Experts: export will help Latvia take the lead from Lithuania and Estonia
Last year, SEB Bank issued EUR 780 million in loans to different enterprises. This is the largest amount of money the bank has ever issued to businesses. The bank notes that it would be surprising to conclude from this fat that Latvian companies are active investors.
Developers built up Tallinn and Vilnius. Now it’s Riga’s turn
SEB Bank’s experts say that Riga is the largest metropolis among Baltic States with the largest potential. However, Tallinn and Vilnius have more active housing markets. For example, around 4,500 teals with new project apartments are registered in Vilnius every year (around 3,000 in Tallinn). Riga, meanwhile, experiences roughly 1,200 every year. Riga has more residents than Vilnius or Tallinn. Residents’ purchasing power is also equal. This is why it is clear that Riga’s housing market is working below its potential, experts say.
«Riga’s problem is that there is not enough supply to satisfy demand – especially in the economic apartments segment. This is why it is no surprise that Estonian Merks and Hanner companies are currently busy building apartment homes in Riga for this specific segment. Smaller developers are also hard at work,» experts add.
SEB Bank mentioned in its publication that housing lease in Western Europe is a competitive alternative to purchasing a home. Lease has certain advantages, and investors are interested in this segment. Only municipalities in Latvia build lease houses. For developers to do that instead there has to be a market for this kind of product. Legislators should balance of rights between tenants and owners in the Law on Residential Tenancy.
At the same time, experts say that there is also high activity noted in the commercial property segment. Having noticed that office space in Riga can offer better returns than office space in Tallinn or Vilnius, real estate funds like Lords LB (Lithuania), Eften and Colonna (Estonia) continue investing in office buildings here. On the other hand, their profitability is slowly declining.
Even Latvian companies invest more in foreign countries
The bank’s specialists underline that it is great to see more and more Latvian companies’ ambitions going further than the country’s borders. Some actively search for business opportunities outside of Latvia in order to get closer to their end consumers. Others want to grow more than Latvia’s market potential can allow. The publication also mentions that Latvijas Finieris has factories in Lithuania and Estonia; Valmieras Stikla Šķiedra has factories in the UK and USA. Depo has recently opened a store in Lithuania. Draugiem.lv’s most profitable company in USA is Printful. Another of Draugiem Group’s companies – Mapon – has only just opened an office in Barcelona.
«We feel that the number of enterprises that are actively looking for opportunities to purchase companies abroad or expand their activities abroad is larger than it was in the past,» experts comment.
Companies are financially strong
Experts say there are two more interesting tendencies that prove Latvian companies’ stability. First of all, large companies currently use only approximately 45% of our loan volume. Secondly, it is clear that projects enjoy a large amount of participation from clients. For example, 40% of the approximately EUR 177 million worth Riga Acropolis project was invested by the company.
Money availability: supply exceeds demand
SEB Bank’s experts say the client dictates conditions. Any large company in Latvia can expect three to five banks to compete for the right to provide a loan. Additional service plays an important role: the bank’s ability to structure transactions, the speed at which decisions are made, the institution’s understanding of a client’s needs and ability to find the best possible solution. Resource price is not the only factor in the choice of a bank – relations play a major part as well.
There are also alternative funding methods appearing in the corporate segment. There are already several projects in development in Riga that were financed using crowdfunding. Other companies often pick release of bonds as a funding model. It is more expensive but also fits riskier business ideas and helps diversify funding sources.
Experts mention: «We definitely see a great degree of potential for businesses to attract funding for development through bonds. This also means a duty for companies to fulfil investors’ requirements for transparency, management model and other standards of good practice.»
Labour force deficit presents the largest challenge
The bank notes that the deficit of labour force is a healthy problem, because it forces employers to consider productivity and longevity. Experts add that it is necessary for employers to consider their image and reputation, as well as employees’ motivation. It is also mentioned that there are around 600,000 pensioners in Latvia – at least some of them still want to and are able to work – this presents untapped potential. There are also around 400,000 economically inactive residents – people of working age that have no jobs at the moment. Clever migration – as soon as average wage in the country reaches EUR 1,000 a month. Estonia’s experience shows that it is the threshold that reduces residents’ motivation to leave and encourages those that have already left to return home. Because of that, labour force problem represents healthy tension that keeps companies in good shape.
Experts say that it is important to invest in development and competitiveness. Studies show that Latvian companies are behind their Estonian and Lithuanian neighbours in this regard. For example, data shows that 36% of Latvian companies have plans to invest in their business this year (42% in Estonia and 46% in Lithuania).
«If Latvian companies do not want to be left behind, they have to move forward, develop and be more ambitious in exports. It is hard for me to name an industry in which innovations are unimportant. In addition, it is necessary to keep in mind that customers in Latvia are gradually becoming more demanding. Companies unreachable using channels preferred by customers will no longer be competitive,» experts comment.