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Century21Baltwest: real estate market of Latvia grew by 1.5% in Q1

Nina Kolyako, BC, Riga, 21.04.2011.Print version
New tendencies in the Latvian real estate market: animation in the sector of new business class constructions which the market owes to the Minister of the Interior L.Murniece, the first results of enactment of the investment amendments to the Immigration Law – pluses, minuses, perspectives; how the secondary market of the standard housing will develop in 2011; what the current attraction of Latvia for foreign investors is – everything included in the the overview of the Latvian real estate marker in Q1 of 2011 made by the company Century21Baltwest.

The last 3 months of the previous year were marked by the 3.5% market fall. It happened after the year’s (from September 2009 to September 2010) growth cycle when the overall prices rose by 27%. These processes are based exclusively on proportion of the sellers and buyers in the market which in the majority do not exceed 5-6% of the country population as well as optimism and pessimism of the population in general. The narrowness of the market creates a speculative constituent and increases interest of the players. However, lack of macroeconomic shifts prevents serious institutional investors from coming to Latvia.

 

Having overcome the price barrier of 550 EUR/m2 at the end of spring 2010, the market entered a new quality level. First of all, the offer on average increased by 15% – as the market returned to the prices of the years 2003-2004 and those who were buying apartments at that period were able to return to the market as well as banks who credited these buyers and later owing to the crisis became the owners of apartments. Secondly, the demand reduced by 0.5% – those who dealt with sums in amount of 10-20 thousand left the market. The proportion of sellers and buyers which pushed the market up during the year was disrupted. The level of 580 EUR/m2 reached by the market at that time turned out to be the line of resistance which it did not manage to overcome.

 

We saw two different tendencies in the first three months of the year – on the one hand, actually a side trend in the sector of the secondary serial housing (here the prices were only 1.5% up and comprised on average EUR 569/m2); on the other hand – the market of the new business class housing activated rapidly – apartments with 2-3 bedrooms with the square of approximately 100 m2 and the price minimum EUR 140'000 not only became liquid but have seen the increased demand.

 

The prices in this sector have increased by approximately 10%-15% since January 2011 and comprise accordingly in Riga EUR 1'400-1'500 /m2 and Jurmala – EUR 2’200-2’400.

 

The reason for such phenomenon was appearance of foreign (mainly Russian) investors attracted by the amendments to the Immigration Law.

 

As known, on July 1, 2010 the amendments to the law took effect allowing the foreigners to buy a residence permit in Latvia in three cases: 

 

a) if investing 50 to 100 thousand lats in real estate depending on the size of a populated place (100 thousand – in the Riga planning region, Jelgava, Daugavpils, Jekabpils, Liepaja, Rezekne, Valmiera or Ventspils; 50 thousand – in other places);

b)  making investment in a Latvian credit institution in amount of minimum 200 thousand lats in the way of a subordinated capital (taking into account that the term of the transaction may not be less than 5 years, without the right of termination thereof within the term);

c) making investment in amount of LVL 25,000 in the capital of a company registered in Latvia and with the further payment of  minimum LVL 20,000 within the following year.

 

 

The new law caused ambiguous reaction among the experts. There were a lot of opinions against. Century21Baltwest as well were critical about assessment of the first results of the project under a nominal name "a residence permit in exchange to investment".

 

It was obvious that the state can earn in the immigration market hundreds times more in a different way without any investment in the real estate or banking capital. Canada alone for example attracts to its economy more than CAD 1 billion by means of accepting just 2,000 immigrants a year (besides these are people who must have a profession or capital). At the same time net income of the authorized Canadian banks comprises USD 50 million. For comparison, as yet LVL 0.5 million have flown into the Latvian economy according to the official data (LVL 250 thousand – the real estate tax, LVL 240 thousand – taxes paid by businesses and up to LVL 10,000 – dividend taxes). 

 

Besides all other, the Latvian law has a number of shortages which do not allow the majority of customers from abroad.

 

The main shortage is hidden in the word “temporary”. Strange as it may seem, according to statistics, the main consumer of this product is located not in Russia and not even in CIS but in China and Pakistan. This is an extremely beneficial buyer as it is interested in Eastern Europe solely as the gates to Western Europe – they have customary ethnic communities and higher living standards.  For this reason he is not going to live in Latvia or even Poland.

 

However, the eastern mindset is such that nothing temporary seems attractive to it. A temporary residence permit (TRP) has not become an exception. For this reason the main consumer was cut off by the Latvian legislator from membership in this project at once.

 

The second minus is a complete lack of this business infrastructure abroad starting from advertising campaigns and ending up with a network of specialized agents. Though Y.Luzhkov and the Latvian Minister of Interior L.Murniece who did not allow him to the country provided a helpful hand in this case in a couple of weeks having created a reason for news for the leading news agencies worldwide, and in Russia in the first place. Actually Ms. Murniece is the one whom we owe for the fact that a flow of potential immigrants has been only increasing.

 

The third minus which frightens the potential investors off, especially those from the emerging economies – a lack of the “investment visa” notion in the Latvian laws. Such visa which is present in a number of countries guarantees to its holder a residence permit under a condition of realization of the promised investment. In the event that the investment is not realized within a definite period the visa is cancelled. However, if the investor has fulfilled its liabilities, it obtains a residence permit automatically – all necessary checks of a potential investor take place at the stage of obtaining the investment visa. In our version the investor has no guarantees that after buying a real estate it is not denied a visa (although there have been no such cases so far except for the precedent with the former mayor of Moscow Y.Luzhkov – though to be denied the visa one has to “distinguish oneself” in particular e.g. be on the list of members of terrorist organizations or publicly insult Latvia which the majority of Russians luckily can’t boast).

 

Nevertheless, the program has been activated though in a less volume and with a lower potential. Two obvious advantages have played a role – cheapness (there is no need to give the money away forever and moreover, one can earn on the price increase and presence of the Russian culture environment which is significant for CIS customers which form the majority so far.

 

Within the 9 month which have passed since enactment of the amendments 242 residence permit applications have been submitted (together with the family members – 557). The number of the issued residence permits – 192 (together with the family members – 466)

 

Out of this number 128 foreigners have obtained the residence permit owing to investment in the real estate (the majority of them are the citizens of Russia) – for comparison, in December 2010 they were 55; 52 persons – thanks to taking part in investment in the subordinated capital of Latvian banks, 12 have obtained a temporary residence permit having invested LVL 25,000 in the equity capital of Latvian companies and having paid LVL 20,000 more in a year’s time in taxes.  Besides we are talking about the applicants, not their family members.

 

128 real estate transactions is a very small number from the standard European as well as Russian market point of view though this is a good number for Latvia. If these investments were directed to the liquid secondary serial housing market, as many thought at the beginning, then today we would have an expressly positive and rapidly developing trend in this sector.

 

Though almost all this money was invested in the business class accommodation – new buildings in Riga and Jurmala have immediately turned this sector not only into a liquid but also an extremely demanded one. Such is a mindset of the citizens of Russia – they prefer high quality and new housing as the mandatory requirements.  

 

Today an average Russian investor wants to buy for the required EUR 140,000 a new dwelling with the square of not less than 90 m2 in a good district and with good neighbours. Many of them prefer renting it out immediately after the purchase which still is a problem for Latvia, others prefer leaving it for themselves realizing at the same time that they cannot afford coming to the country more than 2-3 times a year. A little percentage is going to move here permanently – these are either pensioners to which children want to secure happy old days in a country they became fond of already during the Soviet times or businessmen whose business interests are related with the region and willing to provide education in Russian to their children.

 

The reason of obtaining the temporary residence permit among the citizens of Russia in the overwhelming majority of cases is the political uncertainty about the future and a wish to acquire a reserve airfield. It does not mean that the economic constituent is lacking – today Russians are not ready to buy the aforementioned Latvian real estate at a double price.

 

However, a number of people willing to buy the real estate are growing which of course is reflected on prices. They have grown by 10-15% (such difference is understood taking into account a low market liquidity in the recent past).

 

If such a tendency continues, very soon a deficit of objects the citizens of Russia are interested in will emerge. It already exists; in particular as regards the high class dwellings. In such case we will see a real reason of the amendments to the Immigration Law in 2010 – the construction industry will start reviving. Already today it becomes apparent that there is a little number of new constructions worth 1'500-2'500 EUR/m2 in the market and their number will become critically low already at the end of the year.

 

As a consequence developers, constructors and everybody related will be in demand again. In fact, this was the main consideration of the government – first to pull out of the crisis swamp the old locomotive of the Latvian economy – the construction sector which in the recent past pulled the entire national economy of the country.

 

And although it’s a big question whether it is a good idea to step into the same water twice, today this process without doubt will facilitate recovery of the country from the long-standing economic crisis.

 

How stable is the process? It’s too early to talk about stability and results of this project in general. Very little time has passed. Besides at the moment the Latvian Parliament is reviewing new amendments to the Immigration Law which have already passed two readings and which to great extent may complicate the entire project.  

 

As of 1 January 2012 it is proposed to introduce a minimum amount of the cadastre valued of objects – around LVL 30,000 in Riga, Riga planning region and main cities and LVL 10,000 – elsewhere. It means that apart from the market price of LVL 100,000 the object will have to meet one more requirement – have a definite cadastre value. This amendment is offered as an instrument for counteraction to fraudulent schemes when e.g. a brother sells to a sister 2 m2 of its dwelling space at a price which is required to obtain a temporary residence permit (such cases are already known).

 

The mere fact of origination of the new amendments of a restricting character in half year’s time after adoption of the investment amendments is already bad for any investment process. The investor does not like when the rules of the game change.  

 

On the other part it is required to set a barrier on the way of fraudulent schemes which the lawmaker was not able to foresee in due time. Though won’t it turn out that the baby will be tossed out with the bath water? Indeed, if this norm is adopted, the actual price of the object purchased with the aim to obtain the TRP would almost double as today the cadastre value of the most popular apartments comprises 15-20 thousand lats.

 

What should be done in such situation? How to protect a decent investor? The lawmaker proposes to introduce an appraiser to the process. In other words, if the object costs as much as required for the TRP but its cadastre value does not meet the legal norms, the transaction parties address the appraiser which appraises the property for 100 lats and issues a reference on its real value. If the amount specified in the reference satisfies the requirements of the lawmaker, one can visit a notary to process the deal and if not – one should look for another object. Everything would be ok but this causes unnecessary headache and requires additional time and money.

 

Century21Baltwest addressed the Parliament members with a request to reduce the minimum allowed level of the cadastre value to 10,000 lats in the Riga planning region and other big cities and to 5,000 lats in other populated places. Thus it is allowed to reduce the time and costs of the transaction processing – indeed, a shed in the yard of a summer house will not cost 10,000 lats and the majority of the apartments sold today have the cadastre value above the designated amount. This amendment was transferred to the Parliament on behalf of the Harmony Center; however, the final wording is not known yet.

 

In any case the investor will be protected of course. The question is – in whose favour will the protection be – in favour of appraisers or parties of a transaction?

 

By the way, there have been strong rumours about amendments to the Law of a different character – the amendments which will increase the attractiveness of the Latvian real estate market even more. It refers to accountability of the investor contribution in developer projects when obtaining TRP. It means that investment made by the investors at the construction stage will be taken into account. If it happens, it will facilitate the rebirth of the developer business. And the Russian investors will be able to take part in the interest-holders’ game they are so much fond of.

 

Will the sector of the business class housing pull also the serial housing? There is no objective supposition for that as the internal buying interest remains low and the main thing – the index of consumer expectations has been falling for the second consecutive month both for the real estate market and the economy on the whole.

 

The latest DnB NORD Latvijas barometrs study points at rapid changes of the public opinion for all showings related with the national economy, besides the speed of deterioration of the public mood can be compared to the one in spring 2009. “Despite the encouraging forecasts which have been pronounced in the public space as regards the economic recovery, all showings that are measured within the study following the lasting growth have rapidly returned to the level which was observed a year ago, the study says. – Such fall for the first time after a long period is observed for all showings without any exceptions – assessment of the current and future economic situation, assessment of the current and future material state of a family, evaluation of the government work and opportunities to find a good job”.    

 

SEB Housing Price Indicator during March 2011 reduced by 9.3 points to 16.8 points (in February this year the indicator was on the record high level – 26.1 points). And though it is by 25 points more compared to March 2010, the tendency is alerting. The number of those who forecasts growth of the real estate price within one month has reduced by six%age points – 33% of respondents consider that in a year’s time home prices will be higher than now (in the previous month’s survey 39% chose this option). In turn, compared to the previous survey the number of those who forecasts a price fall has increased by 3%age points – 16%.

 

Within the previous month increased the number of neutral opinions – 34% of respondents (32% last month) expressed an opinion that the home prices will not change in the next 12 months and in a year’s time will remain on the same level.

 

The official unemployment remains on the 14.5% level. It means that the actual, inter alia also concealed unemployment balances on the 18-19% level. It is not much less than 1.5 years ago. Growth in taxes, pension cuts, public sector employees reduction as well as increase of the public facilities tariffs which last winter was responded by the country residents by mass defaults in payments – all these factors not at all enable growth of the purchasing power and certainty about tomorrow.

 

Moreover, during last year investments in the Latvian economy reduced three times. At the moment the pure capital outflow is observed. The cumulative foreign investment indicator is rapidly decreasing. This is the result of the tax increase by the state government. Entrepreneurs prefer taking their capitals out to the neighbour countries where the state of affairs is more favourable for business activities.

 

And though specialists forecast the national economy growth of 4.5% in 2011 and  a record high export growth tempo was recorded in January 2011 compared year-on-year, all this does not reflect on the lives of simple residents and businessmen that are not related to export.  

 

Hence, possible positive changes of the macroeconomic figures will hardly have positive effect on the internal demand in the near future. And taking into account that the foreign investment in the real estate does not come into the sector of serial apartments, we have good reasons to assume that within three coming months this market will either remain its current positions or will start its gradual falling to the level of EUR 500-550/m2.

 

In fact we are talking about the coming split of the market. The market of standard (serial) apartments will completely turn into the market of the internal use. As regards the markets of the new business class housing, it will become the object of interest on the part of foreign investors, mainly citizens of Russia. Growth of this interest depends both on the internal situation in Russia and on activities (considerate or not) on the part of the Latvian government and parliament. In case of a favourable outcome we will see a rapid growth of prices in this sector in the near future and increase of deficit of the business class objects.

 

However, also the internal country situation will change in future. The rigorous monetary course undertaken by the authorities without any doubt has nothing in common with the economic reforms required to the country.  Though if the authorities will be able to realize an adequate tax reduction for investors at a definite stage and will not force the salary increase, the country will be able to become an attractive location for the industrial investment after some time. And it means new workplaces and increase of the same internal demand.  

 

However, this is a far perspective. Meanwhile the only attractive moment of the Latvian market still is its potential. It is huge and it refers to all segments of the market. The narrowness of the market has added a required speculative element to it which is totally absent in a number of European markets. Therefore the question whether foreign investors will come to the Latvian market to great extent is already rhetorical.

 

Of course will they come and the proof for it was the 14th International real estate conference “Real Estate and Construction in the Baltics’2011” which took place on 15 April 2011 in the Riga City Council and which gathered more than 100 famous specialists both from the Baltic countries, Russia and Germany. The fact that the country has an obvious potential in the sector of residential and office squares construction, in the field of lease as well as in the secondary market (including commercial real estate and in the land market – by the way, the situation in these sectors has not experienced significant changes within the last quarter) today is clear to every expert.

 

The only question is – when will the real moment of entering the market come? And this is the question which still remains unanswered. However, it seems like the Russian investors have already started solving the problem.

 

www.century21.lv

 






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