The Baltic Course  

Turning point in standard-design residential market

By Aleksei Sarki

Apartment houses marketing situation has leveled out in 2003 in the three Baltic States – in Latvia, Lithuania and Estonia. 

Even lay people have recognized the general outlines: standard apartments lost its previous attraction, new multi-apartment houses market is growing relentlessly, and capital cities’ suburbs are expanding by family houses’ development. Residential market in the Baltic States is gradually beginning to become comparable, giving rise to some common trends in all three republics.

Riga: time of change

Photo: Nams 24

Riga, Kipsala.

The year 2003 can be described as fateful for Latvian housing market, of which 80% is concentrated in Riga and neighboring areas. The upward prices growth trend for standard-type apartments has reached its turning point; experts had warned about that already in 2002 when residential apartments’ price growth slowed down.

When apartment prices started creeping upwards in summer 2001, few real estate professionals could imagine an average price growth over 200% in less than two years. In the first five months of 2003 prices grew only 12-17%, prompting even the most sluggish analysts to accept the fact that the period of steady growing apartment prices has come to an end. In fact, saturation period could be seen already in January and February of 2003 as the number of transactions on the secondary real estate market fell to its minimum of less than 100 deals a week. Sellers kept routinely raising prices, but buyers had lost interest in standard-designed housing. As a result, serious disproportion between sales prices and the supply occurred, the trend, actually, reflected in the apartment market in May 2003 when sales transactions shrank to 70-80 a week and the price growth was less than 1%. Throughout the summer real estate experts offered a variety of growth forecasts from +2% to -2%, which rather suggested lack of any movements on the market. At autumn's beginning, a negative price trend appeared bringing standard apartment prices down 6-8% in comparison to May prices. Moreover, these figures are based on changes in “ prices”, although actual sale deals’ number showed 10-15% fall. Thus, the annual analysis reveals a minimum price growth for standard apartments' market at about 5% with an average standard apartment price in Riga’s suburbs within USD 510-660 per square meter.  

Almost opposite trend is seen in Riga centre where apartment prices kept soaring up, rising 25-30% over a year time. High demand and insufficient supply in conditions of a moratorium on construction in the city center area, coupled with rise in house to almost unbelievable height allow an assumption that the apartment price curve will continue for a time. At the end of 2003 it was almost impossible to find an apartment in a decent brick-house anywhere in an active part of Riga centre for less than USD 1,000 per square meter.

Market overheating: a dangerous reality

It can be said that the key reason for changes on the secondary housing market in 2003 was the beginning of active new multi-apartment building construction. No doubt, other objective factors for terminating the price race can be found (loan interest rates, for example) but they rather helped to push prices up than bring them down until comparable items of better quality were on the supply side.

At the end of 2002 about 40 different active sites in the real estate market could be spotted, and about 20 of them were almost fully sold-out or booked. Today, there are over a hundred of similar construction projects, although real work is under way in just 20-25 sites. The plans are striking in their magnitude, i.e. the total number of announced but not yet commenced projects has reached 60, threatening to throw soon into the market over 5,000 new apartments. In addition, every week 3-4 sets of documentation for construction of multi-stored apartment buildings are submitted to the city’s Construction Board for the review and approval. Prices for apartments with “grey” finished works in the newly-built houses vary from USD 650 to USD 1,100 per square m.

In case that just half of all projects revived developers have submitted are approved, the newly-built apartment market in Riga is very likely to overheat in the next 2-3 years with all the consequences to real estate developers and financial institutions.

Photo: E. Prozes

In the centre of Tallinn

Tallinn: the Baltic market’s trend- favorite

When discussing apartment market in Riga, one should take a good look at Latvia’s northern neighbor Estonia because a couple of years ago (2000-2001) Tallinn experienced almost the same trends. Standard apartments' prices sky-rocketed first, then sank to USD 380-45 per square m. and, after “putting on some weight”, stabilized with the price change curve running mostly in the horizontal direction. Today the price range on the secondary market stands at USD 450-650 per square m. Like in Riga, the price rise followed the decline of mortgage loan interest. Housing construction boom started as soon as prices leveled up, the trend that still holds dynamics.

In 2003 over 2,000 new apartments situated in some 75 newly designed residential districts were to be put into commission in Estonia. Most of these buildings (60) were constructed in Tallinn with the rest built in Tartu and Parnu. The prices for new apartments close to the city centre run up to USD 1,200-2,000 per square m. while in suburbs they cost about USD 900-1,400 per square m. Both prices and new apartments' rate of supply are growing. Experts think that the price growth in 2004 could be around 5-10% and much more new housing will appear on the market than it had been in 2003.

There is a very active and constant demand for exclusive apartments in Tallinn centre where prices have risen 12-15% over the last year, to the level of USD 1,200-2,300 per square m. Analysts attribute high growth in this market segment to the following factors, i.e. constant growth of residents’ wellbeing, expanding national annual GDP growth at 5-6%, wages rising about 10% a year on average, and steady decline of loan interest to 4.5% a year. Construction in the central part of the city is limited to satisfy growing demand, which can lead to some disproportion in 2004 between the demand and the supply and an adequate market response in the form of higher prices.

Vilnius catches up with neighbors

For quite a long time Lithuanian real estate market has been lagging behind its northern neighbors in a number of aspects, allowing experts to build their market forecasts using Latvian and Estonian markets’ examples. Administrative, organizational and controlling aspects in real estate still remain weak but in general Lithuanian market started to explore trends that are similar to its neighbors.  

The prices for standard apartments have increased little last year in the suburbs of Vilnius, but still remain lower than in Riga or Tallinn. The average price for a standard apartment in not too popular regions is about USD 310-380 per square m. while a flat in a more attractive part of the city would cost USD 450-550, which is some USD 100-200 less than it would be in any other Baltic State. As prices keep growing, it is very likely that in the coming 2-3 years they would rise to the level commensurate to neighbors’ markets.

On the other hand, the prices for apartments in newly built houses already can hold competition, at the level of USD 700-1,000 per square m. in suburbs and USD 800-1,200 in locations closer to the city centre. These figures include 6-12% “correlative” price growth typical for the whole 2003.

Special attention should be paid to the price difference on the primary and secondary housing markets, which seriously deviates from the general Baltic pattern. This is probably due to great activity of Lithuanian developers: in 2002 about 2,200 new apartments were built in Vilnius, and 90% of them were sold before the buildings were put into commission. In 2003 this figure was a little higher and further growth is expected in 2004.

Experts believe that the boom, as usual, was due to the strong demand able to satisfy its needs thanks to a high GDP growth (5-6% annually) and very low interest rates (4-5% a year).

When looking at developments on the apartment markets in Baltic capitals, one can conclude that the trends of growing new construction and rising prices continue. The only exception is the standard apartments in Riga market but the negative direction of the curve should be regarded as the adjustment result for the previously overpriced properties rather than a sign of regional change on the standard apartments market.

Aldis Riekstins,

Realia (Latvia):

“One can say that the main trend in 2003 was the growing developers` activity, the results of which were visible not only in the form of advertisements or construction projects submitted for the approval, as well as in the form of increase buildings that have already been put for commission.

The second most important trend on the apartment market of the capital city was the weakening customers' interest in standard apartments. In the short run, it will encourage developers to offer more and more new high-quality products, and in the long run, it will facilitate existing housing renovation.

The 2004 is going to be even more fruitful year because mentioned market trends will continue moving upwards and, together with the EU membership later in the year, this may lead to absolutely unexpected results”.

Kalev Roosivali

Pindi Kinnisvara (Estonia):

“Looking back into 2003, we can see a continuation of favorable market trends in real estate, i.e. prices for standard-design apartments fell a little while apartments in newly-built houses and exclusive apartments in Tallinn centre became more expensive. Developers have kept setting all possible records, having put into commission about 1,400 new housing units.

Most of the new sites are concentrated in Tallinn with the rest built in Tartu and Parnu.

The new construction in 2004 will be at least on the same level but we can expect a growing demand over the supply for the next couple of years because Tallinn market can absorb about 2,000 apartments”.

Rolandas Klidzia

Armitana (Lithuania):

“The most important event in Vilnius real estate market has been the construction of Europa complex which would house a shopping centre, city municipality, business offices, apartments, etc. Never before in Lithuanian capital's history has it seen such an elaborated concept on such a grand scale.

Against the background of such enormous projects, even construction of as many as 2,200 apartments went almost unnoticed. Stable demand allowed builders of new residential houses to meet their sales targets and the slight surplus could explain continuous new apartment prices' upward trend (6-12% a year).

Prices for standard apartment construction have been growing too, and if compared with prices in Riga and Tallinn the potentials for growth are still very high”.