Text: Neringa Rastenytė-NEWSEC

The Baltic countries seem to start recovering from a deep recession. All in all, the region’s competiveness is improving and, as the internal imbalances are solved, the region is expected to continue its progress on the economic ladder, followed by recovery in real estate market. Since the beginning of 2010 the Baltic countries have been trying to reach the bottom and is still unsure what the frail surface under the feet really means. Notwithstanding this, it is rather clear, that further fluctuations should be very minor and the major shocks are left behind. In any case, lets hope that global economy will not suffer the “W” scenario, which could be extremely harmful for such fragile economies as the Baltic States. So, what challenges and opportunities will Lithuania face in 2011? Is the current foundation strong enough to restart at a full pace?

Real estate market in Lithuania – how reasonable is the latest optimism?

Hundreds of thousands of square meters have been cancelled or frozen in 2009; the renewal of development projects does not seem to be started in next few years. The planned new development volumes for 2011 are modest and the few projects that will actually come on to the market are generally completions of previous years’ projects or extensions of existing ones. It is hardly possible, that developers will start developing without any pre-leases and banks will be extremely selective in financing new projects for at least next 2 years.

Retail turnovers have stabilized in the beginning of Q2, 2010 and some retailers start monitoring minor growth on a monthly basis. Local indexes of consumer confidence have started to improve half a year ago and keep growing in all three Baltic countries. Massive rent-price renegotiations have led to temporary rent discounts of around 30-35% and have changed rent payment structures. Turnover rent structures are now gaining ground in the Baltic region. Most of existing occupiers are not asking to increase existing rental discounts, which mainly are provided by the end of the year, however expect them to be prolonged for another 6 to 12 months. In 2011, owners of the most successful commercial properties, are going to start removing discounts step by step.

Occupational markets are still vulnerable; however it seems that vacancies in office markets are melting faster than expected. Vacancies in the field of prime offices have decreased substantially since the end of 2009. The main reason - low overall supply (Baltic capitals are still one of the least developed cities in the field of modern offices in all Europe), meaning that every single deal makes strong impact on vacancy rates. For example, there was 25-30% vacancy in Vilnius office market in the beginning of 2010. Impressive? Yes, if you look at percentage rates; no, if you look at number of vacant square meters. There is only ~400 thous. sq.m of modern office space in Vilnius (one of the lowest ratio per capita in Europe). Couple of deals in 2010 has affected vacancy rates significantly, which is just ~10% or 40 thous. sq.m today. In other words, the company seeking to lease office immediately would have no choice in existing A grade buildings. Moreover, most of large lease agreements have been concluded in 2007-2008 for mainly 3-5 years. Some of these occupiers will definitely consider moving into a newer office, thus local developers have solid platform to start pre-agreeing new lease agreements and plan new office developments.

Source: Newsec Baltics

Residential market seems to be the most affected; however more and more developers start new constructions. Most of unsold stock is of rather poor quality and is now in the process of being taken over by banks.  After a rapid decline in 2008/2009 (~40% in Lithuania, ~50% in Estonia, ~65% in Latvia), prices have stopped dropping in the end of last year in Latvia and Estonia and in the end of Q1 in Lithuania. Most of transactions are concluded in the field of old soviet type apartments, where transaction value does not exceed 40-70 thous. euros per single unit.

Source: Newsec Baltics