The Baltic Course  

A Trend for Three Participants

By Aleksei Sarki

The year 2003 was full of hopes to bring long-awaited activity for Baltic states’ real estate owners.  The numbers of big deals in real estate market have already increased  considerably, especially in Riga and Vilnius.

Latvia, Lithuania and Estonia spent first half of 2003, waiting anxiously for the crucial moment concerning joining the EU. Preparations for the accession can be found in almost every sphere of business activity but most envisaged are huge potentials in real estate market.

Common direction for different countries

The key difference between real estate markets of the three Baltic states lies in some specific features concerning their development. For example, due to smaller territory and earlier inflow of foreign investments, Latvian northern neighbor Estonia was already 1–2 years ahead in the development. On the other hand, it seems that Latvia still outpace Lithuania in this sector.

Despite obvious differences, future EU membership has brought about similar trends in real estate markets in all three countries. First of all, active change of ownership for big and extremely big property sites has begun. For many years a number of property owners in Riga, Vilnius and Tallinn have been unable to dispose of their assets following raising prices’ trend reflecting their idea about real estate growth dynamics.

The year 2003 has brought the long-awaited demand for property. The number of major transactions increased considerably, especially in Riga and Vilnius. And many new property owners still wish to get their share of profit in offices’ rental market through efforts to renovate their properties to suit the demand.

The likely consequences of such activity did not take long to come. Respectable dealers raised prices and kept the apartment prices at a high level. Previous practice of reducing initial price by about USD 100–150 thousand can only be construed as a feature of unfaltering demand.

According to the price increase many property giants became active in advertising. Banks, insurers, forwarders, multi-profile companies and even developers themselves started making offers of modern trade and office facilities although on terms that they would hold leasing status for next 7–5 years.

Most likely that big owners are of somewhat different opinion as to “wild” price level increase after Baltic states’ accession to the EU. But their position has a light influence on the property market because most buyers in modern real estate property represent Russian capital. The eastern neighbour’s intention is easy to understand: who would refuse to acquire real estate in a future EU country at a presently quite low price level compared to Moscow or St Petersburg’s price level. 

Tallinn: about 100,000 sq. m for sale in the near future

The growth of new construction sites keeps up with the pace in re-distribution of existing properties. In little Tallinn alone about 100 thousand square meters of newly built houses are expected to be for sale by the end of the year. With the total property market is being in the amount of 385 thousand sq. meters. Moreover, major business centers in the Estonian capital have less than 2 percent of vacant space, a good tip for less developed countries to take into consideration. Due to high demand, rental prices hardly change at all. The price for business tenants is USD 13–20 per sq. meter per month.

There is no need to repeat that retail trade chains play an important role on the real estate market. Thanks to City Market, 15,000 sq. m emerged in the form of two new shopping centers and another 50,000 sq. m will come into existence in spring 2004 as a shopping mall on one of “retail promenades” near the airport, although the leading lessee will be Rimi hypermarket. Regardless of the falling retailers’ income, experts believe that the demand will be able to absorb the expected supply. A major problem for shopping centers is the lack of international lessees that could bring in new clients.

Riga: construction boom goes on

Developers of large shopping centers in Riga know no limit to their business. Today existing shops contribute about 290 thousand-sq. meters to the market, of which 234 thousand-sq. m that could be used commercially. The coming years will surprise anyone by the new construction boom unprecedented for Latvia. According to a preliminary estimate, a whole series of premises with total area of 212 thousand- sq. m are on the architects’ drawing boards at the moment. Of course, separate projects are at different implementation stages and finished construction will not flood the market at the same time but the very fact of a possible two-fold growth makes one think about the fate of small and medium-sized stores.

Just as in Estonia, big developers also dominate Latvian property market. Eight major retail chains have a total of 210 stores, and their number will increase to 315 by the end of 2003. Over 30 percent of Latvian commercial trade-area market have been concentrated in large shopping centers.

Contrary to the northern neighbour, Latvian capital cannot boast absorbing expected supply. The only chance to survive is a hypermarket of one of huge retailers. Probably this is also the reason why the operators pay only USD 10–12 per sq. m a month whereas average rental level stands at USD 17–55.

Vilnius: property sales doubled

Today Vilnius still remains behind Riga and Vilnius by amount of sales areas available in the market but the growth dynamics of the southern neighbour convincingly promise very near and dramatic changes in the situation.

In 2002 developers provided for Vilnius property market about 106 thousand meters of commercial trade space, almost doubling the previous figure (from 139 thousand-sq. m to 245 thousand-sq. meters). But the demand is still unsatisfied and vacant spaces are occupied in less than a month. After all, retail chains bring to shopping malls buyers in numbers quite enormous by Lithuanian standards.

Experts do not expect any serious fluctuation of the monthly rent (around USD 17 per sq. m) in the next two or three years, with the exception of separate grant projects where a successful concept, coupled with a prime location, allows the lessor to charge a higher rent. For example, a place in the popular Akropolis shopping center (55 thousand-sq. m) would cost USD 11–44 per sq. m a month.

Mass construction of shopping malls in Vilnius will continue in 2004 with most of these facilities to be built in extremely well-situated and profitable locations. The market will expand by additional 110 thousand-sq. m to 355 thousand-sq. meters, getting ever closer to its northern neighbours, i.e. Latvia and Estonia.

In preparation of the article experts from Ober Haus, Arco Real Estate, BaltHaus, Realia, Pindi Kinnisvara realtors have provided consultations.