mind to move to Vilnius half of year ago, bought a one-bedroom apartment for 120,000. Just a few years ago, this cost nearly 200,000 litas. However, Vaidas’ plans, due to an unsuccessful job hunt, had to be reconsidered, compelling him to look for buyers for the recently acquired property.

“I was expecting the selling process would take long, as the market is still rather rigid. Honestly speaking, I feared I would experience some loss in the resale margin. I handed the matter over to a real estate brokerage company, which had warned me of the market slack. However, the property beat all my expectations, as I have been swamped with calls and visitors interested in the apartment. It took me barely two weeks to sell it for 140,000 litas, pocketing me 20,000 litas. I think, with the feeble signs of economic recovery and leveling off of realty prices, people come to the understanding that now is the best time to acquire a property. Very soon the prices will be rocketing, however, I doubt whether they will reach the former heights,” said Kuniauskas.

Real estate developers agree with the notion, claiming that construction companies, in an immediate need for current assets, are compelled to sell their properties at cost. “Starting last November, we, on average, sell 6 - 7 new apartments monthly, which has been an excellent result, as the sales had come to a dead halt in recent years. I credit the recovery to the more favorable lending conditions, the lower loan interest rates and the optimistic economic forecast. In order to survive the worst period, which was last summer, we had to sell the new apartments for prices lower than their prime price. Recently, however, their prices were steadily going up, which is adequate to the investment. I am glad buyers comprehend this and indicate a more vivid interest in the properties,” J. Raisutis, director of construction company ‘Pamario troba,’ maintained.