Lithuania’s real estate market begins leveling off

  • 2011-02-16
  • By Linas Jegelevicius

DOWNSIZING: Though market activity is picking up, most of the transactions are at the low end of the market, says Zigfridas Rackovskis.

KLAIPEDA - The economic crisis may be retreating, but construction and real estate deals in Lithuania are still sluggish. Nevertheless, most industry experts point out that frozen real estate projects are being resuscitated, and it is generally believed that the market will see an accelerating pace this year. According to Robertas Dargis, head of Lithuania’s Real Estate Expansion Association (LREEA), 2010 was a year of survival. It, however, “exceeded a little bit real estate entrepreneurs’ expectations,” he claimed.

In Lithuania, 1,000 newly built apartments were sold last year, while the other 1,000 did not find buyers. “Speaking of 2010, for most of the year, new construction projects had not been implemented and supply has not grown, which may result in fewer real estate sales this year. Implementation of new construction projects is about to be started just now. This means that, at best, there will be new homes only next year,” Dargis reasoned.

Nerijus Valancius, director of Lithuania’s Real Estate Agencies Association (LREAA), reiterates Dargis’ notion on the market. However, he asserts some market segments have shown certain cheeriness. “From the beginning of 2010, we have been observing rising interest in the market. It is something we did not see in the previous one and a half years. As far as the number of concrete deals is concerned, we saw it rising only in the largest Lithuanian cities, especially in Vilnius. The biggest activity has been reported in the residential sector, while commercial real estate and lot sales remained sluggish. Improving real estate sales in the new apartment and house sector bring a good deal of cautious optimism. Real estate developers’ successful sales emboldened new construction projects at the end of 2010. Bank-crediting conditions for the private sector have been improving, which is also a strong recovery sign. Nevertheless, I would not like to hurry to evaluate the current situation as the end of the meltdown in the market. I would rather say that we all are observing a clear end of the real estate price tumble, and of feeble activity growth. In other words, the market has bottomed out and is stabilizing,” Valancius said to The Baltic Times.

According to him, before, many shady and untrustworthy market players were engaged in the real estate business. Real estate and brokerage agencies were popping up abundantly and uncontrollably, all in the chase for rapid gains. The meltdown’s positive affect was the market’s sifting out, ridding of the weakest dealers and leaving real professionals in the business. Nowadays, real estate brokers try to work together, more professionally – to meet clients’ requests and demands more attentively, improve skills and work more effectively. With the weak recovery signs seen, the LREAA director remains cautious about further developments in the market. “Though real estate prices went up slightly in Vilnius in the second half of 2010, they continued to fall in the rest of the country. There is no reason to expect rapid price growth this year, as inhabitants’ purchasing power remains small. Though banks, generally speaking, loosen up and improve lending conditions, they are still stringent while evaluating their clients’ solvency capabilities. Adverse factors, like increasing emigration, the population’s high debts, low rent costs, rising energy and food prices, as well as bitter lessons of the crisis, all this will keep the market from swinging and growing,” Valancius emphasized.

Vytas Zabilius, head of Ober-Haus Group, the largest real estate agency operating across the Baltic and Central European region including Poland, Estonia, Latvia and Lithuania, calls the real estate market still “very weak.” He discerns, however, slightly rising trends in the largest Lithuanian cities and in Vilnius particularly. “After a free fall in 2009, prices still continued falling in 2010, however, at a much lower speed – 8.3 percent in Kaunas, 3.1 percent in Panevezys and Siauliai. Last year, only Vilnius saw a positive price change, up 0.1 percent. In some single cases, because of a swift supply decrease and new construction projects in the pipeline, some real estate sellers raised real estate prices by 10-15 percent. However, in the luxury residential sector, mostly sprawled out in the central part and prestigious districts of Vilnius, a slight price decrease, from 3-6 percent, was reported,” Zabilius suggested to The Baltic Times.

Despite faint positive trends, new home construction numbers were significantly trailing the output of the golden real estate age in 2008. Last year 500 new apartments were built in Vilnius, which is a three-fold decrease compared to the previous year and an eleven-fold fall in comparison with 2008. In Klaipeda, last year, 350 new apartments were built – a three-fold decrease against the years of 2008-2009. As for Kaunas, it could offer 160 new apartments last year – a nearly six-fold plummet from 2008. “While the beginning of 2010 was still sluggish, the end of the year brought more hope, as some construction companies started erecting forklifts and cranes. Considering the current situation and the construction pace, I can forecast a slow but steady demand growth,” Zabilius said.

The changing market, he says, has altered the average real estate buyer’s behavior. “People have become more rational, smart and decision-conscious. Therefore, last year, economy-class, energy-saving and smaller homes were in the biggest demand in Vilnius. Buyers were ready, on average, to pay from 200,000 to 300,000 litas (57,900 – 86,900 euros) for such an apartment,” Zabilius said. According to him, foreign investors, most of them coming from Belarus and Russia, have considerably enlivened the Lithuanian real estate market. “Ober-Haus brokers have sold properties for over 10 million litas to citizens of these countries. Considering that real estate prices are very attractive currently in the pan-Baltic region, I can predict that Russians, Belarusians and other Easterners will show an increasing interest in the Baltic markets. As a rule, they invest in leisure and luxury-class real estate. They don’t  scoff at economy-class homes, either. For realtors, they are golden customers,” Zabilius inferred.

When it comes to the apartment rental sector, Ober-Haus observes that the market, in the fall of 2010, was noticeably on an increasing trend. However, in winter, landlords had to exert much effort in looking for tenants. “In order to find new tenants, or retain the present, apartment owners had to slash 100-200 litas from the initial rental price. Even the more flexible property owners of larger homes and costlier maintenance-requiring units had to be much more flexible this winter,” Zabilius emphasized.

As for the commercial property sector, Zabilius points out, “The situation was the worst in 2009, characterized bluntly as a ‘free fall.’ However, the sector began to show certain stability in 2010 and it has shown definite signs of improvement, as early as the second half of the year. In several facets, the sector registered some record-breaking lows in 2010. First, it was a record low in both sale and rental prices in the first half of the year. Second, market activity was still exceptionally low, closely resembling that in 2009. The only sector showing a higher activity rate was the modern office lease sector. Experts say this was due to local and new foreign financially stable companies alike, that took advantage of the situation, leasing out new premises at exceptionally attractive rates. Third, speaking of the record lows, the new apartment and house supply was the lowest for 10 years. In the beginning of 2010, Lithuanian cities have seen a particularly low number of commercial projects carried out, as most of them were suspended and waiting for a more active market.

“The commercial property development outlook remains rather vague for 2011. Despite a considerably decreased quantity of commercial premises, it is very unlikely that we will see faster expansion of the sector this year. Considerable availability of this kind of property in the market will hinder attracting larger investments to the sector. It is most likely that, at best, already suspended projects will be carried out or a few built-to-suit projects will be started,” Zabilius predicted. According to Ober-Haus, in one year, modern office lease prices in Kaunas and Klaipeda have not changed, averaging 20-37 litas per square meter in A-class space and 10-20 litas in B-class space. However, in Vilnius, over the same time, new office lease prices have gone up 10-12 percent, reaching 35-48 litas per square meter in the A-class category and 22-32 litas in B-class space. Ober-Haus predicts that shrinking availability of commercial space and decreasing supply will trigger price growth in the modern office lease segment, up to 5-15 percent is likely.

As far as the leasing of supermarket premises is concerned, proprietors had to adjust drastically their prices in order to fill up their free space or just keep present tenants. “However, the situation in supermarkets and malls is not the same. While some proprietors bask in 100 percent-occupancy, some have to put up with 70-90 percent, or even less, occupancy. Considering that the retail sector will show more vitality this year, it is likely that 2011 will be more cheerful for both large merchandise premises owners and single premise owners,” Zabilius maintained.

Zigfridas Rackovskis, director of real estate agency Centro Kubas, maintained to The Baltic Times that “the market is considerably more active this year, even compared to 2010.” He says that “Unfortunately, the activity is more felt in the economy-class home sector. We can state that there is already a shortage of economy-class apartments in the largest cities. However, when it comes to luxury and exclusive real estate units in the Old City and prestigious Vilnius districts, sales are much slower, requiring extensive negotiations and flexibility,” Rackovckis pointed out.

He asserts, however, that “I am certain Lithuania is reaching the end of the crisis.” As for office lease prices, according to the Centro Kubas director, it reached record lows in 2008-2010, down 25-40 percent from 2008. “Currently, the prices are leveling off, as we observe a certain demand growth in A-class offices. I can predict their further demand growth, as there is a tangible shortage of them today,” Rackovskis said. Interestingly, though industrial property sales and leases remain inactive in Vilnius, there is a rising trend of turning industrial premises into groovy residential lofts. They are in good demand in Vilnius now,” the Centro Kubas director emphasized. Wrapping up the interview, he concluded that the real estate sectors that relied on loans and other borrowed resources have been hardest crisis-hit.