Property market picks up in Riga

The property investment market in Riga picked up the pace in 1998, as foreign investors began buying fully-tenanted buildings and the first true class A office project broke ground.

Until this year, local and foreign developers had been content to simply remodel existing facilities, adding paint or new windows where necessary. Who could blame them, with bank credit for redevelopment still not widely available, and while freshly wallpapered Soviet era office space still fetched rents in excess of $240 per square meter a year?

Times have changed. As supply of office space on the Riga market increased, and access to finance widened, many developers saw the necessity of developing the higher end of the market. Companies such as the Swedish construction company Skanska and the Estonian developers Reval Hotel Group and Ober Haus will be building substantial amounts of class A office space in the next two years.

Investment yields

Although sales and rental data for renovated office and retail space fluctuate month to month, data indicate gross yields for developers of more than 20 percent on renovated class B and newly proposed class A space. Yields for secondary investors are difficult to gauge due to the still limited activity of institutional investors, but are generally between 15 and 20 percent.

Supply and demand

Riga, with a population of 810,000, is the largest city in the Baltic states. Its central location between Lithuania and Estonia is quickly developing Riga into a business center of the Baltic region and an important transit point. The city has plenty of buildings in the center and few land lots available for development.

Further, great many buildings are architectural monuments that are of high aesthetic and historical value. Due to this specific situation, most investment has gone into refurbishment of existing buildings.

Class A office space does not exist today. Most of the refurbishment projects do not offer central air conditioning or ample parking, and are in buildings that are 60 years to a few centuries old.

Even banks, the usual developers of class A space in emerging markets, have turned to refurbishment of older city center buildings. Next year, however, projects like the downtown Valdemara Center, developed by Skanska, will be complete, offering 9,000 square meters of class A space.

General leasing guidelines

Lease periods are usually one to 10 years. Usually, the consent of both tenant and landlord is required to extend the lease. Termination clauses usually require three months notice.

Rent is mostly in U.S. dollars. Annual adjustment in line with the U.S. inflation is widely used.

A well-renovated downtown office will cost between $180 and $240 per square meter.

New downtown office buildings now under construction are being pre-leased for $370 per square meter, plus common charges.

Quoted rents generally include only base rent payment. All utilities and sometimes separate service and security charges are extra charges. Landlords are eager to find blue chip tenants, and will be somewhat flexible with rents with those clients (up to a 10 percent discount of the asking rent).

Property market development

Until 1991, almost all real property was owned by the state. Property rights reform started in 1991, resulting in the rapid development and expansion of the real estate market in Latvia. Within a broader process of privatization, both the institutional structure and the legal background regulating real estate were established.

Today both local and foreign physical and legal persons can own real estate. Legislation permits land purchase in Latvia by legal entities registered in Latvia and owned by foreign investors based in North American and most European countries.

In the period from 1991-1996 credit was tight, with borrowing rates slowly declining from the high of 150 percent to 20-25 percent per year.

Last year was marked an important milestone; interest rates on real estate loans declined and now hover between 10 and 16 percent per year.

In addition, foreign investment into the local stock market provided profits and liquidity for local investors to spend on real estate.

Latvian banks did not tighten their loan policies even after the fall of the Baltic stock markets in the autumn of 1997. The market will see a significant growth of activity already this year as some of the present developers and investors announce or have announced new projects. In the next couple of years, we should observe rapidly expanding real-estate investment. That growth will come partially rom local and smaller international developers.