After another productive year in the Baltic real estate market, the world was hit by the raging COVID-19 coronavirus pandemic in early 2020, so we entered this year with a dual mood: we were still in a growing environment yesterday and today we are already in great uncertainty about our future. Looking at various challenges facing today’s world, the Baltic real estate market certainly cannot stay on the sidelines and will experience both negative and positive changes along with global markets. This was published in the latest annual Baltic Real Estate Market Report by Ober-Haus which provides a detailed situation in the real estate market in 2019 and forecasts for the coming year.
“The rapid growth of the economy and the real estate market as a whole in previous years has often compensated for the not-always-weighed decisions of market participants and allowed them to engage in active development of their business. It is therefore obvious that in 2020 we will see a number of changes in the real estate markets, where every decision made will be much more important than before. And the variety of possible changes in the real estate market in the Baltic countries will definitely offer wider opportunities for both local- and foreign- capital investors,” says Raimondas Reginis, Research Manager for the Baltics at Ober-Haus.
As for 2019, a further stimulus to the development of the real estate market was the significant growth of the Baltic economies. Rapid growth in household income, consumption and business development stimulated the development of both the commercial and residential real estate sectors. In fact, the situation in the real estate market in 2019 can be well described by at least two all-time records set in Lithuania: according to Ober-Haus, investments in traditional modern commercial property increased by 15% totalling EUR 463 million and record EUR 2.3 billion were spent on the acquisition of housing in the country.
“As the pandemic hit the countries at the peak of activity in the last decade and the results for 2020 will be compared with the extremely high indicators of the previous year, it may be difficult for Baltic real estate market participants to adapt to the radically changed situation. Where the Latvian real estate market did not demonstrate very rapid growth over the last decade, the indicators of the Estonian and Lithuanian real estate markets rose much higher”, points out Raimondas Reginis.
The Baltic capitals are entering 2020 with large new housing supplies
The capitals of the Baltic States continue to demonstrate high development intensity in the residential and commercial sectors. The development in the segment of apartment buildings particularly stands out in Vilnius and Tallinn, where construction volumes have been the highest since 2007–2008. On the other hand, developers’ confidence in the prospects of the residential sector in Riga remains much lower. This is also reflected in the construction volume indicators both for 2019 and in the forecasts for 2020. According to Ober-Haus estimates, where developers in Vilnius and Tallinn will build about 17 apartments and 14 apartments, respectively, per 1,000 residents in the period 2019–2020, in Riga this indicator will be twice as low for the same period, i.e. 7 new apartments per 1,000 residents of the city.
According to Raimondas Reginis, one of the important reasons limiting developers’ confidence in the housing market in Riga is the continuing decline in the number of permanent residents in this largest Baltic city. While populations in Tallinn and Vilnius increased by 6% and 3%, respectively, over the last five years, the population of Riga shrank by almost 2%. “Among all other indicators, the changing number of potential homebuyers is a naturally very important factor for developers in assessing future prospects of this sector for specific regions or cities”, says the expert at Ober-Haus.
However, the most important thing is that the Baltic capital cities enter the year 2020 with a record supply of apartments in the last decade, and the capital of Lithuania stands out the most here with developers planning to build about 5,200 apartments in apartment buildings per year. According to Ober-Haus, about 3,000 apartments are planned to be build in Tallinn in 2020; for Riga, this figure is slightly above 2,500. “Given the current pandemic-induced situation and the uncertainty in the market, it is very likely that, in the course of this year, some developers will adjust or be forced to postpone their development plans for later. Therefore, it will not be surprising if the actual construction volumes this year will be more modest than it was expected”, points out Raimondas Reginis.
In 2019, sales prices for apartments grew at a different pace in the Baltic capitals. While apartment prices in Riga increased by only 2.3% over the year, they grew by 6.9% in Vilnius and even by 9.7% in Tallinn. The high activity in the housing market in Vilnius and Tallinn recorded at the beginning of 2020 gave reasonable hope for another very productive year and at least 4-6% growth in apartment prices.
“However, the consequences of the coronavirus pandemic may have a negative impact on housing prices in the second half of the year, and the overall annual price change in the Baltic capital cities may be negative. Depending on the duration of the pandemic and its effects through the economies of the world and on individual countries, a drop in prices may be limited to a symbolic drop of several percent or be a double-digit fall in prices”, says the representative of Ober-Haus.
The recovering sector of Riga’s office space may be halted
After active development in 2018–2019, the office segment is now ready for a further strong supply surge in all Baltic capital cities. According to Ober-Haus, where in 2018–2019 a total of 290,000 sq. metres of office area were built in Tallinn, Riga and Vilnius, it is realistic that office space built in these cities will slightly exceed 300 thousand sq. m in 2020–2021.
The situation in Riga is particularly pleasing, as the lack of supply previously kept the city from competing fully with Tallinn or Vilnius for the attention of international companies. Ober-Haus estimates that almost 56,000 sq. m of new office space was supplied to the Riga market in 2019 (as compared with some 66,000 sq. m in Vilnius and 20,000 sq. m in Tallinn). In 2020–2021, more than 70,000 sq. m of office space should be constructed in the capital of Latvia and this should be a solid boost for the city in the competition for potential foreign-capital tenants. Therefore, it will be interesting to see how both local- and foreign-capital companies will react to the abundant new offers in the largest Baltic city.
However, at the beginning of 2020, Riga immediately encountered two challenges: a strong momentary surge in supply and a coronavirus pandemic threatening the country’s economy as a whole. In 2019, the significantly increased availability of modern office area in Riga raised the level of vacant office space from 4.5% to 8.5% over the year. “A similar situation was seen in Kaunas in 2019, where the significantly increased area of new office premises raised the level of vacant premises to double digits. In these cities, the market needs more time to fully absorb the abundant supply than, for example, in Vilnius or Tallinn”, points out Raimondas Reginis.
Meanwhile, a vacancy rate for premises in Tallinn and Vilnius did not change significantly during 2019 and stood at 3% in Vilnius and 4% in Tallinn at the end of the year. Encouraged by the particularly good occupancy indicators in Vilnius business centres, developers in this city are strongly determined to supply the market with at least 170,000 sq. m of office space in 2020–2021 (in projects under construction and at the completion phase).
According to the Ober-Haus expert, these development plans would be reasonable and would not cause any surprise in the environment of a growing economy, but the situation at the beginning of 2020 already seems less encouraging. “In the environment of dramatically increasing supplies which continue to grow, the slowing down or even shrinking development of companies could significantly raise the level of vacant modern office spaces in Vilnius, in particular given the current vacancy rate for office premises which is as low as 12 years ago,” says Raimondas Reginis. Where all the business centres that opened their doors in Vilnius in 2019 were fully leased out, we can hardly expect the same situation in 2020 or 2021. Although some recently launched projects may still be suspended or postponed (not only due to uncertainty in the real estate market, but also due to external financing), most of the projects currently under construction have already reached a late stage and it is likely that developers will try to finish them.
Moreover, the overall vacancy rates for premises may increase not only as a result of the new supply of offices, but also due to the migration of tenants as their move to newly opened buildings will vacate a large number of premises in older buildings. “Therefore, if the forecasts of the country’s economic downturn prove to come true and we will evidence the general growth of the level of vacant office space in the market in the near future, then the situation in specific projects may be extremely varied. While some building owners will be happy to have full occupancy and tenants who are resilient to downturns, others may have to accept, at least temporarily, large amounts of vacant spaces and a significant decrease in income”, says Raimondas Reginis.