Baltic Real Estate Market Overview
The three Baltic states, Estonia, Latvia and Lithuania, remain a key market for EstateGuru and our investors, and it is with this in mind that we have decided to compile this real estate market overview, using data gathered from the Oberhaus Market Report Baltic States 2019 and the Colliers International Market Report Estonia, Latvia, Lithuania 2019.
We’ll look at the real estate market in general and also delve deeper into each country individually to see what happened in 2018 and what we can expect in terms of trends and predictions for the rest of 2019 and beyond.
Economic growth in all three Baltic states remained strong over 2018, and this growth is reflected in the market. The total volume of investment in commercial real estate in the Baltics exceeded €1 bn, which indicates a 19% increase over 2017. This growth was largely driven by several large developments in Latvia and Lithuania.
The Baltics’ economic success is in part driven by a move towards a knowledge-based economy and the encouragement of entrepreneurship, and this is reflected in the continuing popularity of the office segment across all three states, which accounts for 44% of the total market share. Hot on its heels was the retail sector, with 33% of the total market.
While foreign direct investment remains a key economic driver, in the real estate sector at least, most investment remains homegrown, with Baltic investors responsible for a whopping 65% of total investment numbers, followed by international and Nordic investors, accounting for 19% and 13% of total volume respectively. The share of TOP5 investors – NEPI Rockcastle, EfTEN Capital, SG Capital, Lewben Investment Management and East Capital – amounted to 37% of total Baltic investment volume.
Prime yields remained largely stable with some compression in the office and industrial segments in Vilnius and in the office segment in Riga.
However, the outlook is not entirely positive. As banks continue to tighten their loan policies and the trend towards being more risk-averse continues, there may be a slowdown in the industry. Conversely, this may cause growth in the non-traditional financial sector as P2P and crowdfunding loan solutions experience growth and fill the gap left by bank conservatism.
The office market has continued to demonstrate consistent activity in Tallinn during the last six years and 2018 proved to be no different. By the end of the year, the estimated total stock of modern office facilities was approaching ca 1 million sqm. New total supply delivered to the real estate market reached ca 94,500 sqm in 2018. Despite this phenomenal growth, vacancy rates remain relatively low at 7% on average across all office classes.
2019 may see a somewhat increased vacancy rate, especially in older office buildings (Class B2) as well as in some existing Class B1 buildings due to high-volume construction of new office buildings.
Approximately 56,000 sqm of new retail space is expected to be delivered to the market in 2019-2020, driven largely by the expansion of Ülemiste Centre and the expected opening of the Porto Franco complex in 2020.
The retail market in Tallinn is extremely competitive and may be slightly overserved, with more and more developments vying for fewer retailers and a stagnant amount of foot traffic. As a result of this, construction work on several previously-announced new retail development projects is being postponed due to the fact that finding potential tenants is relatively difficult.
At the end of 2018 rents for medium-sized premises (150-300 sqm) in shopping centres ranged from €13.00 to €20.00 per sqm, smaller units – €35.00-€70.00 per sqm. Rents for anchor tenants run from €8.50 to €13.00 per sqm.
The warehouse and industrial property market continued to remain active in 2018 in terms of new developments and buoyant demand for modern quality space.
In 2018, the number of transactions involving residential land in Tallinn and Harju County increased by 2%. The average price per sqm increased by almost 9%. These trends are expected to continue through 2019.
The completion of three new office projects in 2018 added 24,900 sqm of office space to the market in Riga. Total office area at the end of 2018 stood at 793,400 sqm. In the course of 2019–2020, eleven new office buildings are scheduled to come to market in Riga, with a total office space of up to 140,000 sqm.
This shows the market finally reacting to what many perceived as a shortage of available office space.
For the fourth year in a row, no new traditional shopping centres (over 5,000 sqm with over 10 tenants) were opened in Riga in 2018. This excludes the expansion of existing ones.
The development of the AKROPOLE shopping centre is proceeding, and in 2019 it will be the largest multifunctional retail and office project in Latvia. It will comprise 60,000 sqm of shopping area and 9,000 sqm of office space.
Three projects with total warehousing area of 59,800 sqm were completed in Riga in 2018. The total amount of modern warehousing space in Riga and its immediate surroundings reached 708,800 sqm by the end of 2018.
In 2019, at least three major projects in Riga and its vicinity (within 20 km) – and including expansion stages – with total warehousing area of around 70,000 sqm, are scheduled to be implemented. These projects are being developed by VGP, Piche, and Sirin Development.
Invest Lithuania set a new benchmark by attracting 45 foreign direct investment projects into Lithuania in 2018, creating a total of over 4,600 new jobs. This represents a 15% increase over 2017.
The market for modern offices in Vilnius continued to grow significantly in 2018. In total six new projects were completed in 2018 bringing 43,000 sqm of office space to the market.
The vacancy rate of modern offices in Vilnius decreased from 5.4% to 3.7% in 2018, and the total vacant office space decreased from 37,600 sqm to 26,400 sqm, indicating that this sector still has scope for significant growth.
The commercial property investment market in Lithuania broke new records. According to Ober-Haus, 22 investment transactions totalling €422 million were concluded for purchases of core properties (modern office, retail and industrial property worth over €1.5 million), reaching an all-time high in 2018. This represents an increase of almost 36% compared to 2017.
In 2018, no large traditional shopping centres were opened in Vilnius, in fact, the capital has not seen any new such projects since the second stage of the NORDIKA shopping centre was opened in May 2016.
Apartment prices in Vilnius increased by 3.0% in 2018, after an increase of 3.6% in 2017, according to the Ober-Haus Lithuanian apartment price index. This is the smallest annual increase in apartment prices over the past five years.
This slowdown in price growth shows that the housing market in Vilnius had moved from a rapid development stage to a more moderate growth phase.
According to Ober-Haus data, 4,355 apartments (in 58 different projects) were built in Vilnius in 2018, which is 5% more than the number of apartments constructed in 2017. The number
of apartments built in 2018 in Vilnius is the highest since 2008. This reflects the city’s growing population.
The Baltics remain one of Europe’s most robust economical areas and in general, the outlook for growth is positive.
All three real estate markets are expected to grow in 2019, with plenty of opportunity for developers and investors alike.