Buying a Property in The Baltics
Why The Baltics?
Until recently the Baltic States of Latvia, Lithuania and Estonia were hardly visited by British tourists. Joining the EU in May 2004 opened a lot of doors for the Baltics, and property investors took advantage of these three burgeoning economies.
The story of the Baltic States is really one of size, and it has been thanks to such manageable land mass that all three countries achieved such an awful lot in a short space of time. Hopes that Estonia will be the first nation on earth to become completely wireless gives you an idea of where these countries are headed.
NATO membership and currencies that are pegged to the euro completed the package, while low interest rates and falling inflation encouraged the locals to get onto the property ladder. Despite being slow starters in the property game (nationals were only permitted to buy their own homes in the early 1990s), prices in the Baltics fast approached Western levels. However, in the past couple of years a combination of a drop in interest from European buyers as credit conditions tighten and an oversupply of new property has forced prices down.
Popular buying locations
The capital cities of Tallinn, Vilnius and Riga are where most British buyers have been looking, lured by strong capital appreciation and regular rental income. These three cities are hot on Prague’s heels in terms of a budget weekend destination, a fact which compliments the established long-term rental market extremely well. Rents in the capitals are falling and need to be closely examined if you are looking for the property to support itself, but still remain relatively good
Having said that, coastal resorts near the city centres have also proved popular with investors. Located just an hour’s drive south of Tallinn is Parnu – Estonia’s ‘summer capital’. Property prices here are around 30 per cent cheaper that in Tallinn itself, and the resort offers two golf courses and several spas to boot.
In Latvia, the town of Saliena, just five kilometres from Riga, is well placed for commuters. It is the recipient of some well designed master-planning, and the old port is now a bustling residential centre. Meanwhile, Lithuania’s second city of Kaunas offers a good alternative to the capital, offering bustling nightlife at more reasonable prices.
There are no restrictions on the type of property that you are able to purchase, however some buildings may be protected under heritage regulations. If you buy a resale property in an old town, there could be rules which you will need to abide by regarding renovation.
There have been instances of some resale homes being sold without the correct title deeds, but this isn’t a problem that can’t be avoided with the use of an independent solicitor. Be aware that the purchase contract is highly likely to be in the local language, so if your solicitor is not bilingual you will need to arrange for a professional translation.
If you are buying a new-build home, the final contact will not be signed until the property has been completed – usually around 12 to 18 months later – but this probably won’t deter many developers from charging stage payments throughout the build. If this is the case, make sure that all financial transactions are legally documented.
If buying in a city centre, you will more likely than not be purchasing an apartment. In this instance, it is a good idea to get your lawyer to check over the management contract before you sign anything. Maintenance fees are usually divided by the whole block, so it is important to ensure that, if you are buying a studio, you are not paying the same monthly service fees as the three-bedroom penthouse.
The buying process
The Baltic States rely on a notary system, similar to that in France. Despite this representation, it is essential that you employ independent legal advice from a solicitor who acts solely on your behalf.
When you have found a property that you wish to buy, you will need to put in an offer through an estate agent – much as you would in the UK. When the offer is accepted you will be required to pay a reservation fee of around €1,000 (around £900), shortly followed by a deposit of around ten per cent. As soon as you have paid the reservation fee you are legally bound to the purchase – there is no cooling off period.
Both parties sign the final contract in the presence of the notary, who then registers the new title deeds with the relevant authorities. Transfer of title can take as little as four weeks, but the time scale really depends on how quickly you are able to make an appointment with the notary.
Local mortgages are available at competitive rates, usually from around 3.5 per cent, and finance is available for up to 100 per cent of the purchase price – although 85 to 90 per cent is more common. The mortgage market is a highly competitive one as more locals realise the benefits of such financing options, though global credit restrictions have caused the stream of credit to slow considerably.
The loan issued will depend on your ability to repay the mortgage, as well as the type of property that you are hoping to secure it against, and it will be conditional on the property being correctly insured. You may find it easier to get a mortgage on a new home but all properties, even if they are new-build, will have to pass a bank valuation. However, be aware that terms and conditions change depending on how many properties you own – local banks are unlikely to lend more than 50 per cent LTV (loan to value) for any successive properties.
Fees and taxes
You will need to budget for notary fees of around €250 (£224), land registration fees of €100 (£90), valuation fees of €100 (£90), mortgage arrangement fees of one per cent, and relevant insurance costs. A two per cent purchase tax will also need to be paid before the property is registered at the land registry.
In Estonia you will have to pay 26 per cent tax on a second home that is bought as an investment property. You will also be liable for Land Tax, which is paid on the market value of any land that you own on a yearly basis.
Estate agents fees vary between three and seven per cent, and you may have to pay these when buying as well as when selling. In Latvia there is no capital gains tax, provided that you have owned the property for at least a year, and the CGT thresholds are currently being reduced in Estonia and Lithuania. There is no inheritance tax in any of the Baltic States, but there is no guarantee that this won’t change.
Visas, residency and work permits
British citizens do not require a visa to visit the Baltic States as they are all members of the European Union, however you may need to declare yourself resident for tax purposes if you live there full time. Residency is determined by the number of days spent in the country. People who spend more that 183 days in a calendar year, or who have a permanent home in the country, are considered to be tax residents. The UK currently has a double tax treaty with Estonia.
If you are planning on living and working in Estonia on a permanent basis you may need to obtain a Business Visa before you enter the country. Once you have been granted a Business Visa you will need to prove that you have health insurance to the value of £15,000 before you are granted entry.
New-build versus resale
Be aware that new-build property in the Baltic States is not delivered as it is in the UK – it is normally sold in what is called a ‘grey finished state’. This means that you simply inherit an empty shell, with bare concrete floors and walls that haven’t even been plastered.
Occasionally you may purchase a property that’s in a ‘white finished state’, and while this will have plastered walls, flooring and doors, you will still need to install both a bathroom and a kitchen as well as decorate the property. Although labour is much cheaper in the Baltic’s, as a rule of thumb you will need to budget around €10,000 (around £9,000) to get your property into a habitable state.
Resale homes are likely to be more expensive than their new-build counterparts. This is because they tend to be situated nearer the old city centres which command the premium prices. They also don’t come with the two-year guarantee of new-builds.
The Knight Frank Global House Index for the first quarter of 2006 cited that house prices in Estonia rose by an impressive 17 per cent – making it the fastest growing property market in the world at the time. Since then, prices rises have slowed and even started to come down as international buyers become scarcer, global credit flows slow down and the oversupply of property in the cities takes hold. In Tallinn however, investors can still expect to see rental returns to range between four and seven per cent.
Latvia has perhaps suffered some of the worst drops in property prices of all of the emerging markets since their peak level in April 2007 – some figures put the drop since then at up to 45 per cent in Riga. The trouble of the finance and banking sectors has caused a degree of chaos in the housing market, and as the economic struggles have now spilled into the political arena, further instability could be on the cards in the future. However, some will see the drop in prices as a blessing for the future of real estate in Latvia, bring prices down to more realistic levels and offering a little more value to buyers when they are attracted back into the market.
There was a similar story in Lithuania, as prices peaked in early 2007 and then began to fall back. Average price drops have been around 29 per cent when the higher rate of inflation in Lithuania is taken into account. GDP growth is still continuing in the Baltics, although at a much slower rate than was previously the case, but it is difficult to make a case for short-term investment in the property market at the present time.
Health and education
No vaccinations are required before travelling to the Baltic States, but ensure that you take out comprehensive medical insurance as, while the private health sectors have a good reputation, the public hospitals aren’t so well organised.
Education is largely hindered by the language barrier. While English is widely spoken in the Baltic States, it is not the primary language in schools and, so, while education is of a high standard, it is probably best to continue to educate your child in Britain unless they are young enough to easily absorb a complex second language.
easyJet flies into Tallinn, as does the national carrier Estonian Air. Once in the city, there is a range of hire care firms available if you wish to drive, which is on the right. If you preferred that somebody else did the navigating, there are always taxis available, while buses, trolleybuses and trams provide an even cheaper alternative.
Riga is perhaps the most accessible of the three capitals, as it is serviced by easyJet, Ryanair, BA and Lufthansa. Latvia has a good road network, and is home to the Via Baltica – one of the largest infrastructure projects currently underway in the Baltic’s. A national rail service connects the major cities of Latvia for a reasonable price, although it is perhaps not the country’s quickest mode of transport.
In Lithuania, Air Baltic flies into Vilnius, while Ryanair services Kaunas. Once on the ground, Lithuania’s major roads have a good reputation, with Vilnius, Kaunas and Klaipeda being linked by a modern motorway. If driving, be aware that the Lithuanian’s have zero-tolerance for drinking and driving.
It is unlikely that the Baltic States will become any more than a weekend-break destination due to their climate. Mild, fresh summers are succeeded by bitterly cold winters that rarely break freezing point. It is also extremely dark from October to March, meaning that Estonia, Latvia and Lithuania are unlikely to attract many full-time expats.
The language barrier can also be a tough one to break, with many Brits struggling to make head nor tale of the local dialects. And, while the capitals of Tallinn, Riga and Vilnius offer a cosmopolitan dining scene, you may struggle to get more than the traditional fare of pork and potatoes the further afield you travel.
It is also possible that the city centres are at risk of over development and oversupply has been a problems in all three capital cities. While the local market was strong, prices continued to rise at a hectic pace. Since then, the locals have been priced out of the market – therefore affecting resale potential.
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