Property market shows improvement

  • 2011-03-02
  • From wire reports

RIGA - The Baltic States’ real estate market is showing the first signs of recovery from the sharp slowdown in activity which started in late 2007. “Viewed from a long-term perspective, the Baltic States of Lithuania, Latvia and Estonia remain a powerful testament to the transformative power of capitalism even after the setbacks of the past three years,” writes the Financial Times.

“Just two decades after escaping the grip of a crumbling Soviet Union, the Baltic capitals of Vilnius, Riga and Tallinn have become modern European cities with gleaming office blocks rising against the backdrop of their medieval old towns,” the article says.

The newspaper points out that to the more recent investor, however, the Baltic countries have been a disaster area since the bursting of a property bubble in 2008 made the region one of the earliest victims of the global financial crisis. Commercial real estate investors were among the hardest hit, as rents plunged and new developments were scrapped.
“After seeing their economies contract by between 14 and 18 percent in 2009 – by far the deepest recessions in the European Union – the Baltic trio stabilized last year and all three have now returned to growth. The real estate market has been slower to recover, but experts say there are finally signs it could be returning to life.”

“There is relief that the market has bottomed out,” says Ricardas Cepas, chief executive of Newsec Baltics, a property consultancy firm. “We are starting to see vacancy rates decline, which should help bring back confidence.”
The FT points out that recent economic data have strengthened the case for optimism. All three Baltic countries beat expectations for growth in the fourth quarter of last year, with annual rates varying from 3.7 percent in Latvia to 6.6 percent in Estonia.

“Estonia’s smooth entry into the euro on January 1 was viewed as another important sign that the region is back on track – and still committed to economic integration with wealthier parts of the EU,” the article point out.
“Big challenges remain, particularly in Lithuania and Latvia, which face further painful fiscal consolidation if they are to meet their target to join the euro in 2014. But after two years of brutal wage cuts and lay-offs, unemployment is starting to ease and consumer confidence edge up across the region.”

The British business daily says that this should create the conditions for gradual improvement in the property market, although analysts say it is too soon to declare a full-blown recovery. “With rents down by as much as 35 percent since the crisis and financing hard to come by, the prospects for new projects remain dim. Hundreds of thousands of square meters of office and retail space have been cancelled or frozen since the crisis and the pipeline remains almost empty,” the FT says.
“The few projects that will actually come on to the market are generally completions of previous years’ projects or extensions of existing ones,” said a recent Newsec report. “Banks will be extremely selective about financing projects for at least the next two years.”

However, the article points out that with little new capacity coming into the market, vacancy rates should gradually decline, as the economies recover, improving the prospect for rent stabilization and, eventually, increases in existing properties.
Cepas highlights Vilnius, the Lithuanian capital, as having the tightest supply, with vacancies in Class A office space down to about 5 percent, compared with double-digit rates in Riga and Tallinn.
“In the long term, the Baltic States look ripe for further real estate development. Even after the construction boom that preceded the crisis, Vilnius, Riga and Tallinn have relatively low supplies of modern office space compared with other European cities,” the FT goes on to say.

The article also points out that there have been signs of some Scandinavian investors starting to show renewed interest and the Latvian government has pushed through legislation aimed at encouraging Russians to buy property in the country. It looks likely to be some time, however, before most foreign investors pluck up courage to make another big bet on Baltic property.
“More or less all investment transactions at the moment involve people who are familiar with the market, either local investors or foreign investors with experience here,” says Cepas. “Large institutional investors are still on the sidelines."