Despite having activated in the past nine months and showing certain signs of optimism, Latvian real estate market recovery still lingers behind the one in the rest of the Baltic states, Olga Kozina, Newsec Latvia managing director, told the business news portal BNN.

Newsec Latvia managing director Olga Kozina

What is the latest data from the report of the Baltic real estate market (Summer/Autumn 2011)?

It has been activating over the past 6-9 months, there are signs of optimism and climbing activity.

How is Latvian property market doing, compared to the one of the other two Baltic states?

I must say Estonia still ranks as the leader in terms of the Baltic economies and, consequently, also the real estate market. Eurozone accession, stable political situation, less economic turmoils and consistent activities from the part of the state during the crisis boosted businessmen, investors and banks’ trust, as a result of which Estonia is now way ahead of other Baltics in terms of both the number of deals and economic indicators. New housing is being built in Tallinn and the commercial space is growing as well.

Similarly, also Lithuania, thanks to its effort to attract new businesses (Barclays, Western Union, etc.), promote export, including to the neighbouring countries, as well as, improve domestic consumption has managed to revive its property market. It is, of course, still lagging behind Estonia, but still new housing projects are under development, high class office space is rented more and more and there is even slight shortage of class A office space. Also, some grocery chains are planning expansion.

In terms of Latvia, despite optimism, growing interest in commercial space from the part of tenants and gradual return of investors’ interest, the market still drops behind the ones in the rest of the Baltics.

Of course, there are also segments with Latvia reporting the biggest activity – exclusive apartments in Riga City Centre and Jurmala, boosted by Russians and clients from CIS countries so that they are granted a residence permit. Thus, there is also interest in new apartment projects in Jurmala and Riga City Centre. Besides, there is also interest in developing new supermarket chains.

What are the forecasts for 2011 in Latvia (demand, supply, prices, etc.)?

Currently, tenants find it difficult to negotiate the rent with the owners. Most likely, many will change offices and the total space absorption will hit higher than in 2009 and 2010. Despite there are no grounds for excessive optimism, some owners are already trying to raise rent for the existing and potential tenants, not considerably, though, for the time being.

Real estate market will develop along with the economic recovery, as, essentially, it is infrastructure for business. Given the economic structure and ongoing trends, no miracles are expected. The very low point was already hit and, logically enough, it will be followed by the phase of development. The only question is about the pace of it.

Optimism is surging, but I hope market players have learnt their lesson from the crisis and will treat development plans more realistically.

Which Baltic real estate market gets the most investments and which the least? What determines that?

Currently, the biggest investment deals take place in Estonia (supermarket Kristiine, office building Metro Plaza, etc.).

Transactions are smaller in Lithuania and Latvia, moreover, they are more of speculative nature, rather than investments. Investors placing their money in Latvia differ as well – these are speculative investors either from Russia, the Baltics or Scandinavia. The nature of the deals is more like speculative, as the commercial property market is still quite weak (a lot of free space, low rents, poor structure of rental agreements). Consequently, most of deals focus not on the current yield, which is pretty poor, but low prices and cash flow boost.

What is playing a role in investors interest in Latvia? In what ways can Latvia compete with Estonia and Lithuania in attraction of investments?

It is well developed transport and finance infrastructure, favourable location easily accessible from any EU or CIS country, as well, as cheap but quality workforce. Riga is the leading metropolis of the Baltic states with the most economic activities. Latvia has numerous advantages, yet it is losing because of the unstable tax policy not allowing investors to forecast these costs and cash flow in a medium or long-term. Besides, the economic situation, despite better indicators, still lacks stability.

How will the fact banks are now the leading property owners affect the market? When could they start selling all this real estate they have?

They will, sooner or later, as managing real estate is not among their basic operations. Given the amounts of seized property, simultaneous putting up them for sale can have an impact on both the total supply and prices. Banks have variable strategies, some of them sell real estate right after it is seized. Others wait for higher prices. However, the question calls for more in-depth comment.

You have told the crisis separated the good projects from the bad ones. What expects the bad ones? Is demand for them expected any time soon?

Despite there is still a lot of free office space in Riga, tenants willing to rent huge space face limited supply. It is exactly bad projects with 50-80% free space. These unsuccessful examples will still have to suffer from poor demand. After the market recovers, they will attract tenants only with low prices. As only two new office buildings are being built (Z-Towers and Jupiter Centre), there could be shortage of quality space in a couple of years time. This would allow these projects also improve their indicators.

Are there projects that will never be finished and people will never live there, because of their bad infrastructure?

There will always be clients considering the price as the key factor. They could purchase also unsuccessfully planned and located apartments. Still, the question is whether it is economical to finish such projects. Moreover, there are also projects that were finished, but still it seems they will never be inhabited, as no one has managed them for two years already.

How have the needs and desires of an average customer in Latvia changed, compared to the pre-crisis period?

From the perspective of cash flow, it is more advantageous for business operations to rent property, instead of owning it. It allows keeping in balance operational revenue and expenditure, avoid freezing huge funds in assets, as well as, escape excessive liabilities, not endangering the liquidity. In the pre-crisis period, there were companies who bough premises for their own needs, as credit resources were cheap and easily accessible. In an attempt to boost liquidity, they tried to sell them during the crisis. Currently, there are only a few examples of companies purchasing real estate for their own needs, mostly, these are attempts to make profit by renting out, developing and then selling it off for a higher price.

Also, real estate buyers now turn more attention to the location, perspectives, the current and potential cash flow, as well as, the price.

Has the very profile of the average Latvian real estate purchaser changed?

Speaking about commercial property buyers, basically, they are locals or private investors from the Baltics, as well as, CIS countries’ opportunistic investors. However, most likely, their dominant position will soon be taken over by institutional funds as Baltic Property Trust, East Capital and international private investors currently actively seeking for opportunities to invest in good real estate. Usually, they invest 10-15 million euro, with an exception of those who can afford even more. The current deals still range between 1 and 7 million euro.

Is the management of the state-owned property efficient? Are any changes needed there?

This is a very serious issue for discussion. At the moment, the state owns numerous properties. However, even when in favourable locations, in terms of quality, they still drop behind the one of private real estate. Inefficient planning, poor technical condition, bad management, high maintenance costs, legal limitations for their use, rent and sale, as well as, other matters boost the inefficiency of their management.

Development of efficient state-owned property system should start with detailed property market research and draft of short, medium and long-term strategies. Currently, management of these properties lacks a single strategy and vision. Problems are solved just from today’s perspective with no assessment of the total benefits or long-term losses. Huge funds are spent on managing free space in the city centre. They accumulate losses as years come and go. Neither can private investors buy them from the state and develop. Estonia is one of the most successful examples, as it sold a number of the state-owned property during the crisis. Despite the market prices were low, the overall benefit is still positive.

Of course, certain responsible institutions try to boost the efficiency of portfolios under their management, however, limitations set by the legislation, the lack of systematic approach and common strategy, make immediate needs be attended first and the overall benefit to the state is minimal.