Riga lags behind Vilnius and Tallinn in RE development
Although Tallinn and Vilnius outpace Riga in terms of construction activity, with the new developments in the Latvian capital being mostly focused in Riga, Jurmala and the suburban areas of Riga, the situation is expected to improve significantly over the next two years as ca. 100,000 square metres of retail space and ca. 60,000 square metres of office space, now under construction, will be added to the market. The Baltic Times asked Aldis Riekstins, Board Member & Head of Customer Service at Latio, one of Riga‘s premier retail estate agencies, to answer the questions.
What is characteristic to the Latvian real estate market this year? How different is it from last year?
This year, the level of activity in the Latvian real estate (RE) market has been about the same, I mean yearon-year. Construction of new developments continues both in the housing segment and commercial real estate segment.
What can you discern in the separate RE segments, i.e. residential, commercial, warehouse, and lease segments? In Riga and elsewhere?
No significant changes have been observed in the residential market. There is slightly retarded activity in the market of new housing in Riga - it is due to the temporary limited current supply in the middle-class housing segment, rather than a lack of buying interest. This statement is also supported by higher sales in the alternative segments, like the apartments in the more expensive types of Soviet-era blocks of flats, as well as in pre-war buildings located in the city centre.
The commercial real estate segment has improved owing to the filled retail space, thus supply of vacancies has been reduced. Activity is growing in the retail space market, especially in the restaurant and coffee-bar segment. Regarding office space, there is a stronger demand in Class A and B+ offices, whereas, in the warehouse segment, hardly any greater activity was observed.
How different are the RE developments in the capital city, Riga, from other major Latvian cities? Which of the peripheral towns do better than the most?
The new developments are mostly focused in Riga, Jurmala and the suburban areas of Riga. At present, there are almost no new housing developments under construction in areas more distant from Riga. Yet the town councils of several major cities such as: Ventspils and Valmiera are searching for the best way to solve the shortage of quality housing supply.
In the commercial RE segment, the activity is better since retail space and warehouses are built for companies’ own needs, and the development of logistics centres is taking place. Stronger activity has to be noted in Liepaja and Valmiera.
How does the Latvian RE supply and demand look like in comparison to Lithuania and Estonia?
Currently, Tallinn and Vilnius outpace Riga in terms of construction activity. Around 3,000 new apartments have entered the residential market of Riga over the past couple of years, and another 2,000 flats are expected to enter the market this year. It is planned to complete nearly 20 new housing developments this year and next year.
In the commercial RE segment, activity in Riga is two times lower than in the capital cities of the neighboring countries, but the situation is expected to improve in two years since there are ca.100,000 square metres of retail space and ca. 60,000 square metres of office space under construction that are about to enter the market in a few years.
How are the Latvian banking sector reforms likely to affect lending?
The Latvian residential market was affected badly by the so called “returned-keys principle” adopted 2.5 years ago when the market seemed to come to a halt temporarily. Later on, this principle was amended so that it became the choice of a borrower - the lending has resumed, and the market returned to its previous positions within a few quarters. Now banks compete severely for customers by offering various bank service packages including some free services, etc. The market is well-supported by the government support program Altum for young families with children to purchase their first home.
With the mortgage rates nearly back to the 2008 levels, is there not a possibility of a RE “bubble” burst? What are things to be watched for?
We do not see it as dangerous at present as the banks consider borrowers more strictly than during the precrisis period, and the buyers have become more rational in their decision-making process as well – households assess their financial capability very critically and arrive at pragmatic decisions. The price rise is incremental therefore - it is not that widespread among buyers to purchase apartments for speculative purposes. Instead, increasingly more buyers choose to purchase a quality apartment as an investment - to gain profit from renting it thereof at an average yield rate of 8% per annum. In the middle – class segments, the prices are higher due to stronger demand, and they are driven up more rapidly due to a relatively smaller supply, yet the leap is about 5-10% a year.
Which Riga developer projects have gained an excellent reputation over the years?
The developer’s reputation has become an increasingly more significant factor among buyers. It is crucial when it comes to quality, and it guarantees higher liquidity of a purchased apartment. The major developers have a good reputation in the market, for example, YIT, Bonava, Merks, although there is a range of small-scale project developers who realise the importance of quality and reputation and implement high-quality housing developments.
What would be your tips for a foreigner willing to buy real estate in Latvia? How would you suggest the foreign buyer avoid paying an artificially inflated price, to identify shady RE agents?
The best way for a foreigner to purchase real estate in Latvia is to hire some major and reputable RE agency which is well known on the market, us, for example- we employ certified, experienced, and professional estate agents and render related services such as real estate valuation, legal advice, etc.
Do you believe RE acquisition in Riga, Daugavpils or Liepaja guarantees a good return on investment?
Now that the bank interest rates are comparatively low, real estate is one of the best alternatives where to invest free funds. There is a relatively high yield in Latvia - it can reach 4-8% a year, depending on the type of RE and the segment. The yield might be even higher since a part of the transactions stay in the grey zone, and this fact does not allow for precise estimation of the actual return. When investing into rental apartments meeting the domestic demand, it takes pretty short time to rent them out provided that the rent is reasonable.
How would you suggest sorting out credible RE agencies from the shady ones?
Taking good care of their reputation, the major RE agencies apply the best business practice in their work. One of the main things for a foreign national to remember – normally, the agent’s commission is paid by the seller upon RE purchase, or by the landlord in case of a rent/ lease contract. A credible estate agent or the estate agency should be a member of the Latvian Real Estate Association (LANIDA).
We strongly recommend signing a cooperation agreement so that the cooperation terms would be clear and understood by both parties. Normally, the rate of the commission does not exceed 5% of the transaction value, or the amount of monthly rent in a rental transaction.