By Luka Anlauff How do you see the prices for housing, office space and storage developing in the Baltics over the coming months and years? Is the supply sufficient to cover the demand? Will the prices rise after the current crisis? That’s a question I am asked much more often than I can answer. To begin with, looking at the broader picture, it’s not that clear which phase of the economic cycle we are at due to the pandemic and related issues. It’s a crisis we have probably not seen before, and while the unity in fighting it is inspiring, the mid-term effects of both the pandemic and the measures to cope with it are yet to come. What we are dealing with now appears to be a short-term rise in the construction costs, up to 25%, due to the disrupted supply chains. There are also large cash reserves both of companies and households, as well as cheap financing. Finally, there is a fear of inflation in the near future. The combination of all this is already reflected in the rising prices to some degree. The office segment in the Baltics has been quite competitive for the last few years, especially in Vilnius and Tallinn, with Riga jumping into the game recently. Due to the active development of new modern stock, it has become a tenant’s market, with tenants having a better negotiating position thanks to the supply, which was even more intensified during the pandemic. What we see now is people gradually returning to offices. In the future, we will probably see a change towards a combination of office and remote work, but companies will still definitely need offices, and overall there will be a need for more space, as the economy is growing. We also see that office space developers have retained confidence in the future of the market, resulting in 160,000 sqm of space under construction in Tallinn, 90,000 sqm in Riga, and 200,000 sqm Vilnius, which will be delivered to the market in the next couple of years. So how does all that affect rent prices? For the upcoming months, we expect them to remain stable, even though construction costs are rising, and maybe with a downward pressure for older, secondary office buildings. However, it’s a tough task to predict what will happen in several years and it will also take some time to understand how different the “new normal” will be. If we consider the storage or wider industrial real estate market, my personal favourite, we had a market of stable rent prices, growing demand and development volumes during the last several years. It is no secret that the pandemic has actually worked as a catalyst for demand globally, and the Baltics were not an exception. Due to the disrupted supply chains, increased e-commerce activities and expansions of many traditional production businesses, the need for space has been even more evident compared to the pre-covid times. On the other hand, the development of new supply has been active, and this has balanced the situation. In the short term, I would say the growing construction costs are the main factor already pushing the rent prices up slightly, but as the base for this is hopefully temporary, the situation will most likely stabilize for the years to come. Does the trend of moving out of the big cities into a home in the countryside apply to the Baltics too? Do Lithuania, Latvia and Estonia differ in this regard? I think it does, though probably not as evidently as in Western Europe or the USA, as even our largest cities are actually not that large and still very comfortable to live in. But the pandemic has definitely given many people a new perspective on where they have to, or where they could live. I would say that what we see is a combination of three types of moving out: firstly, from an apartment in a big city to a house or cottage in the suburbs; secondly, a temporary relocation to a resort or a country house for the lockdown period, and thirdly, a permanent relocation, in most of the cases to a smaller city. While all three types are can be observed, I would say that only the first two are obvious. Are there special rules for foreigners purchasing land? What rules apply to the purchase of agricultural land or forested area as opposed to urban plots? Foreigners have pretty much the same rights to buy urban land in all three Baltic countries. However, for agricultural or forested land there are some restrictions. I’d say Estonia is the most flexible in that respect, followed by Lithuania and then Latvia. As far as I know, Estonia only restricts legal and private persons residing outside the European Union and limits their purchases to 10 hectares. In Lithuania, foreign entities meeting European and transatlantic integration criteria can buy the land, so they also have to be residing in the EU or in OECD member states and similar. Latvia has chosen a slightly different path, forbidding all non-resident natural persons to buy agricultural land whereas, in case a legal entity is the purchaser, all of its owners have to be residents of the EU, EEA and similar. There is also a requirement for the potential buyer to be able to demonstrate an advanced knowledge of the Latvian language, as well as the requirement for the land transaction to be approved by a municipal committee. To sum up, while agricultural land is accessible for foreigners, there are some conditions to be met and I would suggest consulting with experts in such cases. Which cities and regions of the Baltics are growing fastest and what are the reasons for their success? Unfortunately, there are no fast-growing regions in the Baltics. What we’ve seen recently are probably merely the stabilization signs after the phase of shrinking. On the other hand, the capital cities – Vilnius and Tallinn in particular – seem to be growing slightly in this respect. Looking from the real estate perspective, all the capitals are more or less booming at the moment. In Vilnius it is offices and housing, as well as storage space to some extent. Riga is really active in storage development, also residential to some degree, and is becoming more active in the office segment, while Tallinn is really active in the offices, but also in residential and stock office projects, meaning small retail-warehousing unit complexes for small and medium-sized enterprises.
By Līva Melbārzde Estonia 1. Reimbursing communal costs The tax-free reimbursement of communal costs (such as heating, water, communal costs, and internet bills) is possible only with a percentage calculation of the workplace which can be compared to the total available floor space for the flat or house. A 50/50 arrangement is possible if there is no separate study. It is important to calculate how long any work is being done in the home office. The tax office also recommends that a written agreement be concluded between the employee and the employer regarding any home working. It is also possible for the employee to rent a room in their home to the employer. However, any rent must correspond to the prevailing applicable market price. Construction work in the flat or on the house can generally not be reimbursed unless it is fully and completely related to the work. 2. The use of personal equipment and inventories for work If the employee and the employer agree that the work will be carried out in the home office, then agreement must also be reached regarding whether any work-related equipment (such as a computer, or a desk) will be brought home or whether new equipment will be purchased. It is possible to reimburse these costs on a tax-free basis only if the owner of the equipment remains the employer. 3. Input tax on home office invoices It is possible to deduct input tax only in the case of invoices being issued to the employer and not to the employee. Otherwise any costs are to be reimbursed to the employee as gross amounts. If any invoices are issued to the employer (such as, for example, an invoice regarding internet provision), but the employee also uses the invoiced item for personal purposes, then a percentage share must be taxed in the form of a special remuneration. 4. Health protection and accident prevention in the home office Employers must ensure that working conditions in the home office also comply with applicable legal acts (covered by the ‘Occupational Health and Safety Act’). A risk analysis is also necessary for the home office. 5. Home office abroad If the employee works in a home office which is located in another country, and on a temporary basis, such remote working may cover a period of time which is generally no longer than six months in any given year, otherwise income tax must be paid in that country. Such an arrangement also depends upon any double taxation agreement (DTA) between the specific countries. Such employees are to be classified as expatriates abroad, and A1 health insurance must be applied for at the EU level. There are more and more companies which are making use of employees in a back office in other countries.. As long as such employees are only carrying out support work (and are not involved in not preparing invoices or concluding contracts), it is only necessary to pay income tax in Estonia. The AHK provides payroll services for foreign companies which have employees in Estonia, Latvia, and Lithuania. Latvia 1. According to the ‘Labour Code of Latvia’, the employer is obliged to reimburse the employee for expenses which are necessary for the due performance of their work under the applicable employment contract or which are incurred with the employer's consent, including expenses which are incurred by the employee for wear and tear on work-related equipment which belongs to the employee and which is being used for the purposes of work under the terms of the employment contract. Such expenses are to be justified by appropriate documentation and are not subject to the payment of income tax. 2. In 2021, income tax is also not levied on an employee's expenses where these are related to remote work which is covered by labour agreements in accordance with the ‘Labour Code’. Such compensation can amount to as much as €30 a month. The current scheme for the reimbursement of remote work expenses is, for the time, being limited to the year 2021. 3. Input value added tax can only be deducted if an invoice is issued to the company and not to the employee. Otherwise any costs are to be reimbursed to the employee as gross amounts. If an invoice is issued to the company, but the service is also used on a personal basis by the employee then a percentage share must be taxed in the form of special remuneration. 4. According to the ‘Labour Code’, an employee must provide the employer with all of the necessary information which will allow a full evaluation of remote working conditions and any risks which may be posed by working environment. The employer has the right to establish internal rules for any remote work. 5. Home office abroad- the same as in Estonia. Lithuania The ‘Labour Code’ stipulates that remote work can be carried out at the request of the employee. The employer will then assess whether the employee can work remotely. Those work functions which are carried out by the employee, and any specific details regarding such work functions, are to be fully assessed. In the case of teleworking, the following points should all be agreed in written form: - those requirements which are inherent within the workplace (if any), - the work equipment which is being provided for the work, - the procedure for providing such work equipment, - the rules for the use of the work equipment, and - the person responsible within the business to whom the employee is accountable. If the employee incurs any additional costs in connection with their work, or in relation to the acquisition, installation, and use of work equipment, during the period in which they are required to carry out remote working then any such costs are to be reimbursed. Any financial compensation and payment terms are to be agreed between the parties to the employment contract. Any additional costs which are directly related to the work and the use of work equipment must be economically justified and must not be abused for tax purposes. For example, a calculation must be carried out to show how long a particular item of work equipment is being used for work. Expenses which are incurred by the business when its employees work from home - such as in terms of electricity, telephone, and internet costs - and which are to be reimbursed through the payment of a fixed monthly benefit, are included in deductible deductions as employee benefits which are subject to income tax.
By Vytis Kapocius, Head of Industrial Newsec Baltics The manufacturing sector employs around 30 million people in the EU, and some additional 10 million employees within the transport, warehousing, and logistics industries. While the economies of most of the EU member states are forecast to recover by late 2022, the European Commission still calls for us to roll up our sleeves. That is no coincidence: the further development and growth of industry and logistics across the EU will play a major role in determining our overall economic development course. What should you expect across the Baltics states and within Lithuania in particular? Remaining very active If you had to pick a colour for the industrial and logistics segment in 2021 – it would be surely green. The first half of 2021 has already shown that industrial real estate objects are no longer just the niche class of an alternative investment. The total transaction volume of industrial real estate accounted for €164 million in the Baltics – that is a striking 42% share of all investment transactions. The growth of attention to the industrial real estate market has been fuelled by market players realizing that industrial investment objects often offer favourable investment yields and good risk diversification as opposed to other classes of real estate. Unsurprisingly, the Baltic market continues to see the new dedicated industrial, logistics or infrastructure investment funds coming into play. One should expect this trend of capital flow into the industrial and logistics segment to continue well into 2022. Equally important, the year 2021 has already demonstrated that a strategic shift towards a more sustainable “green” economy is taking place at an unprecedented pace. This is not only due to the European Green Deal whereby member states pledged a €0.6 trillion investment to finance it. Businesses across the Baltic states are taking the initiative on their own to embrace digitalization, supply chain transformation, and energy and resource efficiency. There is a clear understanding that these are 'must-haves' to stay competitive on the global scale over the years to come. As a result, the industrial real estate segment adapts to the new energy efficiency requirements and considers if materials used for construction are sustainably sourced, which leads to a rising demand for sustainability certifications. While in many developed European markets, land scarcity is already becoming a serious issue threatening to constrain growth potential, all three Baltic states – Lithuania, Latvia and Estonia – benefit from still being unsaturated and manufacturers can still find suitable locations for erecting their modern factories and responding to the global demand for various goods. Untapped potential I trust the regular Baltic Business Quarterly readers are already familiar with the success stories of international investors – both manufacturers and service providers – benefiting from the high-quality labour force and good infrastructure in the capital cities of the Baltic Tigers. I would argue that international investors can still reap the untapped investment opportunities of the mid-size regional cities. This is particularly relevant for manufacturers. For example, take Lithuania. Besides the 7 Free Economic Zones, there are multiple regional industrial parks that also offer ready-made infrastructure, close proximity to the municipal decision-makers, and often less competition for skilled labour, not to mention the fact that the employees face no traffic jams in mid-size cities. The operators of such industrial parks understand that international investors’ long-term success is their own long-term success as well. Therefore, they are willing to innovate and make the necessary commitments. The bigger cities are also experiencing significant developments as purchasing power continues to rise across all three Baltic states. Real estate innovations The pandemic had a significant short-term impact on the hospitality, leisure and office segments, all of which saw an increase in vacancy levels. Unsurprisingly, this means intensified competition for tenants. Despite this, we see a new supply being offered to the market, which specializes in quality, flexibility and delivery times as important differentiators among projects in the bigger cities. The pandemic has to some extent changed our daily habits – from the way we work and go shopping to the way we spend our leisure time. There is a much greater emphasis on health, safety and well-being than there was just a few years ago. Real estate developers now have to take these needs into account. The market was quick to adapt and we see multiple active construction sites with tall cranes working to supply the new complex buildings in H2 2021 and next year. This is not only the revival of building modern offices, but also the emergence of new categories as well. The pandemic in the Baltics has created favourable conditions for spurring the rise of so-called stock offices. These are the type of real estate buildings that blend warehousing, administrative and shop-floor space, often with a separate entrance for customers and conveniently reachable by personal transport. Of course, the location remains important for this type of industrial premises, yet the stock offices create a good basis for mid-size businesses to flexibly grow their economic activity in the post-pandemic economy. Scalability and sustainability of any real estate product is important in order to be attractive on the market. With plenty of global opportunities, businesses want to be able to scale-up (or sometimes scale-down) at their own pace. This concept is especially important for start-ups to be able to grow and gain scale. The active development of science parks shapes the attractiveness of the city, as it illustrates that there is already a critical mass of talented young minds who are capable of innovating on a global scale and performing value-added R&D operations and related services. Find everything about our new BBQ issue here
Ursula von der Leyen has not shied away from big words. “We give our best when we are bold and aim high. With the European Green Deal, we are aiming high”, the European Commission President said when unveiling her highly anticipated flagship environmental plan for the first time in December 2019 that will made climate action a key priority for the EU. The main goal is to make Europe climate-neutral by 2050. But what does this actually mean? Baltic Business Quarterly has compiled the most important facts about the EU’s headline project. What is the European Green Deal all about? The Green Deal is the EU’s new strategy for sustainable growth and aims to create the framework for transitioning to a modern, resource-efficient and competitive economy. It covers every aspect of society and the economy, and includes goals for biodiversity and agriculture. The measures accompanied with the initial roadmap of key policies range from ambitiously reducing emissions to investing in green technologies and protecting the natural environment. "On the one hand, the European Green Deal is about cutting emissions, while, on the other hand, it also means creating jobs and boosting innovation", von der Leyen said. "Our goal is to reconcile the economy with our planet, to reconcile the way we produce and consume with our planet, and to make it work for our people.” Ultimately, the European Green Deal demands a new economic model, a completely different Europe and a new generation project for a climate-friendly transformation of the whole continent. Unsurprisingly, this has received both support and criticism from all sides. During the coronavirus pandemic, the Green Deal has taken a back seat, but the EU commission stresses that it should form a cornerstone of recovery measures. How does the EU plan to achieve climate neutrality? To pave the way, the EU plans to implement a legally binding European climate protection law this year to enshrine into law the goal for Europe to become climate-neutral by 2050. This means achieving net zero carbon emissions for EU countries as a whole. As an intermediate target, the EU is to cut its carbon emissions by 2030 by at least 55% below the 1990 levels. The entire EU legislation is to be aligned with these goals and implemented by a combination of incentives, support measures and regulations. It will include strategies for biodiversity, agriculture, hydrogen, building renovation, offshore wind energy, methane pollution, sustainable investment, the circular economy and many more parts of the world’s second-largest economy. Once these new rules come into effect, pressure will be on the 27 EU member states to actually bring them to life. The political wrangling over them will start when the EU commission presents its legislation in summer 2021 on how to meet the proposed 2030 emission reduction target of 55%. At present, the EU target is a 40% reduction of carbon emissions. "If we can get the legislation in place in the next five years, we will have 25 years as a generation left to get it all implemented", said EU Commission Vice President Frans Timmermans, who is responsible for the European Green Deal. No action is not an option. What does this mean for the European economy? To achieve climate-neutrality, radical changes will be required. ENERGY: The production and use of energy across economic sectors account for more than 75% of the EU’s carbon emissions. BUILDINGS: Commercial and residential buildings account for 40% of the energy consumed in the EU. MOBILITY: A growing 25% of the EU’s carbon emissions are generated by transportation. INDUSTRY: Industry accounts for 20% of the EU’s carbon emission and only 12% of the materials it uses are recycled. All of these emissions have to flatline in only three decades by switching to clean technologies, and also a climate-friendly transformation of agriculture is on the to-do list. Other elements include greener, cleaner cities, better home insulation and massive reforestation. Von der Leyen compared the required efforts with the US program for the moon landing in the 1960s and spoke of “Europe's ‘man on the moon' moment”. As the EU executive emphasized, “We will help our economy to be a global leader by moving first and moving fast. The European Green Deal is our new growth strategy – it is a strategy for growth that gives more back than it takes away.” How much will it cost and who will pay for it? Meeting the ambitious goal of the European Green Deal will require huge investment. The current 2030 carbon emissions target is estimated to require an additional €260 billion in spending every year. That is about 1.5 percentage points of the EU’s GDP in 2018. Achieving the new proposed 2030 stepping stone on the way to 2050 – a 55% cut in emissions compared to 1990 levels – will involve even higher investment needs. Beyond 2030, the annual investment needs also run into the billions, but the presented figures are vague. To implement its climate goals, the EU commission plans to channel upfront investments into projects that will see the EU emissions fall drastically in the next decades. It aims to mobilize and leverage at least €1 trillion over ten years for a ‘green investment wave’ in clean technologies, sustainable solutions and new businesses. Around half of the projected sum is to come from EU funds, which should encourage national governments and the private sector to stump up the remainder. One of the main EU investment components is the so-called Just Transition Mechanism. It will support those regions in Europe that rely heavily on very carbon intensive activities. The funding worth €100 billion will be available for all EU member states. Extract from the article by Alexander Welscher, exclusively for Baltic Business Quarterly Summer 2021 Read more in the newest issue here
The Lithuanian unicorn Vinted has a very big ambition to make second-hand the first choice. In the last 13 years, the company has achieved a great deal and the start-up is the biggest player in many countries, but so much more awaits. In 2008, Milda Mitkute was moving from Kaunas to Vilnius and realised she had too many clothes to take with her. Justas Janauskas offered to help and built a website to give away her clothes to friends. Now, not only their friends are using the Vinted platform, but so too are 38 million people around the world. Milda Mitkute tells BBQ readers more about working for the start-up, the concept of second-hand as a greener choice in fashion consumption, and her own dilemma of choosing between ethical, lower-quality clothes and long-lasting leather boots. It is hard to imagine another big Baltic start-up that is so deeply rooted in Germany as Vinted. How did that happen? Actually, by accident. Me and another co-founder Justas Janauskas were huge fans of CouchSurfing. Once, two German women, Sophie and Suzanne, came to his apartment to stay for a longer period, like one or two weeks. One night at 2 a.m. they came home after a party and Justas was coding. They asked what he was doing. He explained and they said: we need to have that in Germany! We didn’t have the money for that but they didn’t care because they believed it was an absolute must for Germany. So they volunteered to help. This was how we agreed. How successful is Vinted now in Germany? I believe we are really successful in Germany. It's growing, and the community is getting bigger and more involved there. 8 million people have already joined. Germany is the second biggest market for us after France. What would be your advice to other start-ups who are thinking about Germany? How should they prepare for this market? There are a few things. One is common for any country. The second might be more specific for Germany. Speaking about the first, I think it's always worth checking if your idea looks attractive to other people – maybe others don't share the same views as you and it will not get enough support. In business terms, make sure you see a product-market match. Secondly, we found that Germany was a role model for how to do business. It seems Germany is always ahead in terms of how to deal with privacy issues and legal matters. There are many things to learn. The country has very high standards and it encourages you to do your best. How did the Covid-19 pandemic impact Vinted’s business and daily operations? I think the majority of online businesses haven't suffered from the lockdown as much as the offline ones. People still want to look good and many of them have a guilty pleasure about buying something for themselves. If physical shops are closed, people will go online. So for us, it was an obvious benefit. However, at the very beginning we were also affected because nobody understood what was happening. It took us a couple of weeks to work out what was actually going on, especially last March. The beginning was so sudden and strange. There were no predictions on when life would be back to normal, but all in all online business is not suffering as much as bricks-and-mortar businesses. Extract from the interview by Anda Asere, exclusively for Baltic Business Quarterly Summer 2021 Read more in the newest issue here