The Baltics: The Baltics

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

The Baltic states (Latvia, Lithuania and Estonia) are one of the most popular investment markets of the moment.

The capital cities of Riga, Vilnius and Tallinn are particularly popular with buyers looking for something which combines capital appreciation with regular rental income over the medium to long term. In the 2006 Place in the Sun study of potential returns over the next ten years the Baltics were placed fourth with potential return assessed at 356%, possibly an overoptimistic assessment.

Part of the appeal of the Baltics is the way that they combine all of the preconditions for a strong property market. The Baltics compete with Slovakia to be crowned as the greatest economic success of the 2004 accession states; the population is getting richer; mortgages are available on attractive terms and fees and taxes are low. The quality of build is also extremely high.

As well as long term lets to locals, the three capitals also have a strong short let market. The historic centres of all three Baltic capitals are listed as Unesco world heritage sites and are on the short-breaks circuit.

Vilnius has Gothic, Renaissance and Baroque buildings whilst Riga stands out for Art Nouveau architecture. Tallinn has an astonishingly attractive medieval Old Town. Ryanair and easyJet both fly to the Baltics from the UK and visitor numbers are rising steadily. In 2005 visitors to Vilnius and Tallinn rose by more than 30% – placing the cities among the fastest growing tourism markets in Europe. Visitor numbers at Tallinn airport showed a 40% increase between 2004 and 2005.

This combination of factors translates into high demand: so much so that developers have been known to raise prices 30% between the two releases of the same development. Estonia has so far been the favourite market with investors, although Lithuania may now be overtaking it.

Is this a good place to buy?

The Baltics offer rewards and economic growth comparable to Asia, but in a safe and cleverly regulated environment. For investors, this means capital appreciation without risk, and as a result, foreign investment has increased dramatically.

The Baltics can be pretty and the capitals of Vilnius, Tallinn and Riga very attractive indeed, but economic factors are more likely to play a role in someone’s desire to buy. These advantages include European Union and NATO membership and currencies already pegged to the Euro, thereby preventing the risk of currency fluctuations. Financially the conditions in the Baltics are good, with falling inflation and low interest rates (e.g. Riga 4.5%) Capital gains taxes are being reduced and in Latvia there is no capital gains tax on a property held in private hands for more than a year.

There is room for more growth in the market. People have been able to buy their apartments since the beginning of the 1990s, and property prices in much of the Baltics increased 1000% over the next decade.

Property prices are still rising, as locals discover the benefits of financing. Mortgages are available for up to 100% of the purchase price and at interest rates from 3.5%, yet mortgage loans account for only 4.5% of annual GDP in Latvia and 4% in Lithuania. Compared to the European average of 38% and combined with annual salary growth of 10%, this means that there is ample room for growth.

Research departments at the larger real estate companies see demand in the Baltics as still climbing, some distance from the peak of the demand curve. This confidence is echoed in the markets and occasionally developers will raise the asking price, aware that prices are rising fast. Sometimes, prices will be asked which are unrealistic – divorced from the buying power of locals without the property greatly differing from cheaper properties. It’s important to look around, choosing something which offers genuine value. New property in the Baltics is often sold as a unit without tiles, flooring, bathroom or kitchen, so it is important to know how you expect the finished apartment to look.

Price history

The market in the Baltics opened up in 2003, with prices for central apartments rising more than 10%, significantly more in Riga. In 2004 the market picked up with prices asked for new build property increasing 25%. A 15% increase was observed in 2005. Apartments on the outskirts of Tallinn which were advertised at £25,000 at the beginning of 2005 are now selling for £34,000/$60,000. The price rise is now beginning to taper to more sustainable levels, but given the strong economic performance of the Baltics the opportunities for long term capital appreciation look good.

Which type of property should you go for?

There is a slight risk that the level of development in the capitals may lead to an over-supply of new build apartments. Good quality townhouses are likely to do well. The majority of new developments are one or two bedroom apartments. The demand for smaller apartments is rising, but perhaps not as fast as developers expect. Some Soviet era property is of poor quality but new builds are generally well put together.

Buyers this market will appeal to

The Baltics appeal because of the unique combination of strengths. The capitals are suitable for both short-term and long-term lets. Rental yields may have been depressed by competition but there is potential for further capital appreciation.

Hotspots

Research suggests that prices in the centre of Estonia are marginally lower than for comparable property in Latvia and Lithuania, However, this gap will not persist. Of the three states Estonia’s chances for long term capital appreciation look strongest. A 2005 survey by Jones Lang LaSalle ranked Tallinn as the first city in the world when measuring potential for development. The survey pointed particularly to a lack of high quality real estate, suggesting that this is a market where buyers should look for quality.

2005 figures show that Estonia attracts higher levels of foreign direct investment than either of the other two states. In 2005 Estonia was placed fourth in the world for having an attractive regime in which to do business. Lithuania and Latvia were placed 23rd and 28th. Tallinn also comes out ahead for tourism. Estonia’s tourism takings per head are over 600 euros, compared to just over 200 in Latvia and Lithuania.

Prices in Tallinn are now inflated in some districts, with one bedroom apartments close to the old town selling for 100,000 euros (£69,000/$120,000). At the end of 2005 there were warnings that the market might be becoming overheated, with speculators driving up prices. Still, property on the edges of Tallinn is likely to prove a good investment, as are new beachfront developments just outside the city limits. About 5 kilometres outside of the old town of Riga thoughtful master-planning is opening up the old port area as a new residential centre. Another major development just outside Riga is Saliena – a satellite town which looks well designed for letting to commuters.

Key risks and opportunities

The level of building in Riga and Tallinn may point to potential oversupply of apartments marketed to international buyers. The sheer confidence of developers also means that they are sometimes prepared to leave apartments vacant rather than accept lower offers.

Baltic citizens tend to prefer to own rather than rent property, although with the area developing a reputation as one of the cheapest and most tax efficient areas to do business in Europe, large numbers of expats are moving into the cities and looking for rented accommodation. New owners looking to rent should be careful not to price themselves out of the market. Apartments rented to locals are unlikely to achieve more than 350 euros (£250/$450) per month. It is this low rental which has combined with higher sale prices to drive down yields.

Purchase process

As with other civil law countries, the services of the notary is the key to buying property in the Baltics. After making an offer to buy, a deposit or reservation fee is paid. The parties then sign the contract in the presence of the notary who then registers the change of ownership with the authorities. Transfer tax is set at 2% with notary fees around 250 euros.

Mortgages

Banks will lend up to 90% of the property value with interest rates as low as 3%. The market is highly competitive and Hansabank announced plans in 2005 to offer mortgages at 2.2% interest.

Opportunity rating

The climate in the Baltics means than none of these countries are going to become tourist hotspots beyond the city-break market. However, their success is more closely related to their economic growth and excellent position as trading hubs between Europe and Russia. Many international businesses are opening up in the Baltic states, bringing with them investment and an expatriate work force. With prices at their current levels and excellent access to capital, prices should continue to perform well.

Rating: $ $ $ $

Risk rating

In markets like these, over speculation and over development is always a risk. Beyond this, though, the Baltic States are very stable.

Rating: * * *

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in “Where to buy a property abroad – An investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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