European investors eye Baltic property market

Due to the recession on the European real estate market, as well as Estonia's imminent accession to the European Union, property markets in the Baltics are seeing heightened interest from institutional investors. Both the representatives of bigger pension funds and smaller private Scandinavian funds have become more active. Mainly they are keen in long-term rental income-generating properties, i.e. retail space near main roads and office buildings in the city center.

In addition to price, foreign investors also looking at the tenant mix and tenant background. Buyers prefer buildings anchored by well-known international tenants with solid lease agreements. In fact, the most common reason for the failure of a building to sell is the existence of poorly written lease contracts.

For the most part foreign investors are entering the Baltic real estate market expecting yields in the 11 percent - 13 percent range. This is certainly higher than yields of 6 percent - 8 percent in Scandinavian capitals, or even those in Warsaw, Prague or Budapest, where prime office yields range from 9 percent to 10 percent. The main reason for the expected premium in the Baltics is market fundamentals: Local real estate markets are small and lack liquidity.

In Latvia, young families will now be able to buy homes with only a 10 percent down payment due to a new loan facility backed by the World Bank. The new credit line will be distributed through major Latvian banks.

Although the first facility is tiny, only $2 million, the pilot project is expected to be expanded quickly and allow many young families to leverage small amounts of equity into starter homes.

In the last two years, the total volume of home loans in Latvia increased threefold. Over the next five years as many as 300,000 new home loans will be distributed in Latvia, according to estimates of Hansabank, the region's biggest bank.

Many office buildings in Riga's center still have a high rate of vacancies, as tenants have shown preference for out-of-center locations with lower rents and better parking facilities. Companies prefer locations where staff and visitors have the possibility to park their cars.

Office rents in Riga have dropped more 20 percent in the past six months, due to the large amount of empty class A and B office space in the center, as well as an oversupply of office space created in refurbished residential buildings in the city center.

And in Lithuania, Ober-Haus was appointed as a sole leasing agent for the new Europa shopping center in Vilnius. Completion of the new 20,000 square meter shopping center is scheduled for the end of 2003. Rents will range from 15 euros to 23 euros per square meter.

This report was compiled by Ober-Haus's subsidiaries in Tallinn, Riga, and Vilnius.