Off to a vibrant start, 2011 comes to a sluggish end, dim forecasts for 2012

 KLAIPEDA - The optimism of the start of 2011, with more vibrant real estate action, evaporated with the year reaching its middle, before winding down. “It seems that all that talk about the market recovery has been a little bit premature, to say the least,” says Saulius Vagonis, head of Real Estate Assessment and Marketing Department at Ober-Haus, the largest real estate company in the Baltics. “I would rather say that we still are on the bottom. There is insignificant growth in terms of real estate deals and prices, but you cannot call it a recovery. By no means can you compare the market to the period of 2005-2006,” the real estate expert said to The Baltic Times.

Now, he asserts, even the most cheerful market prognosticators are not keen to forecast when the actual recovery of the market will take place. “With the eurozone shake-up and a possibility of a second recession lingering, no one can tell how bad things can be. Generally, however, most agree that it cannot be worse than in 2008, when the real estate prices plummeted 40 percent and sales dropped by half,” Vagonis says.

He says real estate developers raised prices of new property by 5-10 percent in the first half of 2011 due to the diminishing supply of unsold housing, lack of new projects, and the optimistic forecasts for the market. “However, in the second half of 2011, the situation changed: more new projects turned up in the market, and the terms of borrowing became more rigorous. At the same time the forecasts of the country’s economic development deteriorated. For this reason, in the second half of 2011 prices stopped rising,” Vagonis says.

By the start of 2012, he points out, the prices of newly built apartments in surrounding residential apartment districts ranged from 2,932 litas (850 euros), to 5,520 litas per square meter, without a final fit-out.

The real estate expert notes that, while new apartments in Estonia and Latvia are sold, as a rule, fully built out, in Lithuania, new developments are generally sold in a shell, i. e. without any fit-out.

A slight price rise was also observed, he says, in the range of old property located in residential districts, because they attracted potential buyers because of the lowest prices in the market.

By the start of 2012, a standard two-room apartment of around 50 square meters in a Soviet-era concrete block building in a residential district of Vilnius cost from 39,000 to 50,000 euros. “Prices of the apartments which are in old brick buildings are usually 10-15 percent higher. The lowest price for old construction non-renovated apartments in Vilnius residential districts is 600 euros per square meter,” Vagonis stresses.

He says one rule applies to the market: the cheapest apartments sell fastest. “It always takes the longest to find buyers for more expensive and luxurious homes, because these buyers are scarce, and their requirements are bigger. However, sellers of medium-class apartments also face certain difficulties, as the supply of such lodgings is quite large and the sales volume, compared to economy class apartments, is more modest,” says the Ober-Haus representative.

As generally living space per person in Lithuania and Vilnius is 40 percent lower than in most Western European countries, he notices, there will be an increasing demand for new residential space, especially in the more active Vilnius market.

In light of the current situation in the real estate market and the dim economy outlook, Ober-Haus believes that the housing prices will remain effectively unchanged in 2012.

Kestutis Kristinaitis, president of SC Matininkai, says he does not predict anything cheerful for the market this year. “I do not see anything consoling in the market. This is the only way to describe the plight: a stable stagnation. No considerable rise in deals and prices, and no new openings for construction industry workers. Practically, nothing is going on, and it is unlikely the situation will change any time soon,” the entrepreneur said to Alfa.lt.

He says there are more signs that point to a further stagnation than recovery. “The reinforcement of loan conditions by the Lithuanian Central Bank for physical entities, who are the most active participants of the market, does not induce borrowing. And furthermore, such measures halt consumption,” says Kristinaitis.

The estate market, showing some signs of enlivenment in the beginning of 2011, had come to a halt in the second half of the year, he concurs with other experts. “The increased market indicators could be related to the improved expectations of the economy and fallen commercial real estate sales and rent prices. The upping trend had come to an end with the pessimism setting in,” the Matininkai president stresses.

Valdas Pocius, director general of Re/House Lithuania, notices another unexpected trend –increased demand for incompletely built residential apartments and lots in Vilnius vicinities.
In the residential segment, he says most potential clients are interested in relatively new, up to 10-year-old apartments with autonomic heating. “Supply for the demand has been very low lately,” he notices.

Vagonis notes that only the strongest market players remain in the market now. “Those who were on the brink of bankruptcy have gone off the market. It includes both construction companies and physical entities unable to pay back the loans,” Vagonis says.

Contrary to the predicted adverse impact of a second wave of crisis on the market, the estate expert hints its relapse may be beneficial for the rest of the participants because of a single reason: lower loan interest. “Lithuanian Central Bank’s decision to tighten up and constrain granting loans will rather serve as a safeguard than a brake. On the other hand, there are people out there who would have borrowed under any condition, and now they have been stripped of that possibility,” says the Ober-Haus representative.

Speaking of the outlook, Kristinaitis maintains he does not predict any breakthrough in the market in the years to come. “We should start thinking of 2014, speaking of a more optimistic estimation,” he says.

When it comes to Vilnius, real estate developers sold 1,200 new apartments last year, 100 units a month, on average.
 
According to the data of the Register Center, 5,600 apartments were sold in Vilnius in total last year, 3 percent up from 2010.

“The residential market was quite more active in the first-half of 2011 than in the respective period of 2010. However, the stricter loan terms, along with the dim economy outlook, started deterring possible clients from proceeding to a deal in mid-2011,” says Kristinaitis Tomas Ziaugra, property market analyst at Eika, a real estate developer and builder.

To speak of the price range, 49 percent of the new lodging sales made up economy class accommodations, which price was from 2,800 litas to 4,600 litas per square meter.

Around 38 percent of the total sales were middle class apartments in the price range from 4,700 to 6,600 litas per square meter. And the rest, roughly 13 percent, Ziaugra says, consisted of luxury lodgings, with the price starting at 6,600 litas and up.

The property market analyst says Vilnius estate developers suggest obtaining around 1,650 accommodations of new construction. “The developers remained active throughout the entire year, adding new lodgings to the market and keeping the average number at 1,500-1,700. However, the demand was not up to their expectations,” the Eika representative notes. He says supply of economy class residencies went down by 26 percent last year. And only in the middle-class apartment segment, supply rose by 48 percent, he says. Due to the trend, buyers looking for economy-class accommodations have to spend weeks, and even months, in order to acquire a desirable apartment.

Ziaugra also discerns real estate clients’ increasing willingness to buy property from well-known experienced real estate companies. “The sales of the five biggest real estate companies made up 48 percent of all sales, a 6 percent increase from 2010. The sales show that property buyers opt for those developers which bear an impeccable reputation and which expose the best professionalism, service quality and approach to the client,” the analyst notes. He adds: “It is what has helped the companies to sail through the times of hardship.”

When it comes to prices, property sellers asked, on average, 250,000 litas for a typical lodging in Vilnius last year, a 5 percent increase from 2010. The average apartment price was at 170-215,000 litas in Klaipeda, and 140,000 litas in Kaunas.

In terms of prices, significant changes were noticed only in Kaunas last year. “In Kaunas, the prices went down by 8 percent while they remained pretty stable in Klaipeda and Vilnius. In the latter two, we saw only a bigger sway in demand. Especially increased demand and insufficient supply for economy class new construction apartments,” says Viktorija Steponaviciute, deputy director of Diginet LT.
 
Speaking of other than residential real estate market segments, Vagonis says the picture is even gloomier. 2011 was the slowest year for the Vilnius office market since the very beginning of its development in 1999,” says the expert.

Last year, Vilnius saw only one small opening – the Evita business center with 2,300 square meters of modern office space. The opening, however, had no considerable influence on the market.

“Nevertheless, in 2011, with the GDP growth, the fractional increase in rents and decreasing vacancy rate encouraged real estate developers to take up new or resume previous construction projects. Despite the still large amount of vacant office space in Vilnius, construction of another eight business centers is currently underway. When these projects are completed by 2013, the total supply of modern office premises in the capital of Lithuania will increase by a further 8 percent,” Vagonis said.

He cautions the new enthusiasm of the developers seems too ambitious for the prevailing sluggish demand. He believes that, in the absence of a faster market recovery, it is likely that the opening of some office buildings will again be postponed.

In the segment of rents, with the drop in the number of office vacancies, especially in 2010, Vagonis says now most office owners have the leverage to raise rent prices. “Consequently, in 2011, new rents increased by an average 7 percent. Given the uncertain economic situation next year, I believe that rents will remain unchanged in Vilnius and also in the other cities during 2012,” the real estate expert predicted.

Supply of new retail space in 2011 was miserably small, as only the supermarket chain Maxima opened two similar size - over 4,000 square meters each - supermarket centers, in Vilnius Pilaite and Zirmunai districts. Another food retail chain, Norfa, opened a supermarket center on Ukmerges Street.
 
“A comparison of Lithuanian cities based on the area of shopping centers per city residents reveals that Lithuania has not seen significant changes in 2010-2011. Currently Vilnius has 0.75 square meters of shopping area per capita, but this figure is still lower than that of Siauliai, which holds the leading position in the rate of shopping centers per capita at 1 square meter. Next on the list are Klaipeda, Kaunas, and Panevezys, at 0.71, 0.55 and 0.49 square meters per capita, respectively,” Vagonis said.

He inferred that developers are not keen to develop large scale projects due to sufficient existing shopping space, the massive emigration and uncertain economic future. Breaking this trend, Swedish Ikea, the world’s biggest home furnishings retailer, plans to open its first store of 25,000-30,000 square meters in the Baltics, near Vilnius international airport. Total investment is expected to be 47 million euros.

Most investors and developers, however, are still wary of the crisis and its possibly ensuing ramifications.