Riga lags be­hind Vil­nius and Tallinn in RE de­vel­op­ment

The Baltic Times - - RE LATVIA - Lu­cis Li­nus Moscow­itch

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.

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