An interview on the developments in Baltic real estate with Regimantas Kacevičius, Partner and Head of Industrial and Logistics at Colliers Advisers International
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.