The Baltic real estate market is moving in the same direction, but at different speeds

The Baltic real estate market was resilient enough and managed to recover quickly after the recent global economic recession and has shown visible subsequent successful development. However, despite the overall similarity between the countries, Estonia, Latvia and Lithuania are at different stages of development both in terms of comparing all the countries and individual processes within each country. The capital cities of the Baltic countries remain the hot spots of the real estate map.

‘If over the past five years impressive changes have been recorded in Tallinn and Vilnius, which are currently at new all-time highs, essential changes in Riga are still underway. Therefore, these cities can offer a wide range of liquidity risks to investors, developers and businesses. The markets of some capitals are becoming tight, which encourages market players to channel investments to other regions: suburbs of the capital cities, resort towns or other larger cities, e.g. to the second largest city in Lithuania – Kaunas’, Raimondas Reginis, Ober-Haus Research Manager for the Baltics, said.

The year 2017 was indeed successful for the Baltic countries, because further economic growth contributed to development of the real estate market. Despite various challenges faced by all the Baltic countries, the overall investment climate remains positive.

‘This is particularly important to foreign investors, who see those positive changes and this is translated into real actions. Foreign direct investment development agencies whose task is to increase awareness of the countries globally and to attract new investment play an increasingly important role in the real estate market. According to the information available to Ober-Haus, in 2017 foreign investment promotion agency Invest Lithuania achieved the best result in the history of its operations and attracted 39 foreign direct investment (FDI) projects; these new projects will lead to the creation of over 5,000 new jobs in Lithuania. And it is important to note that, in addition to Vilnius, a substantial part of this FDI will go to other regions of the country, which will give an impetus to various real estate sectors,’ Mr. Reginis said.

In the meantime, investment in commercial property which generates stable income has remained high on the agenda. In 2017, the highest activity rate in the Baltic real estate market was recorded in Lithuania, where investment volumes in core commercial property reached €312 million and outpaced the previous record in 2008 (€310 million). Activity in the investment transactions market determined a further decrease in yields, which in individual cases is lower than 6%. This attests to the overall confidence of investors in the markets of the Baltic countries and in particular in prime property. For those seeking higher yields, the Baltic real estate market can offer a wide range of different options to guarantee 8% or even higher yields to investors.

Expanding services sector companies have become the main players in the modern offices market and encourage a further quantitative and qualitative leap in this sector. In order to meet high demand, in recent years developers have significantly increased investment in the development of modern offices. According to Ober-Haus, in 2016–2018, a total of 450,000 sqm office space will be offered in the markets of the Baltic countries. Vilnius will have the largest share (46%) with Tallinn close behind (38%), while Riga will have the smallest increase in supply.

Despite the modest supply indicators in Riga, positive trends can be seen in this largest city of the Baltic countries – every year developers are more courageous and propose more and larger new projects to the market. ‘If the economic and social conditions remain favorable, Riga will have the greatest growth potential. However, developers invest not only in quantitative parameters, but also increase their focus on quality projects, which is becoming increasingly important for today’s clients,‘ Mr. Reginis added.

More and more money are spending on housing in Baltics

Ever better indicators are also recorded each year in the residential property sector. According to Ober-Haus, in 2017, buyers spent almost €3.7 billion on apartment purchases in the Baltic countries, 10% more than in 2016 (growth was recorded across all three countries). Estonia and Lithuania each account for 41% of this sum and Latvia accounts for the remaining portion (18%).

In terms of investment per capita, Estonia remains the obvious leader. ‘This is not surprising because Estonia and its capital Tallinn feature the highest average prices for residential property and largest activity in the housing market. Lithuania and its capital Vilnius are in second place and Latvia and its capital Riga are left furthest behind. The recent global crisis hit Latvia, whose capital city was previously labelled as the most expensive city of the Baltic countries, most severely,’ Mr. Reginis said.

Despite different activity trends in the housing market in the Baltic capitals in 2017, the total number of transactions remains high. According to the information available to Ober-Haus, after a record year in 2016, the number of apartment transactions in Vilnius in 2017 fell by 6%, in Riga fell by 1%. In the meantime, annual growth of 7% was recorded in Tallinn and this was a new high.

The trend of rising apartment prices remains in all Baltic capitals. In 2017, an annual increase in the price of apartments from 4% to 12% was recorded in the capital cities: apartment prices in Vilnius increased by almost 4%, in Riga – 6%, in Tallinn – 12%. ‘The main factors of housing activity and increase in prices remain the same – increasing income of the population, positive expectations of households, attractive mortgage conditions and confidence in the real estate market. The housing affordability indicators over the past three years show that the situation remains stable in all Baltic capitals, i.e. housing prices are essentially moving at the same rate and in the same direction as the income of the population,’ Mr. Reginis said.

Baltics Real Estate Market Report 2018