Baltic Property Market Report 2014 L I T H U A N I A | L AT V I A | E S T O N I A
Baltic Property Market Report • Baltic States • 2014
CONTENTS 2 3-4
Introduction INVESTMENT MARKET
5-6 7-8 9-10 11-12 13-14 15-16 17-26
LITHUANIA ECONOMIC OUTLOOK RETAIL MARKET OFFICE MARKET INDUSTRIAL MARKET HOTEL MARKET RESIDENTIAL MARKET LEGAL & TAXES
27-28 29-31 32-33 34-35 36-37 38-39 40-51
LATVIA ECONOMIC OUTLOOK RETAIL MARKET OFFICE MARKET INDUSTRIAL MARKET HOTEL MARKET RESIDENTIAL MARKET LEGAL & TAXES
52-53 54-55 56-57 58-59 60-61 62 63-71
ESTONIA ECONOMIC OUTLOOK RETAIL MARKET OFFICE MARKET INDUSTRIAL MARKET HOTEL MARKET RESIDENTIAL MARKET LEGAL & TAXES
72-73 ABOUT NEWSEC 74 ABOUT LAWIN 76
CONTACTS
Prepared by Newsec: Mindaugas Kulbokas, Head of Research and Analysis, Baltics, m.kulbokas@newsecbaltics.com and Kristina Živatkauskaite, Senior Analyst, k.zivatkauskaite@newsec.lt Legal and tax overview is prepared by LAWIN. Copyright Newsec © 2014 This report is intended for general information and is based upon material in our possession or supplied to us that we believe to be reliable. Whilst every effort has been made to ensure its accuracy and completeness, we cannot offer any warranty that factual errors may not have occurred. Newsec takes no responsibility for any damage or loss suffered by reason of the inaccuracy of this report.
2
Introduction
Ricardas Cepas CEO of Newsec Baltics r.cepas@newsecbaltics.com
Dear Reader, We are proud to present you the brand new issue of Baltic Property Market Report 2014 including real estate overview of all commercial and residential real estate segments as well as essential issues of legal and taxation system in Lithuania, Latvia and Estonia. 2013 was the year of market maturity and brought back interest of investors as well optimism and opportunities to the developing market. Market participants experienced more stability after several volatile years. Constantly growing prime office demand has encouraged developers to start significant office projects, growth of retail turnovers has boosted development of retail chains and enabled renewing of several previously frozen projects. Transaction volume has reached pre-
crisis level and is expected to beat the record in 2014 already. A new cycle in the property market has begun as professionals start investing, demand is increasing for residential properties and office space. However the year 2014 is expected to be challenging for all, property developers, owners and potential investors in order to properly take the best out of situation and maintain development pace. The mid-term outlook of the region will remain strong and successful business solutions will help to unlock the potential. We expect that Baltic Property Market Report 2014 including thorough overview of the main real estate related legal issues and taxes is prepared by LAWIN will be a perfect tool and provide a valuable information about the market and form an excellent basis for your further decisions and plans. Regards, Ricardas Cepas CEO of Newsec Baltics
Baltic states
Baltic Property Market Report • Baltic States • 2014
3
Transaction volume has reached pre-crisis level and is expected to beat the record in 2014 already
Investment market
All three Baltic countries have continued demonstrating one of the best growth results and shape of government finance within the EU, continuously rising private consumption as well as retail trade, stable consumer and business confidence. 2013 IN BRIEF International investors who were previously reluctant to enter the Baltic region because of relatively small markets, currency risk and lack of liquidity, start investigating possibilities to include the region in their investment maps. First of all, the countries have shown impressive results in combatting the crisis as well as recovering from recession. Secondly, the currency risk is removed as Euro is already adopted in 2 of the Baltic countries – Estonia and Latvia (Lithuania expects Euro in 2015). Thirdly, transaction volume has reached pre-crisis level (approx. 480 million EUR in 2013) and is expected to beat the record in 2014 already.
Newsec’s primary markets.
Transaction Volume | Baltic Countries
INVESTORS PROFILE Nordic, Baltic and Russian investors are currently the key players in the Baltic market. All the existing Scandinavian funds continue enlarging their portfolios at the same time successfully implementing exits of their first funds. An important group of buyers is newly established local funds and asset management firms, which have grown significantly since their start 3-4 years ago. The success of the local players is ensured by solid group of private investors willing to invest into real estate as well as increasing appetite from local pension funds. At the same time the interest from Western European countries is continuously increasing and several transactions with investors from core European countries are expected to go through in 2014. YIELDS Though yields have decreased significantly during the recent years, there
Transaction Volume | Baltic Capitals
mEUR
mEUR
1,000
800
800
600
600 400 400 200
200 0 2004
2005
Lithuania
Source: Newsec
2006
Latvia
2007
2008
Estonia
2009
2010
2011
2012
2013E
0
2004
2005
Vilnius
Source: Newsec
2006
Riga
2007
Tallinn
2008
2009
2010
2011
2012
2013E
Baltic states
Baltic Property Market Report • Baltic States • 2014
4
Pre crisis transaction volume achieved in 2013, yields still enjoy from reasonable gap compared to Western European levels, while capital values are expected to demonstrate fantastic growth during the short term is still an attractive gap compared to Western European levels. Average yields for prime retail and office assets remain around 7.25 to 7.75%, with the most attractive properties being closed at up to 50 basis points lower yields. Secondary properties stand between 8 and 8.75%. It is important to note, that rental rates are still in the recovery phase, thus property values are very reasonable, often at around their development costs. Along with prompt growth of retail and office rent rates as well as yield compression, capital values are expected to demonstrate impressive growth, thus giving a chance to get fantastic returns within the short term.
Prime Office Yields | Baltic Capitals Percent 14 12 10 8 6 4 2 0 2007
2008
2009
Vilnius Prime
2010
2011
Riga Prime
2012
2013E
2014E
2015E
2014E
2015E
2014E
2015E
Tallinn Prime
Source: Newsec
Prime Retail Yields | Baltic Capitals Percent 14 12 10 8 6 4 2 0
2007
2008
2009
Vilnius Prime
2010
2011
Riga Prime
2012
2013E
Tallinn Prime
Source: Newsec
Prime W&L Yields | Baltic Capitals Percent 14 12 10 8 6 4 2 0
2007
2008
Vilnius Prime
Source: Newsec
2009
2010
Riga Prime
2011
2012
2013E
Tallinn Prime
Lithuania
Baltic Property Market Report • Baltic States • 2014
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LITHUANIA Economic outlook
Lithuanian economic recovery is continuously fuelled by still increasing exports and strengthening domestic demand. Although the growth of these sectors is slowing down, it retains Lithuania among the fastest growing economies in Europe. Favourable market development conditions influence recovery of the real estate market and increase attention of investors, developers and market end users as well. Activity in the transaction market is gradually approaching healthy and sustainable market levels, especially in commercial real estate investment and residential segments. STABLE GDP GROWTH Lithuania’s economy is on the steady growth track. During 2011 the economy grew significantly (GDP increased by 5.9%). Despite of more conservative forecasts economic activity increased considerably in 2012, GDP grew by 3.6% and by 3.5% in 2013. Lithuania is still expected to be among the most rapidly growing economies in Europe with GDP increase of 3.9% in 2014 and 4.3% in 2015. In 2013 GDP grew in most of economic activities. During the 1st quarter of the year the fastest growth in the value added was observed in production in manufacturing and industrial services, while in construction enterprises a decline persisted. The 2nd quarter growth was mainly coused by a positive change in the manufacturing output and a growth in domestic consumption. However, already in the
3rd quarter the fastest growth was observed in construction enterprises (growth by 14.2% y-o-y), trade, hotels and restaurants, transportation and storage enterprises (growth by 4.1% y-o-y). Lithuania’s GDP at current prices was higher if compared to pre-crisis level in 2012 already. GDP per capita expressed in purchasing power standarts was the highest among the Baltic States and consisted 72% of the EU28 average. EXPORT INCREASE SLOWING Although the economy growth was highly based on the continuously increasing export during recent years, the pace of growth was noticeably slower during HY2 2013. The expected growth is below 9% in exports and less than 8% in imports during last year. Exports have been giving a way to domestic demand which was constantly increasing its importance during 2013. Annual growth of 2.9% in 2013 is expected to be followed by stable 3.9% increase in 2014. UNEMPLOYMENT Positive changes have been felt in the labour market as well. Unemployment rate has dropped to the level of 11% in 2013. Newsec forecasts that the trend will continue and the level of average annual unemployment rate in the country will fall down to single digit in two years.
INFLATION Average annual inflation stood at 1.2% in 2013 and should maintain the minimal level in 2014, at least until the adoption of the Euro. Introduction of Euro is one of key objectives of Lithuania’s economic policy and the plan to enter Euro zone is set for 2015. FUTURE OUTLOOK Balanced exports, low governmental debt and stable domestic demand will ensure future economic growth in Lithuania. Both figures GDP and domestic consumption brings more and more positivity and the growth of wages in 2014 are expected to be more significant compared to the previous year. Lithuania is expected to become a full member of the European Economic and Monetary Union in 2015, January 1st. In order to achieve the goal a year of 2014 will be active Maastricht criteria fulfilment time.
Lithuania
Baltic Property Market Report • Baltic States • 2014
6
Lithuania retains among the fastest growing economies in Europe
Inflation and Private Consumption | Lithuania
Economic Indicators | Lithuania
20
Percent 15
15
10
Percent
10
5
5
0
0
-5
-5
-10
-10 -15
-15
-20
-20
2007
2008
2009
2010
GDP (% growth, fixed prices)
2011
2012
2013E
2014E
2015E
2007
2008
2009
2010
2011
Inflation (yearly average %)
Employment (yearly change %)
2012
2013E
2014E
2015E
Private consumption (% growth)
Unemployment (% of labour force)
Source: Statistics Lithuania, European Commission, Newsec
Source: Statistics Lithuania, Newsec
Foreign Direct Investments | Lithuania
Retail Trade | Lithuania Yearly change, percent
mEUR 14,000
Percent
40 30
12,000
20
20
10,000
10
8,000
0
6,000
-10
4,000
-20
2,000
-30
0 2007
2008
2009
2010
Trade, excl. motor vehicles
2011
2012
2013E
15 10 5 0 -5 -10 2007
2008
FDI, million EUR
Food and beverages Clothing and footwear
2009
2010
2011
2012
2013E
Exports and Imports | Lithuania
Growth, %
Wages and Salaries | Lithuania
mEUR 30,000
Percent 40
Gross avg EUR/month 800
Percent 30
30
25,000
20
20,000
25 600
20
10 0
15,000
-10
10,000
15 400
10 5
-20 -30
5,000
200
0
-40 2007
Exports
2008
Imports
2009
2010
2011
Exports growth, % yoy
Source: Statistics Lithuania, Newsec
-15
Source: Statistics Lithuania, Newsec
Source: Statistics Lithuania, Newsec
0
25
2012
2013E
Imports growth, % yoy
-50
-5 0
2007
2008
2009
Public sector Public sector growth %, yoy
Source: Statistics Lithuania, Newsec
2010
2011
2012
Private sector Private sector growth %, yoy
2013E
-10
Lithuania
Baltic Property Market Report • Baltic States • 2014
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Retail market
New construction is limited to local supermarkets, as retail chains are actively expanding in the market
RETAIL MARKET
NEW DEVELOPMENTS
Private consumption has a more significant role in economic development and the retail trade in Lithuania continues accelerating the fourth year in a row. Consumers are willing to increase their spending on nonfood or even luxury goods while forming a strong base for international brands such as IKEA, H&M and LIDL to enter and expand in the market. 2013 were marked by a growing retail segment and increasing domestic consumption. Grocery retailer’s growth was just in line with the growth of the national GDP. Meanwhile, the country’s total trade turnover was growing at around 5%. These figures confirm that consumers were more willing to spend in non-food segment. Retail sale of textiles, clothing and footwear segment grew by ~10%, sale of electronic goods increased by ~4.5%.
The total leasable shopping centre area in Lithuania amounts to approx. 780,000 sq. m or approx. 0.25 sq. m per capita. Nearly half the total supply is concentrated in the most developed city and capital of the country, Vilnius, with 14 modern shopping centres and a total leasable area of approx. 310,000 sq. m or approx. 0.6 sq. m per capita. There have been no large new retail developments in Vilnius since 2010. New deliveries only comprise of retail chain stores actively expanding in the market. The most realistic projects in the next two to three years are several neighborhood shopping centres in the outskirts of Vilnius. One of the developments under construction is Domus Pro Retail Park (~11,000 sq. m) for 2014 and planned Olinda shopping centre (~18,000) by Vicus. One of the biggest steps in the Lithu-
anian retail market was IKEA’s opening in Vilnius. Approx. 100 mEUR will be invested in the entire project for the first IKEA store in the Baltics (25,000 sq. m) and additional retail stores, creating an attractive shopping destination of 15.5 ha in the area. It is expected that large DIY, electronics, gardening and other retailers will settle in the neighborhood. New construction is limited to local supermarkets, as retail chains are actively expanding in the market. New medium to large scale projects in the market are expected only after the 2-3 year period. IMPROVING RESULTS Improved turnover/rent ratios in successfully operating shopping centres in all major cities have enabled an increase in rents. In 2013 the tendency of growing rent rates was noticeable as well in both shopping centres and
Rental Rates and Vacancies | Vilnius 2007
2008
2009
2010
2011
2012
2013E
Trend Ω≈¬
up to 100/150 sq. m
30–50
25–45
20–30
20–30
25–45
25–45
25-45
Ω
100/150-350/500 sq. m
18–30
15–23
10–15
10–16
12–25
12–25
14-27
Ω
> 350/500 sq. m
12–18
10–15
8–12
8–12
10–15
10–15
12-18
Ω
Anchor tenants
6–11
5–10
5–7.5
6–7.5
6–9
6–9
7-12
¬
up to 5%
up to 3%
up to 5%
up to 3%
up to 3%
up to 2%
up to 2%
¬
5–9%
4–9%
18–20%
13–15%
5–12%
5–8%
5–8%
≈
Rental rates, EUR/sq. m/month
Vacancy rates, % Well performing SC Other Source: Newsec
Lithuania
Baltic Property Market Report • Baltic States • 2014
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2014 will be challenging and stressful for retail market players in order to maintain the position in the market retail streets as the demand of quality retail premises is high. Average rents amount to 19-21 EUR/sq. m/month in the largest shopping centres in prime locations. Rents in shopping centres are set according to the size of the tenant and vary from 12-45 EUR/sq. m/month, while anchor tenants pay approx. 7-12 EUR/sq. m/month. It is expected that the modest growth in rent rates will remain in the upcoming years. Major shopping centers in Vilnius retain strong positions after constant improvements in tenant mixes and minor redevelopments of the schemes. Therefore, prime shopping centres had an average of 10% turnover increase. However, being in a small market each of existing shopping centres are facing difficulties in achieving exclusivity and its own niche.
RETURN OF DEMAND Demand in the retail market is increasing as the majority of retailers have expansion in their plans. All of the largest shopping centres are attracting new tenants and improving their tenant mix. Recently introduced to the market were new retailers in Lithuania such as Next, Aldo, Massimo Dutti, Coccinelle, Strellson, Karen Millen, Grupo Cortefiel and require spaces in good locations in prime shopping centers. H&M was the largest new player in the Vilnius market during 2013 and it will open its stores in other major cities during 2014.
be the consumers who will also help in beating the turnover and footfall records. Low vacancies in the prime shopping centers will remain at the same level, most likely resulting in rentals growth. 2014 will be challenging and stressful for retail market players in order to maintain the position in the market.
FUTURE OUTLOOK Continuous internal and external redevelopment of shopping centres, constant attention to the customers will be beneficial to shopping centres. The winner in the whole market will
Supply of Shopping Centres | Vilnius
Prime Retail | Vilnius
Ths. sq. m 350
Sq. m 700
Percent
EUR/sq. m/month 30
10
25
8
300
600
250
500
200
400
150
300
100
200
50
100
5
0
0
20
6
15
0
2004
2005
2006
Existing stock
Source: Newsec
2007
2008
New supply
2009
2010
2011
Sq. m/1,000 inh.
2012
2013E
2014E
4 10 2 0 2007
2008
Rental rates
Source: Newsec
2009
Vacancy
2010
2011
2012
2013E
2014E
Lithuania
Baltic Property Market Report • Baltic States • 2014
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Office market
Vilnius market over the 2-3 years period will be offered to absorb ~ 90,000 sq. m of office space
OFFICE MARKET
market over the 2-3 years period will be offered to absorb ~ 90,000 sq. m of office space. This will increase A class market share as large scale developments (Quadrum Business City development of 40,000 sq. m GLA by Norwegian company Schage Real Estate, K29 development of 14,000 sq. m by Lithuanian investment fund Lords LB) are under construction in Vilnius Central Business District. In 2014 the total gross leasable area should increase by up-to 29,000 sq. m or 7% of total existing stock.
Excellent economy growth and increasing rate of employment has also affected the demand in office market. Developers’ attention is now targeted towards fast developing Vilnius market. SUPPLY GROWTH The total stock of modern offices in Vilnius exceeded 387,000 sq. m or 0.7 sq. m per capita at the end of 2013. New supply last year increased to ca. 14,700 sq. m (4% growth) compared to 18,200 sq. m (5% growth) in 2012. Almost 19% decrease in new supply was mainly caused by low number of completed new projects. Only two business centres were delivered in Vilnius office market. It includes the speculatively built business centre Gama, developed by Realco and currently owned by Technopolis Lietuva (11,400 sq. m of GLA) and Baltic Hearts 2nd stage (3,300 sq. m of GLA). Vilnius
LOWER VACANCY Average vacancy rate in A class decreased from 5% to 2% level over 2013 and is at the critically low level. B class office segment vacancy has reached 10% in the summer of 2013 and has shrunk to 7.5% by the end of the year. Tenants with requirements for small offices still have a number of options to choose from. However, tenants willing to move to bigger offices
need to plan 2-3 years ahead in order to relocate to A-class locations currently under construction. MARKET ACTIVITY Letting activity in 2013 was relatively high at ca. 44,000 sq. m, reflecting ca. 15% growth compared to 2012. Demand for the A class offices was and is expected to remain high pushing vacancy levels to record low levels. Low supply and qualitative new constructions in the market brought back a trend of pre-lease agreements in the development stage projects. New developments in the market set a more defined pattern in highly flexible, collaboration friendly and open space office environment, however area dedicated for one employee was not decreasing significantly. Some of the biggest transactions in Vilnius concluded during 2013 were transactions by international companies SEB, Barclays, Danske Bank, CSC, Western Union successfully operating
Office Market Indicators | Vilnius
Office Stock | Vilnius
Ths. sq. m 100
Percent 25
Ths. sq. m 500
Percent 50
400
40
80
20
300
30
60
15
200
20
40
10
100
10
20
5
0
2004
2005
Stock
Source: Newsec
2006
2007
2008
Stock growth, % yoy
2009
2010
2011
2012
2013E
2014E
0
0
2004
2005
Absorption
Source: Newsec
2006
2007
2008
New supply
2009
2010
2011
Total vacancy, %
2012
2013E
2014E
0
Lithuania
Baltic Property Market Report • Baltic States • 2014
10
Projects planned to be completed in 2015 will have influence on both rents and vacancy level in Vilnius office market in the market and seeking to expand and/or relocate. Continuously growing local companies (IT, advertising, legal) were leasing offices in more modern projects as well. Demand of office space expressed by net absorption was ca. 33,300 sq. m during 2013 compared to 14,100 sq. m during 2012. INCREASE OF RENTAL RATES Modern office rent rates have been increasing through 2011-2012. In 2013 rent rates kept increasing due to insufficient supply of modern office premises meeting the demanded requirements. In the end of 2013 average market rent for prime office premises in Vilnius CBD were in the range of 1315 EUR/sq. m/month, in other central areas the market rent rates were in the range of 8-12.5 EUR/sq. m/month, whereas B class offices further from city centre were leased for 7.5-9 EUR/ sq. m/month.
MARKET OUTLOOK New construction volume in 2014 is estimated to be around 29,000 sq. m. Average office market vacancy will remain at the lowest historical Vilnius market level and is not expected to increase, at least until 2015. Prime office rents are expected to increase by 3% during 2014. Projects planned to be completed in 2015 will have influence on both rents and vacancy level in Vilnius office market.
Office Rents I Vilnius
Office Vacancy | Vilnius
EUR/sq. m/month 25
Percent 25 20
20
15 15 10 10
5 0
5 2004
2005
A class, %
Source: Newsec
2006
2007
2008
B class, %
2009
2010
2011
Total vacancy, %
2012
2013E
2014E
2007
A class
Source: Newsec
2008
2009
A class Max
2010
2011
B class
2012
B class Max
2013E
2014E
Lithuania
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Industrial market
New developments in the market will reach more than 100,000 sq. m during 2014 with almost 10 new projects on built-to-suit base
INDUSTRIAL MARKET
as, there are approx. 160,000 sq. m of modern warehousing and logistics space in Kaunas and approx. 110,000 sq. m in Klaipeda.
their logistics warehouses in order to improve their services.
NEW DELIVERIES
The Government of Lithuania aims to establish of new generation, serving as distribution centres, dry ports, and modern freight villages. Constructions of Intermodal terminal in Vilnius and Kaunas public logistics centres were launched in 2013 which will be completed in the beginning of 2015. New terminals will be used to transfer goods and shipments from one type of transport to another, namely from trains to trucks and the other way back. The terminals will be used to store containers, transport vehicles, to rent containers to export goods or to carry out logistics to the nearby cities or customers. Rhenus Svoris and Autoverslas have signed letters of intent for development of logistics centres in Vilnius PLC. In mid-term period, modern public logistic centres in Klaipeda region will
The supply in warehousing market follows the improvement in consumption and increased export. Differently from the office market, warehouse and logistics projects development is not concentrated only in Vilnius. New projects are spread and developed in Kaunas and Klaipeda, market activity in Panevezys and Siauliai is growing as well with increasing use of the existing industrial building opportunities. EXISTING SUPPLY There are approx. 753,000 sq. m of modern warehousing space in Lithuania including Vilnius, Kaunas and Klaipeda regions, however, a much greater part of warehousing space is covered by old, not renovated warehouses and industrial units. Currently, a major part (approx. 480,000 sq. m) of modern warehouses is situated in Vilnius and Vilnius district. Where-
The year of 2013 did not bring any new large scale warehousing and logistics projects to the market, however a few new projects are under construction. These projects are expected to be delivered to the market in 2014. New developments in the market will reach more than 100,000 sq. m during 2014 with almost 10 new projects on built-to-suit base, however nearly one half of the premises will be offered for speculative needs as well. New development outburst is mainly caused by well performing logistics, import/export and trade companies willing to develop the objects according their own requirements. Experienced companies such as Transekspedicija, Vlantana, Sanitex, Vinges Logistika, Ad Rem and others expand
PUBLIC LOGISTICS CENTRES
W&L Market | Lithuania
W&LMarket | Lithuania Ths. sq. m 1,000
Percent 60 50
800
40
600
Ths. sq. m 200
Percent 15 13
150
11 9
100
7
30 50
400
5
20 200 0
10
2007
Stock
Source: Newsec
2008
2009
2010
Stock growth, % yoy
2011
2012
2013E
2014E
0
3
0
1 -50
2007
2008
Absorption
Source: Newsec
2009
New supply
2010
2011
Vacancy, %
2012
2013E
2014E
-1
Lithuania
Baltic Property Market Report • Baltic States • 2014
12
The supply for logistics and warehouse facilities will remain limited to build-to-suit or early pre-lease projects be established, and in long-term period – logistic centres are planned to be built in the regions of Panevezys and Siauliai. DEVELOPING FEZ’s There are two long-operated free economic zones (FEZ) in Lithuania – in Klaipeda and in Kaunas. However there are plans to attract experienced operators and establish five more FEZs in Siauliai, Panevezys, Marijampole, Kedainiai and Akmene. Existing and planned infrastructure on the territories will form favorable conditions for further manufacturing industry development and investments attraction. MARKET DEMAND Market absorption ratio reached 52,000 sq. m in 2012 in the main Vilnius, Kaunas and Klaipeda regions. Because of the very low modern warehousing space supply the overall take
up figures in 2013 were not high. Major share of lease transactions were made by tenants already existing in the market and no fresh tenants were attracted. The further tenant migration should be seen due to expiring agreements, especially in the small scale tenants group. New projects in the market will be mostly occupied by the end users of built-to-suit projects and absorbtion is expected to reach more than 65,000 sq. m in 2014. DECREASING VACANCY The vacancy rate in Vilnius region modern warehousing facilities decreased below 5% in the end of 2013. Vacancy rate in modern warehouses in other cities was slightly higher and reached 7-8%. Low vacancy levels are expected to remain at ~5% in combined Vilnius, Kaunas and Klaipeda markets during 2014 as well. However in some particular cases the vacancy in certain objects is much
Warehouse Rents | Vilnius EUR/sq. m/month 6 5 4 3 2 1
2007
2008
Rental rate Avg
Source: Newsec
2009
2010
Rental rate Min
2011
2012
2013E
Rental rate Max
2014E
lower than the market average. Only small scale premises could be leased at the moment and companies looking for premises size 5,000-8,000 sq. m face the lack of supply. It is expected, that vacancy of warehousing and industrial premises will not increase before new speculative projects are presented to the market. STABLE RENTAL RATES The average rental rates now are 3.5-4.6 EUR/sq. m/month for A class buildings in Vilnius prime locations and up to 3.5-4.3 EUR/sq. m/month in Kaunas and Klaipeda. The rent rates also differ according to the size of the tenant. The highest rental rates are asked in Vilnius market. FUTURE OUTLOOK Rental rates for warehouse and logistics facilities are expected to remain stable or a slight increase might be observed in 2014. Warehouse market will remain balanced, however constantly evolving segment. The supply for logistics and warehouse facilities will remain limited to build-to-suit or early pre-lease projects.
Lithuania
Baltic Property Market Report • Baltic States • 2014
13
Hotel market
In 2013 there were 2 hotels opened in Vilnius and increased the stock of rooms by 3%
HOTEL MARKET
and Trakai. Year of 2012 was rather active in hotel development in Vilnius. 3-star Comfort Hotel LT (200 rooms) was opened and 5-star hotel Kempinski Hotel Cathedral Square (96 rooms) was finally finished after several years of construction. Both hotels were opened in September 2012 and increased hotels room supply by 8% (or 296 rooms) in Vilnius. In 2013 there were 2 hotels opened in Vilnius. Louvre Hotels Group opened business class Campanile Vilnius Airport hotel (92 rooms) which is the first Campanile chain hotel in the Baltics. Louvre Hotels Group is operating more than 1,000 hotels in 42 countries across the world. Another hotel opened in 2013 – 4-star Moon Garden hotel (18 rooms) in Vilnius old town. Both of the hotels increased the stock of rooms in classified hotels in Vilnius by 3% (or 110 rooms). Klaipeda market had an opening of 3 star Europa City Aurora Klaipeda Hotel (144 rooms) in 2013. Lithuanian hotel market is dominated
Hotel market is continuously improving in terms of increasing turnover of accommodation establishments, growing number of guests and occupancy levels. The major part of registered hotels is situated in Vilnius and Klaipeda regions which have the largest tourists’ flows within the country. SUPPLY 56% of hotels registered in Statistics Lithuania are classified and star rated. According to Lithuanian Association of Hotels and Restaurants there were 201 classified hotels in Lithuania in November 2013. In 2011 Lithuania along with Estonia and Latvia has joined the Hotelstars Union rating system, since then 26 out of 201 hotels were rated according HSU with 14 hotels located in Vilnius. Nearly 50% of the hotels are rated as 3-star hotels. There are only 8 5 star hotels in Lithuania and they are all situated in Vilnius, Palanga
Hotels | Vilnius
by local companies owning 2-3-star hotels and limiting themselves to construction of mainly small and medium size facilities. In terms of hotel ownership the hotel market is divided into almost equivalent parts – a bit less than a half of all rooms in classified hotels are run by local or international hotel operators, while 54% share of rooms are run by private owners. The presence of large international hotel operators is mainly focused on Vilnius market. However, some of the worldwide known brands are actively observing the market. INCREASING OCCUPANCY Overall economic development affected Lithuanian hotel market in a positive way. Increase in tourists’ flows was noticeable, number of foreign citizens accommodated in Lithuania increased by 11% in 2013, local – by 6%. Although Lithuanian hotels are popular among local tourists, the majority of hotel guests are foreigners.
Demand and Occupancy of Hotels | Lithuania Ths. visitors
5 Stars 4 Stars 3 Stars 2 Stars 1 Star
Percent
2,000
50
1,600
40
1,200
30
800
20
400
10
0
0 2005
2006
Local visitors
Source: Lithuanian Hotels and Restaurants Association
2007
2008
2009
Foreign visitors
Source: Statistics Lithuania
2010
2011
Occupancy, %
2012
2013E
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Number of visitors in Lithuania’s hotels reached more than 1.6 million during 2013 Belarus – 40% more Belarusians stayed in Vilnius in Q1-Q3 2013 if compared to the same period in 2012. The was also a noticeable increase in number of tourists from United Kingdom, United States and Russia – the number of accommodated tourists increased by 14%, 14% and 13% respectively.
The occupancy of hotels is highly seasonal, with Q2 and Q3 being the most active in the market. In 2013 the overall hotel occupancy slightly increased and reached 46% in Lithuania and 62% in Vilnius. INCREASING DEMAND
ROOM RATES
According to Statistics Lithuania hotels in Lithuania accommodated 1.55 million guests in 2012, which is 12% more than in 2011. In 2013 Q1-Q3 number of local and foreign visitors in hotels increased by 7% if compared to the same period in 2012 and it is expected that number of visitors in hotels in Lithuania will reach 1.67 million in 2013. In 2013 the most of foreign guests in Vilnius hotels according to the Lithuanian Department of statistics were Polish, Russian, German and Belarusian. The largest increase in number of tourists accommodated in hotels in Vilnius was recorded for guests from
According to Lithuanian Hotel and Restaurant Association single room prices started to increase since the middle of 2010, however prices are still lower by 10-15% than in the peak years. The average rack rate for a standard double room in Vilnius during 2013 was around 140 EUR in 5 star hotels, 100 EUR in 4 star and 75 EUR in 3 star hotels. Preferential VAT rates for accommodation services in Lithuania have been cancelled in January 2012 and currently Lithuania has the second highest VAT rate for accommodation services in Europe. Statistically the
Demand and Occupancy of Hotels | Vilnius Ths. visitors
Percent
800
70 60
600
50 40
400
30 20
200
10 0
0 2005
2006
Local visitors
2007
2008
2009
Foreign visitors
Source: Statistics Lithuania
2010
2011
Occupancy, %
2012
2013E
cancelled preferential VAT rate did not have destructive effect on the Lithuanian hotel market however it has reduced competitiveness of Lithuanian hotels. It is expected that preferential VAT rate of 9% for accommodation services will be again set in 2015.
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Residential market
The overall Lithuanian market activity has increased by 20% in 2013
RESIDENTIAL MARKET
ments built during 1991-2003 remained stable. The increase in demand for new construction apartments has been caused by long term low supply and lack of good quality projects. It may be noted that the main activity was seen in the economy class segment, therefore mid-range projects and prestigious segment in most cases was in the construction phase.
A lot of optimism has returned to the residential market. 2012 year transaction volume was reached in less than 10 months of 2013. The overall Lithuanian market activity has increased by 20% in 2013. Annual result was more than 30% higher and reached ~7,700 transactions in Vilnius. The revival in the market is obvious, however there is still room for growth if compared to the peak of activity of more than 10,000 transactions per year.
NEW SUPPLY New and unfinished projects did not affect the statistical results of prices and their impact should be considered separately. At the end of 2013 Vilnius market had 32 new projects under development. During the whole last year 22 new projects were introduced to the market. Total supply of new apartments was ~2,400 units in the end of 2013. It is obvious that the market is rather sustainable as total number of 900 apartments in the projects under construction was pre-sold or reserved by the end of 2013. If developers keep introducing new projects to the market the supply
HIGH MARKET ACTIVITY The biggest change in number of transactions was recorded in Siauliai where market activity boosted by 35% during 2013. However it took only 9% of total major cities transactions. Market activity also increased in Vilnius (30%), Kaunas (23%), Klaipeda (30%) and Panevezys (19%). The number of transactions of newly build or reconstructed apartments was constantly increasing while number of transactions for apart-
Residential Market | Vilnius Units 12,000
EUR/sq. m
2,000
10,000
1,600
8,000
1,200 6,000
800
4,000
400
2,000 0
2005
2006
2007
Number of transactions
Souce: Centre of Registers
2008
2009
2010
2011
2012
Average price - new construction Average price - old construction
2013E
0
of new apartments might soon be higher than demand. AVERAGE APARTMENT PRICES SLIGHTLY INCTREASED It is interesting to observe that such an increase in market activity only slightly influenced the average apartment prices which remained relatively stable. Despite monthly variations average apartment prices have increased by 2% in Lithuania during 2013. Only 0.2% increase was in Vilnius market, whereas the highest decrease was in Kaunas and Klaipeda by 3.6% and 3.0% respectively. The largest increase of apartment prices was seen in Siauliai by 3.4% during 2013. FUTURE OUTLOOK The market is considered to be at the sustainable level, where the amount of money invested into the residential properties and the average earnings strongly correlates. This was caused by responsible borrowing rules set by the
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Newsec forecasts more than 1,700 transactions in new construction segment for 2013 and similar activity in 2014 Bank of Lithuania, which obliged the banks not to lend more than 85% of the residential property value. While analyzing the market take-up opportunities Newsec forecasts more than 1,700 transactions in new construction segment (apartments built in 2011 and later) for 2013. These market indicators and other key market data allow forecasting, that market activity is based on sustainable growth and will maintain the similar activity in 2014. It should be observed, that this is not entirely valid for the pricing of new construction apartments. Projected price increase of 5-7% will be related mostly to the macroeconomic indicators (i. e. growth of construction costs). Developers keep introducing new idea to the market - apartments with full finishing. This trend might become very popular as mortgage loans do not include finishing of the apartment at the moment.
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Lithuania
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Legal and tax overview
No major restrictions are imposed on foreigners to invest in real estate in Lithuania.
Corporate Presence
Board is responsible for strategic management of a company, election of the CEO and some other decisions related to the company (e.g. decisions to invest in other companies, etc.).
company?
Lithuania’s corporate laws do not restrict in any way the participation of foreigners in the management of Lithuanian companies. Any foreign citizen, irrespective of his/her origin, may be freely elected either to the Supervisory Council or the Board or to the position of the CEO.
• stamp duty for preliminary registra-
What is the most common type of corporate presence? The most common type of investment vehicle among both foreign and local investors is a private company or sometimes referred to as a private joint stock company (in Lithuanian uždaroji akcinė bendrovė or UAB), which is analogous to a Latvian SIA, German GmbH, French SARL or BV in the Netherlands. The owners of the private company (shareholders) enjoy full limited liability.
What is the minimum authorised capital in a private company?
Describe the management structure of the private company. Are there any participation restrictions applicable to the foreigners?
The minimum authorised capital in the private company amounts to LTL 10,000 (approx. EUR 2,896).
The private company (UAB) can have a four-tier governance structure, comprising the following elements:
Are there any requirements for the number of shareholders in a private company?
• General Meeting of Shareholders; • Supervisory Council; • Board (of Directors); • Chief Executive Officer (CEO). It is not obligatory to form the Supervisory Council and/or the Board in a company. The Supervisory Councils are rarely established in private companies, but Boards are formed quite often, particularly in larger private companies. Contrary to the existing practise abroad, in Lithuania the Board does not have direct executive powers. The
The minimum number of shareholders is 1 and the maximum – 249. Are there any specific requirements for transfer of the shares in a private company? Only fully paid-up shares may be transferred. Other shareholders have a pre-emption right to buy the shares subject to sale. Shares transfer agreement must be made in a written form (notarisation is not required). What are the major fees involved in the incorporation of a private
The registration of a private company involves the following filing and notary fees:
tion of a company name (if any) is LTL 56 (approx. EUR 16); • notary fees for examination and certification of incorporation documents may vary from LTL 250 (approx. EUR 75) to LTL 800 (approx. EUR 230); • stamp duty for registration of the company with the Register of Legal Persons – LTL 198 (approx. EUR 60). Acquiring Real Estate Are there any legal restrictions on the ownership of real estate (interests in entities which own real estate) by foreign investors? A foreigner willing to acquire land into ownership must comply with the criteria of the European and Transatlantic Integration. To meet the said criteria a legal person is required to be established in, or a natural person is required to hold the citizenship or a permanent residency of, one of the following states:
• a
Member State of the European Union (EU) or a state that is a party to the European Treaty (Association Agreement) with the European Communities and their Member States; • a Member State of the Organisation for Economic Co-operation and De-
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Sale and purchase agreement of structures should explicitly discuss the rights of the buyer in respect of the land under the structures subject to sale. velopment (OECD), a Member State of the North Atlantic Treaty Organisation (NATO) or a Member State of the Agreement on the European Economic Area (EEA). Land may also be owned by non-Lithuanian citizens having permanent residency in Lithuania. With certain minor exceptions, even when complying with the above-described criteria, foreigners are not allowed to acquire agricultural and forest land into their ownership until 1 May 2014. There are no restrictions imposed on foreign investors (irrespective of their origin) to acquire interests in Lithuania-based entities which own real estate. Further, foreigners are free to own any kind of buildings and structures in Lithuania provided they are able to secure respective rights to the land (e.g. lease) required for operation of relevant buildings or structures. Are pre-acquisition agreements commonly used in your jurisdiction? What is their legal effect and enforceability? Pre-acquisition (preliminary) agreements are quite common in Lithuania. Their content may vary from a very general (e.g. setting out the deadlines for due diligence and execution of the main sale and purchase agreement, etc.) to a very detailed (providing for the preconditions for closing, calculation of a purchase price, reps & war-
ranties, elaborated termination and liability clauses, etc.). However, preliminary agreements (letters of intent, heads of terms, memorandums of understanding, etc.) may not be enforced in kind. If a seller refuses to sell property subject to a preliminary agreement (breaches the same), a buyer will only be entitled to claim damages caused as a result of such refusal as well as a contractual fine if such is set out in the agreement. Under certain circumstances, a preliminary agreement may be recognised by the court as the main sale and purchase agreement. Describe formal requirements for real estate sale and purchase agreement Any real estate which is subject to a sale and purchase agreement must be registered with the Real Estate Register (except for some simple structures which are not subject to mandatory registration). Sale and purchase agreement for any kind of real estate must be concluded in a written form and certified by a notary public. Notarised form is not mandatory for acquisition of the shares of the company that owns real estate (i.e. in case of a share deal), also when the company’s shares are paid up by nonpecuniary contribution, i.e. by way of transfer of a real estate into the authorised capital of the company.
Although the absence of registration of the real estate sale and purchase agreement does not affect its validity in respect of the seller and the buyer, however, only legally registered agreement may be invoked (enforced) against third persons (for further details please see Section 6 Registration). An agreement on sale and purchase of structures should explicitly discuss the rights of the buyer in respect of the land under the structures subject to sale. Failure to comply with this rule makes the agreement null and void. The plan of the land plot must be attached to the sale and purchase agreement of the land plot as its integral part. With certain exceptions, in case of sale of buildings or premises their energy performance certificates must be submitted to the buyer on the date of entering into the sale and purchase agreement. Can a sale and purchase agreement of real estate or shares of an entity owning real estate be made in a foreign language? Although the Law on State Language requires all transactions between Lithuanian legal and/or natural persons (irrespective of their origin) to be executed in the Lithuanian language, violation of this requirement does not make the agreement null and void.
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The seller is obliged to disclose to the buyer all major encumbrances with respect to the real estate subject to sale. The Lithuanian text of the agreement may be accompanied by the translation into any other language(s), i.e. the agreement may be signed in two or more languages where one of them is Lithuanian. As a general rule, there are two types of agreements which must always contain the Lithuanian text, i.e. must be executed either in the Lithuanian language only or in any foreign language (or languages) and Lithuanian as prevailing language:
• agreements
which require compulsory notarisation (e.g. real estate sale and purchase agreements) – notary public will not certify an agreement executed solely in a foreign language, or where a foreign language prevails over Lithuanian; or • agreements which are intended to be registered with the Real Estate Register (e.g. pre-acquisition agreement, lease agreements, etc.). Other agreements not mentioned above, including shares sale and purchase agreements, can and quite often are executed in English (or other foreign language) only if the parties to such agreements are foreign entities or Lithuanians-based foreign investors. Does any third person (governmental authority, etc.) have a pre-emptive right to acquire real estate subject to sale? A pre-emptive right is enjoyed by:
• co-owners
in respect of the parts of real estate owned and intended to be sold by another co-owner. If such pre-emptive right is violated, the aggrieved co-owner has a right to demand, through the judicial procedure, assignment of the buyer’s rights and obligations under the sale and purchase agreement concluded by the other co-owner and a third party; • the State with respect to: (i) the land plots falling within certain protected areas (e.g. the areas that have been granted the status of Natura 2000, also certain areas of national parks, etc.). The price to be paid by the State for such land cannot exceed its average market value determined by mass valuation; (ii) the land intended to be used for public needs, etc. (except when a co-owners sells its part to the other co-owners); • owners of buildings and structures with respect to the land thereunder; • certain qualified farmers and users with respect to the neighbouring agricultural land and agricultural land plots in use. Describe the moment of acquisition of the ownership to real estate The ownership to real estate passes over from the moment it is handed over to the buyer. Unless the parties agree that the sale and purchase agreement itself constitutes a handover deed of real estate and thus, the ownership to the real estate passes
over from the moment of entering into such agreement, the handover of real estate is to be documented by a separate handover deed. Does the seller have a statutory disclosure or warranty obligation? The seller is bound by the statutory obligation to disclose to the buyer all third parties’ rights, mortgages, seizures, on-going litigation and other encumbrances with respect to the real estate subject to sale. If the seller fails to comply with such obligation and is not able to prove that the buyer was aware of the respective encumbrances at the moment of sale, the buyer shall become entitled to claim reduction of the purchase price or termination of the sale and purchase agreement. The buyer cannot rely on the encumbrances over real estate and invoke remedy measures against the seller if the seller has notified the buyer of such encumbrances or the buyer could have learned of them from the public registers (such as the Real Estate Register, the Register of Mortgages and the Register of Property Seizure Acts). What is the effect of transfer of real estate on contractual and other rights, obligations and warranties? Do these pass over along with the title to real estate? As a general rule, only legally registered agreements, restrictions and encumbrances remain effective upon the sale of real estate.
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The maximum term of any lease may not exceed 100 years.
Transfer of the statutory warranties (e.g. construction guarantees) is normally documented by an additional statement in the sale and purchase agreement or the handover deed declaring the assignment of all seller’s rights under such warranties to the buyer. The guarantees issued to the seller by third persons (e.g. bank guarantees, sureties of insurance companies, etc.) are either reissued in the name of a new owner or assigned to the latter. What are the conditions for termination of real estate sale and purchase agreement? As any other commercial agreement, the real estate sale and purchase agreement may be terminated:
• by mutual agreement of the parties; • by either party’s demand if the other party commits a material breach and fails to rectify the same in due course (the parties may agree on what is to be considered a material breach under the agreement; otherwise, the material breach is to be determined based on statutory provisions); • on other grounds set out in the agreement (the parties are free to establish any grounds for unilateral termination of the agreement either through the judicial procedure or without applying to court). What are the fees for notarisation of real estate sale and purchase agreement?
Notary fee charged for certification of a real estate sale and purchase agreement amounts to 0.45% of the transaction value and cannot exceed the established caps of LTL 20,000 (approx. EUR 5,792), if only one real estate unit is being sold, or LTL 50,000 (approx. EUR 14,481) if more than one real estate unit is subject to the same sale and purchase agreement.
to extend or renew its lease? A tenant having duly performed its obligations during the validity of a lease, upon its expiry has a priority right against third parties to renew the lease for a new term (if further lease of the property is intended by the landlord). The landlord is obliged to inform the tenant of its right to renew the lease prior to its expiry.
Commercial Lease What are the formal requirements for the execution of a lease agreement? Any real estate lease must be in a written form. Lease of buildings, structures or land has to be registered with the Real Estate Register in order to be enforceable against third parties. With certain exceptions, in case of lease of buildings or premises a copy of their energy performance certificates must be submitted to the tenant. Are there any statutory restrictions on a lease term? In general, the maximum term of any lease may not exceed 100 years. Special rules are applied to the lease term of the State-owned land – it cannot exceed 25 years for the State-owned agricultural land and 99 years for any other State-owned land. Does a tenant have a statutory right
Rent and its adjustment: are there any statutory restrictions on the amount of rent? What is the general market practice? Generally, there are no such restrictions. Nevertheless, all transactions between the related parties should be effected based on the arm’s length principle, i.e. the transactions between the associated parties should be made under such (market) conditions (including rent) as if the parties to the transaction were not associated. In commercial leases rent is usually established as a fixed fee payable on a monthly (rarely on a quarterly) basis in advance. Turnover rent quite often is introduced in major retail leases in addition to the fixed (base) rent. In case the rent is established in the national currency (Litas), it is quite often pegged to Euro. Normally, the rent is adjusted annually based on the local or EU consumer price index. Alienation: what are the rights of the tenant and the landlord with respect
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The landlord must disclose to its tenants the intended sale of the leased property. to assignment, sub-lease or placing a charge over a lease? Typically, the following alienation rules are applied:
• a landlord is free to sell the leased property, also pledge receivables from the lease or assign the landlord’s rights to them; • a tenant has to obtain a prior written landlord’s consent for: (i) subleasing of the property to third persons (in office sector exceptions from this rule are frequently applied for sublease to the related persons (parent or sister companies, etc.)); (ii) pledging or otherwise encumbering the lease right; • except for the above-mentioned, neither party has a right to assign all or any part of its rights and/or obligations under the agreement to any third person without a prior written consent of the other party. What is the common form and length of eviction? Generally, the landlord seeking eviction of the tenant has to apply to the court. If the tenant fails or refuses to vacate premises after the adoption of the final decision in favour of the landlord, the latter will need to apply to a bailiff for the enforcement of the court decision. The length for eviction proceeding depends on a number of circumstances (availability of written evidence, ten-
ant’s objections, etc.). In the best case scenario the first instance court’s decision (which may still be appealed) could be expected approximately in 2-3 months after the application to the court. Although there are no extensive case law as to the landlord’s rights to exercise self-defence, commercial leases usually contain the landlords’ rights to cut off the supply of electricity and other public utilities, lock the doors, inventory and remove tenants’ property and invoke other similar measures against the tenant refusing to vacate the leased premises. What are the restrictions on the transfer of title on real estate subject to lease? The landlord is free to sell or otherwise transfer or encumber the leased property, unless otherwise set out in the lease agreement. The landlord must, nevertheless, disclose to the tenants the intended sale or other transfer of the leased property. How does the transfer of real estate affect the tenant’s rights and obligations? Tenants have a statutory right to unilaterally terminate any lease in case of change of the owner. Further, upon change of the owner of real estate, its lease agreement will remain valid provided it has been registered with the Real Estate Register.
Construction Describe the common stages of construction (development) process Territorial planning Usually new developments are enabled through the preparation of a detailed plan establishing specific development regimes (requirements) of a land plot. However, starting from 1 January 2014 the preparation of detailed plans for the construction of new buildings is not required if such development is intended to be carried out in:
• urbanised
areas or areas being urbanised where no detailed plans are in place; or • areas, which are not (being) urbanised if the planned constructions are in compliance with the applicable general plan. Environmental impact assessment It is required to be carried out if the planned development falls within the list of activities established by the Law on Environmental Impact Assessment (the list of such activities is transposed from the Directive 2011/92/EU). Design of the building It is prepared in accordance with inter alia territorial planning documents, connection conditions obtained from owners and operators of engineering and communication networks and special architectural requirements issued by local municipalities. Additional special requirements are applied to designing of buildings falling within
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Only registered real estate may be sold or otherwise disposed of.
the protected areas (parks, nature reserves, area of cultural heritage, etc.). For certain buildings an expertise of the technical design should be carried out. Construction permit It is issued within 10 to 45 business days of the submission of all required documents depending on the extent of construction works to be carried out. The construction permit is valid for unlimited period of time. In the majority of cases the construction permit is issued by the municipal authorities. Construction works In the process of construction works, design, technical and State supervisions are carried out. Completion of construction works Completion of construction works must be documented either by the completion deed (in case major construction works have been carried out) to be issued by the State commission upon inspection of the works performed, or by the employer’s declaration in the approved form which in certain cases has to be certified by a competent State authority. Describe the main requirements for construction licencing As a general rule, any legal entity registered in the Republic of Lithuanian, also foreign legal entity having a licence (right) to carry out the construction works in its home country as well as a construction engineer is entitled
to engage in construction business in Lithuania. In all cases a legal person willing to carry out the construction works must employ a qualified construction manager. Special licencing requirements are applied to the legal entities willing to engage in the construction of buildings of exceptional significance, the characteristics of which are approved by the Ministry of Environment (e.g. all residential and non-residential buildings of 30 metres and higher, etc.). To be eligible to act as the contractor of exceptional significance building an entity must obtain:
• a qualification certificate confirming inter alia compliance with respective requirements, also listing the type of construction works (general, mechanical, electro-technical, etc.) permitted to be carried out, etc.; or • a certificate of recognition of the foreign entity’s right to engage in similar type of the construction works in its home country (applicable only to the contractors established in a Member State of the European Union or the EEA Agreement or the Swiss Confederation). Similar qualification requirements are applied in respect of designers and entities willing to engage in designing business in Lithuania. The procedures of certification and recognition of the right to construct
and/or design are pursued by the State enterprise Certification Centre of Building Products. What are the statutory guarantee terms for construction works? The following statutory guarantee terms are applied for the defects of the designing, construction and technical supervision works:
• 5
years for structural part of construction works; • 10 years for defects of hidden elements; • 20 years for intentionally hidden defects. Registration Does all real estate require to be registered? Except for certain simple and temporary structures, all other kinds of real estate have to be registered with the Real Estate Register. Only legally registered real estate may be sold or otherwise disposed of. What rights (if any) to real estate are subject to registration? What are the consequences of failure to register? All in rem rights and personal rights to real estate, also encumbrances of and various legal facts related to real estate or restriction of rights thereto (such as seizures, lawsuits, decision of authorities affecting real estate, etc.),
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Lithuania has a very modern, efficient and reliable real estate registration system. may and, in the cases stipulated by the laws, must be registered with the Real Estate Register. In most cases validity of rights and obligations to as well as encumbrances of real estate is not dependant on their registration, and they become effective from the moment agreed by the parties. The exception is applied to some specific rights in rem, in particular, servitudes and usufructs, which create the rights and obligations to their holders and property owners only upon their registration, unless such rights are determined by the laws. However, both personal rights (e.g. lease, sublease, gratuitous lease, etc.) and in rem rights to the real estate, as a general rule, may be invoked against third person only if they have been registered with the Real Estate Register. A tenant cannot rely on the lease against new owner of a building, if its lease has not been registered with the Real Estate Register at the moment of change of the owner. What is the procedure for registration of the ownership to real estate? Two alternative ways for the registration of the ownership to the acquired real estate are available:
• request the notary who has certified the relevant acquisition agreement (the notary will transmit necessary data to the Real Estate Register electronically); or
• apply to any branch of the State Enterprise Centre of Registers which administers the Real Estate Register. What time and costs are involved in the registration of real estate (rights thereto)? The major costs relate to the registration of the title to real estate. Such costs mainly depend on the type of real estate (land or building/premises), its average market value established by a competent authority by way of massive valuation and the acquirer of the real estate (natural or legal person). In any case the costs for the title registration cannot exceed the established cap-fees – LTL 5,000 (approx. EUR 1,448) for legal persons and LTL 1,000 (approx. EUR 290) for individuals. Substantially lower fees are involved in the registration of other rights, encumbrances and legal facts pertaining to real estate. The standard term for the title registration is 10 business days, while any other registration procedures have to be completed within 5 business days. Accelerated registration within 1, 2 or 3 business days is available upon payment of 30, 50 or 100% mark-up on the standard fee, respectively. How reliable is the registration system? By virtue of law, data recorded in the
public register is deemed accurate and true (prima facie evidence) unless rebutted. The data of the Real Estate Register provides comprehensive information on real estate owner, leases, mortgages, seizures and other encumbrances registered in respect of real estate, also on-going lawsuits, decisions of authorities affecting the real estate (e.g. decisions regarding expropriation procedures), etc. Thus, an investor is able to receive an up-to-date data on any real estate at any time. Is the register publicly accessible? Data contained in the Real Estate Register, as a general rule, is considered to be public insofar disclosure thereof is not explicitly restricted (e.g. classified information) and complies with the personal data protection requirements. Normally any person, upon paying the set fee, may order an official record on any real estate registered with the Real Estate Register based on the address of real estate, its identification number, or name or identification number of the legal person. Access to the data of the Real Estate Register based on the name, surname and/or personal number of a natural person is available only to certain qualified authorities, organisations and officers (e.g. state authorities, notaries public, bailiffs, credit institutions, insurance companies, attorneys-at-law).
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Lithuanian thin capitalization rules apply in respect to the borrowings from or guaranteed by the related parties. The debt to equity ratio is 4:1. Taxation
shares to their issuer.
in a tax haven country.
Corporate Income Tax
Lithuanian entities are taxed on their income sourced inside and outside Lithuania except for income sourced through permanent establishment in countries which are members of the EU or which have effective Double Taxation Treaty (DTT) with Lithuania and where such income were subject to tax.
Capital gains of a foreign entity from the sale of real estate located in Lithuania received otherwise than through its Lithuanian permanent establishment, also income from the real estate lease received from the source in Lithuania as a general rule are subject to a withholding tax at a rate of 15%. The withholding tax is imposed on gross income received from the sale of real estate. After the tax is paid, foreign taxed entity is entitled to apply to Lithuanian tax authorities for the re-calculation of the tax on a net basis (i.e. on the difference between acquisition and sale values (prices) of real estate) and refund of the overpaid amount.
Interest Interest paid by a Lithuanian entity to a foreign entity is not subject to the withholding tax provided such foreign entity is registered either in a Member State of the EEA or a state that has an effective DTT with Lithuania. In other cases interest paid to non-residents is subject to 10% withholding tax.
Capital gains Capital gains of a Lithuanian entity or a foreign entity acting via its permanent establishment on transfer of shares are exempt from tax if:
Capital gains generated by a foreign entity in Lithuania from the sale of shares otherwise than through its permanent establishment are not subject to taxation in Lithuania.
• the transferred shares are of an en-
Dividends Dividends paid by a Lithuanian entity to either a Lithuanian or foreign entity are subject to the withholding tax at a rate of 15%, unless the participation exemption can be applied. Dividends paid to a legal entity are tax exempt if a legal entity holds continuously, at least for 12 months, including the date of distribution of dividends, shares carrying more than 10% of the total number of votes in the Lithuanian legal entity (the payer of dividends). The participation exemption cannot be applied in case the recipient of dividends is established or otherwise organized
Tax rate and basis The standard rate of corporate income tax in Lithuania is 15%. A reduced rate of 5% is applied to small entities complying with the established criteria.
tity, which (i) is registered or otherwise organized in an EEA Member State or a state, which has an effective DTT with Lithuania, and (ii) is a payer of a corporate income tax or an identical tax; and • the transferor holds more than 25% of the total number of shares of that entity for at least 2 consecutive years (whereas in case of reorganisation – for not less than three years). The aforementioned relief does not apply in respect of transfer of the
Thin capitalization rules Lithuanian thin capitalization rules apply in respect to the borrowings from the related parties as well as the borrowings guaranteed by the related parties. The debt to equity ratio is 4:1. These provisions do not apply if a Lithuanian company can prove that the same loan under the same conditions would have been granted by a non-related entity. Tax losses carried forward Losses, except for the losses incurred as a result of disposals of securities and/or derivative financial instruments, may be carried forward for an unlimited period of time, however the deduction of such losses from the profits of the tax years commencing after 31 December 2013 shall be limited to 70 % of a current year tax profit. Carrying of losses except for the losses incurred as a result of disposals of securities and/or derivative financial instruments shall be terminated if the entity ceases its activities giving rise to the losses for reasons that are not beyond the entity’s control.
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Lithuanian entities are allowed to transfer their tax loss accrued for a tax period to another group companies. Losses incurred as a result of disposal of securities and/or derivative financial instruments (except for losses incurred by financial institutions) may be carried forward not longer than for 5 consecutive tax periods, starting from the tax period following the tax period during which the losses were incurred. Losses incurred by financial institutions as a result of disposals of securities and/or derivative financial instruments, may be carried forward for an unlimited period of time, however the deduction of such losses from the profits of the tax years commencing after 31 December 2013 shall be limited to 70 % of a current year tax profit. Intra-group consolidations Lithuanian entities are allowed to transfer their tax loss accrued for a tax period to another group company which would reduce its taxable income for the same tax period by the amount of the loss transferred to it.
Individual Taxes
plied in case of sale of real estate used for residency purpose.
Taxation of employment related income Employment-related income received by a Lithuanian tax resident from a Lithuanian employer is subject to the following taxes:
Income received either by a tax resident or non-tax resident of Lithuania from the lease of real estate located in Lithuania is subject to personal income tax at the standard rate of 15%.
Taxes withheld from the gross salary of employee: • personal income tax at a rate of 15%; • health insurance contributions at a rate of 6%; • social security contributions at a rate of 3%;
Sale of shares Capital gains generated by a tax resident of Lithuania from the sale of shares not exceeding LTL 10,000 during a calendar year are exempt from personal income tax. The part of capital gains exceeding LTL 10,000 is subject to 15% personal income tax.
Taxes payable by the employer on the top of the gross salary of employee: • social security contributions at a rate of 30.98% • contributions to the guarantee fund at a rate of 0.2 % (payable only by Lithuanian employers).
Capital gains of a non-tax resident from the sale of shares are not subject to taxation in Lithuania.
A foreign entity is allowed to transfer its tax losses to Lithuanian entity if:
Sale and lease of real estate Capital gains from the sale of real estate are subject to a 15% personal income tax.
a foreign entity is treated as resident for the tax purposes in a Member State of the EU, and a foreign entity is not allowed to carry forwards its losses in accordance with the legislation in the country of residence; and the tax losses of a foreign entity were calculated (recalculated) under the provisions of the Lithuanian Law on Corporate Income Tax.
Full exemption from personal income tax is applied on income of either tax resident or non-tax resident of Lithuania when real estate is sold (i) at least 3 years after its acquisition if real estate was acquired prior to 1 January 2011 and it was not related to the seller’s individual activities or (ii) at least 5 year after its acquisition if real estate was acquired after 1 January 2011. Some further tax exemptions are ap-
Taxation of self-employed individuals Income generated by self-employed individual from his/her individual business activity (after deduction of allowable expenses) is subject to personal income tax at a rate of 5 % or 15% depending on the nature of the activities. Self-employed individual is entitled to apply one of the following methods for calculation of taxable base:
• to
decrease amount of income received by 30% (without providing any evidence of the expenses incurred and deducted); • to deduct all allowable expenses from income received, provided that self-employed individual possesses
Lithuania
Baltic Property Market Report • Baltic States • 2014
26
VAT is applied to the sale of new buildings, land plots with new buildings or designated for construction. documents proving expenses deducted (certain limits apply for some type of expenses). Profit of self-employed individuals is subject to the health and social insurance tax at a rate of 37.5%. The taxable base (profit) cannot exceed LTL 71,424 (approx. EUR 20,700) per year irrespective of the actual profit generated by a taxable person. Sale and lease of real estate and shares is not considered to be individual activity of self-employed individual under the Lithuanian law. Value Added Tax (VAT) A standard VAT rate of 21% is applied only to the sale of (i) new buildings (i.e. which are under construction or had been built or materially renovated within the last 24 months prior to their sale), (ii) the land plots (parts thereof) together with new buildings and (iii) the land plots developed for the construction of new buildings (regardless of whether or not the actual construction works are carried out on such land plot). Save for the abovementioned, the sale of any other real estate is exempt from VAT. Lease of real estate is VAT exempt except for the lease of (i) residential premises for a term not exceeding 2 months, and (ii) premises, parking sites/lots, garages for parking or keeping of any means of transport or other property with a similar function.
Notably, a VAT taxable person has the right of option for calculation of VAT on the sale or lease of real estate that is exempt from VAT provided however that such real estate is sold or leased to a VAT payer. Once chosen, the latter option should be applied for at least 2 years.
ter alia residential and leisure purposes, owned by individuals, provided that the total value of the property falling under the same type of real estate tax exemption does not exceed LTL 1 million (approx. EUR 290,000).
Individuals engaged in economic activities are obliged to register as VAT payers in Lithuania if:
Land tax is imposed on the land owned by individuals and legal entities in Lithuania, except forest land.
• the
The annual tax rate ranges from 0.01 to 4% of the land taxable value. The particular tax rate to be applied during the next taxable period (calendar year) is set by local municipalities before 1 June of the current year.
total turnover from his/ her economic activities exceeds LTL 155,000 (approx. EUR 44,900) per 12 calendar months; or • the value of the goods acquired from the persons established in an EU Member State exceeds LTL 35,000 (approx. EUR 10,000) per 12 calendar months.
Land Tax
State-Owned Land Lease Tax
Real Estate Tax
State-owned land lease tax is charged for the State-owned land leased without holding an auction.
Real estate tax is imposed on the real estate owned by individuals and legal entities in Lithuania except (i) land, (ii) real estate which is not in use as a result of unfinished construction works and (iii) real estate created or used for private and public partnership.
The annual tax rate varies from 0.1 to 4% of the land taxable value. The particular annual tax rate and its payment terms are being established by local municipalities within the territory of which the taxable land is located.
The annual tax rate is set every year by local municipalities in the range of 0.3%-3% of the taxable value of real estate. Among other cases, full exemption from real estate tax is applied in respect of properties designated for in-
Latvia
Baltic Property Market Report • Baltic States • 2014
27
LATVIA Economic outlook
GDP CONTINUES TO GROW Latvia has shown a strong recovery from the decline of recent years. The economic growth in Latvia continued throughout of 2013, mainly driven by growth in trade and commercial services. From the industry point of view, the fastest annual growth showed operations with the real estate industry; high growth rates had a public service sectors (public administration, medicine and education), construction, trade, as well as accommodation and food services sector. The annual GDP growth is expected to be lower in 2013, comparing to 2012 (5%) and will reach 4.1%. Latvia may show the most significant growth trends in the region during the following two years. Activity will increase in real estate, and recovery in the construction sector will continue, although at a more moderate speed, whereas financial and insurance sector will continue to adapt to the post-crisis circumstances. Gradually there is improving economic situation in the Euro area and the Nordic countries, which are significant markets for Latvian companies. In 2014, shall take effect on the number of changes in tax laws that will increase household income. The forecasted GDP growth for 2014 is 4.5%. At the end of 2013 Standard & Poor’s raised its credit rating for Latvian outlook from stable to positive while maintaining the current rating of BBB+ level. PRIVATE CONSUMPTION In 2013 the private consumption con-
tinued to increase and stimulated GDP growth by nearly 5.2%. The growth of the private consumption was mostly influenced by the increase of average salary rate and reduction of previous savings. During the 2013 consumers continued to buy more long-term use goods. The inflation factor is very important for the forecast of private consumption for the year of 2014. The domestic supply factors, e.g. higher excise tax on tobacco, delayed rising of electricity tariffs for households, etc., will also affect inflation in 2014. Private consumption is expected to maintain stable at 4.1% annual growth during 2014. DECLINE OF UNEMPLOYMENT In 2013 the expansion of economic activity contributed to the recovery in the labor market – employment and wages increased, however the prices have been rising very slow. Unemployment tended to decline from 15% in 2012 down to estimated 11.9% in 2013. However, unemployment is expected to remain a double-digit number also in 2014. Average net monthly salary has improved slightly in 2013 comparing to 2012 and has grown in private sector by approx. 3.8%. RETAIL TRADE In 2013 retail trade, except of automotive fuel, continued to grow by estimated 6%. The fastest growth by 25-35% was in retail sale of furniture, lightning equipment and other household. Due to economic sentiments and rising infla-
tion, the increase in private consumption is expected to slow down its pace in the following years, however retail trade growth is still ahead of the growth in the earnings and the amount of the consumers’ savings is relatively low. FDI The rebound of investments in 2013 continued, although the amount of total investment did decline due to overall global financial instabilities. Sweden remained the main source of foreign direct investment in Latvia, providing total investment cumulative flow of 2.5 billion EUR (22% of total FDI). The significant growth of foreign direct investment during 2013 was observed in education sector as well as mining and quarrying. The most active investors in 2013 were Hungary, Germany, Spain and offshore financial centers. EURO ADOPTION Latvia has met the Maastricht criteria in spring 2013, and joined the Euro area in January 2014. The adoption of Euro usually results in so called “Euro shock” with a relatively high inflation and economic growth caused by prices being rounded up; high expectations for increasing private consumption and growth of salaries. Latvia joining the Euro area in 2014 has several advantages, however the most important to real estate market is that there will be no currency exchange risk, and thus Latvia will become more attractive for international investors.
Latvia
Baltic Property Market Report • Baltic States • 2014
28
Latvia has met the Maastricht criteria in spring 2013 and has joined the Euro area in January 2014
Inflation and Private Consumption | Latvia
Economic Indicators | Latvia Percent 30
Percent 20
20
10
10
0
0
-10
-10
-20
-20
2007
2008
2009
2010
GDP (% growth, fixed prices)
2011
2012
2013E
2014E
-30
2015E
2007
2008
2009
2010
2011
Inflation (yearly average %)
Employment (yearly change %)
2012
2013E
2014E
2015E
Private consumption (% growth)
Unemployment (% of labour force)
Source: Statistics Latvia, European Commission, Newsec
Source: Statistics Latvia, Newsec
Foreign Direct Investments | Latvia
Retail Trade | Latvia Yearly change, percent
mEUR
50 40
25 8,000
20 10
20 15
6,000
0
10
4,000
-10
5
-20
2,000
-30 2007
2008
2009
Trade, excl. motor vehicles
2010
2011
2012
0
2013E
0 2007
2008
FDI, million EUR
Food and beverages Clothing and footwear
2009
2010
2011
2012
2013E
-5
Growth, %
Source: Bank of Latvia, Newsec
Source: Statistics Latvia, Newsec Exports and Imports | Latvia
Wages and Salaries | Latvia
mEUR 14,000
Percent 40
Percent 40
Gross avg EUR/month 1,000
30
12,000
20
10,000
10
8,000
0
6,000
-10 -20
4,000
-30
2,000 0
30
10,000
30
-40
Percent 35
12,000
30
800
20 600 10 400
0
200
-10
-40 2007
Exports
2008
Imports
2009
2010
2011
Exports growth, % yoy
Source: Statistics Latvia, Newsec
2012
2013E
Imports growth, % yoy
-50
0
-20 2007
2008
2009
Public sector Public sector growth %, yoy
Source: Statistics Latvia, Newsec
2010
2011
2012
Private sector Private sector growth %, yoy
2013E
Latvia
Baltic Property Market Report • Baltic States • 2014
29
Retail market
A notable and relatively persistent improvement in consumer purchasing power led to an increased activity in retail segment
The recovery of Latvian retail trade continued accelerating in 2013, but still remained below the pre-crisis level. A notable and relatively persistent improvement in consumer purchasing power led to an increased activity in retail. Due to this, the performance of shopping centres located in Riga has improved significantly. Retailing is expected to record a low, but stable and constant value growth over the next twelve months. Similarly to earlier periods, the key driving factor for grocery retailers in the future will be the overall economic situation in Latvia. Grocery retailers returned to a relatively strong growth in 2013, and a further expansion is expected in the upcoming years, though at a slower pace. A higher disposable income is likely to enable consumers to spend more on discretionary items, such as fashion, beauty and healthy lifestyle items. Non-grocery retailers are predicted to record a relatively stronger growth compared to the grocery format.
SUPPLY OF SHOPPING CENTRES
IMPROVING PERFORMANCE
Total GLA of shopping centres in Riga exceeded 422,000 sq. m in the end of 2013 (16 shopping centre projects included). Only 5 projects consist of more than 30,000 sq. m (51% of GLA), while others are considered medium or small shopping centres. The leading grocery chains, in particular Rimi Latvia SIA and Maxima Latvija SIA, were increasing the number of hypermarkets and supermarkets not only in Riga, but also in the biggest cities of Latvia. Similar to 2012, only hypermarkets/supermarkets were delivered to the market in 2013: supermarket “Draudziba” (“Firendship”) were delivered into the market with the anchor tenant RIMI and two Maxima hypermarkets: Maxima next to the SC Domina at Dzelzavas street 6a and Maxima Bikernieku are expected to be completed.
In 2013, further occupancy and performance improvement of shopping centres continued in Riga. Vacancy rate in the best-performing centres, such as Galactico centres run by Linstow Center Management (Alfa, Galerija Centrs, Origo, Mols), Domina Shopping and Spice rarely exceeded 2-3%, while secondary centres where consumers were attracted mainly by supermarket and catering services, demonstrated double-digit vacancy rates. Based on the results from the first three quarters, the most successful shopping centres have maintained a growth of turnover of approx. 8-9% during 2013. The highest growth in turnover is observed in such sectors as apparel, jewellery and watches, footwear and electronics. The average purchase in the best-performing centres has increased in average by 4% in 2013 compared to 2012. In the first half of 2014 due to economic
Rental Rates and Vacancies | Riga 2007
2008
2009
2010
2011
2012
2013E
Trend Ω≈¬
up to 100/150 sq. m
25–60
20–50
15–45
20–50
20–50
20–50
25-60
Ω
100/150-350/500 sq. m
15–30
12–30
10–22
10–25
10–28
10–30
15-35
Ω
> 350/500 sq. m
9–17
8–15
6–13
7–15
7–15
8–16
10-20
Ω
Anchor tenants
6–12
5–10
3–8
3–8
3–11
5–11
6-11
Ω
Well performing SC
up to 2%
up to 3%
up to 5%
up to 5%
up to 3%
up to 2%
up to 1%
¬
Other
10–20%
12–30%
15–35%
15–25%
15–25%
15–25%
5-10%
≈
Rental rates, EUR/sq. m/month
Vacancy rates, %
Source: Newsec
Latvia
Baltic Property Market Report • Baltic States • 2014
30
Further occupancy and performance improvement of shopping centres continued in 2013 sentiments, a slow-down is expected in retail trade and tenants’ performance. As a result, the weakest shopping centres might suffer, and the difference between the best shopping centres and other shopping centres will be more distinctive. RENTAL RATES Rental rates in the best shopping centres have increased in average for 25% in 2013. 2014 is expected to remain stable or even lower costs due to the higher estimated vacancy in shopping centres. NEW FASHION BRANDS In 2013 overall market take-up was mainly based on existing retailers’ expansion. Anchor tenants and strong players with recognized store brands continued seeking the best locations in 2013, which resulted in strengthen-
ing the tenant mix in the core centres. Opening of retail area of H&M stores in shopping centres required relocation and even closing of several stores within the core shopping centres, which in the case of Galerija Centre consequently raised the interest of retailers in opening street retail stores in the prime proximity to Galerija Centre. Following the overall economic recovery and retail trade improvement, the market faced new brand entrances in 2012, such as Next, Burberry, Massimo Dutti, H&M. In 2013, the international fashion brands continue to demonstrate their interest in Riga market, so H&M continued the expansion with the opening of the third store in SC Mols. There are announcements of opening such brands as Debenhams in 2014, as well as there are some other potential new brands interested in entering the market in 2014. Continuously improving consumption and joining Euro area may attract new international retailers
Supply of Shopping Centres | Riga
EXPANSION PROJECTS The main retail market strength and threat to the new developments is the concentration of 5 shopping centres
Prime Retail | Riga
Ths. sq. m 500
Sq. m 700 600
400
500 300
EUR/sq. m/month
Percent
30
10
25
8
20
6
400 300
200
200 100 0
in medium term of 2014-2016. At the same time, some retailers are closing their operations - in 2014 Varner Baltija will exit Latvia’s retail market and will close all eight Dressman, Cubus and Bik Bok shops located in the bestperforming Riga Shopping centres. Rimi and Maxima are two clear leaders in grocery retailing in Latvia, both accounting for market shares of approximately 25% in grocery retailing. Among other noticeable players in 2013 are Palink, Prisma, Skai Baltija, Baltstor (the network of Mego and Vesko stores), the chain of Beta stores and Elvi. Grocery retailers, Maxima Latvija, Rimi Latvia, also continued expanding chains of their supermarkets and convenience stores during 2013.
2004
2005
2006
Existing stock
Source: Newsec
2007
2008
New supply
2009
2010
2011
Sq. m/1,000 inh.
2012
2013E
2014E
15 4 10
100
5
0
0
2 0 2007
2008
Rental rates
Source: Newsec
2009
Vacancy
2010
2011
2012
2013E
2014E
Baltic Property Market Report • Baltic States • 2014
31
In 2013 the rent rate in the best locations has increased in average by 10-15% compared to the year of 2012 (~33% of total GLA) operation under Linstow Center Management. Linstow Center Management has announced the expansion of SC Alfa and SC Origo. Planned expansion projects of Origo and Alfa shopping centres are based on the existing retailer’s expansion and tenant mix improvements. Expansion is planned to start in 2014 and to be delivered by the end of 2015. These projects will strengthen the position of mentioned shopping centres and might abandon other big scale developers’ plans due to relative market oversupply. Akropolis has announced the plans to start the development of a new shopping centre, thus the total stock will increase in 2015/2016. HIGH STREET RETAIL In 2013 has observed increased activity in street retail market in the active center of Riga, based primarily on the general improvement of economic situation, consumption and retail sales growth as well as change of owners for good retail properties in such areas as high retail streets in the Old Town, Quiet centre and Active centre of Riga city. In the 2H of 2012 and during 2013, the demand for street retail premises in the downtown Riga increased significantly with several big international brands looking for premises in the city centre. It is worth noting that for tenants looking for the premises in excess of 800 sq. m there is no available space in the centre. The tenants have to monitor the existing leases for expiry in order to compete for the space to open a store
in active pedestrian flow locations. In 2013 the rent rate in the best locations has increased in average by 1015% compared to the year of 2012. It is worth noting that in 2013 rents rose faster than the turnovers of retailers, thus in spite of a low vacancy in this segment, further rent adjustment is limited due to retailers’ turnover and the ability to pay rent.
Latvia
Baltic Property Market Report • Baltic States • 2014
32
Office market
During 2013, office market was driven mainly by relocation of existing players and expansion of companies within current premises
A slight slowdown of activity in Riga office market was observed in 2013 due to a relative shortage of vacant good-quality office space and growing rent rate expectations by landlords. The office market in Riga was driven mainly by the relocation of the existing players and the expansion of companies within the current premises. Unfortunately, Riga still does not have a clearly established central business district. Skanstes Street region, which is adjacent to the posh Quiet Centre, with its planned critical mass developments concentrated under management of a few solid developers, is expected to become a future CBD of Riga. However, the development of the whole district is still a question of decades, especially taking into account the currently inactive developers and the banks’ attitude towards the commencement of new construction.
office premises in Riga amounted to 539,000 sq. m. The absolute figure of business space is miserable for the biggest metropolis within the Baltic States with a major share of the country’s GDP concentration. The total stock of modern offices per capita in Riga is pretty limited comparing to other European capital cities. No new speculative office projects were constructed in 2013. The Latvia’s office market future prospects are not encouraging. Office stock next year will increase by the B class office building for the State Revenue Service needs, as well as the long-awaited ZTowers project, despite the planned changes to the concept, will also provide the office space into the market in 2015. Theoretically, office market will be able to observe a sharp increase in the vacancy rate in 2015/2016 if during this or next year the projects as “New Hanza City” Stage 1 (16,500 sq. m) and Merks’office project Skanstes Biznesa centrs will be started to construct.
NO NEW SUPPLY In the end of 2013, stock of modern
Ths. sq. m 700 600 500
Percent 30
50
100
25
40
80
20
30
60
15
20
40
10
10
20
5
400 300 200 100 2005
Stock
Source: Newsec
2006
Total office absorption in A and B class segment was around 12,000 sq. m during 2013 it is about 60% lower than it was observed during 2012. During the 2013, the office market in Riga was driven mainly by the relocation of the existing players and the expansion of companies within the current premises. There were no noticeable newcomers to the market. The further development of the office stock in Riga is strongly related to the financial performance of office occupiers, their expansion activities and the entrance of new companies. The key future trends on the market include an increasing
Ths. sq. m 120
Percent 60
2004
RELOCATION-RELATED DEMAND
Office Market Indicators | Riga
Office Stock | Riga
0
A class office space accounts for approx. 20% of total Riga’s modern office supply. The majority of A class offices are build-to-suit and all of these are located in Riga city centre. Banks, e.g. Swedbank, Citadele, Rietumu Banka, DNB, are the key occupiers of A class office buildings.
2007
2008
Stock growth, % yoy
2009
2010
2011
2012
2013E
2014E
0
0
2004
2005
Absorption
2006
2007
2008
New supply
Source: Statistics Latvia
2009
2010
2011
2012
Stock growth, % yoy
2013E
2014E
0
Latvia
Baltic Property Market Report • Baltic States • 2014
33
It is forecasted that supply of B class offices will be provided to the market in mid-2014 demand for green technology and energy efficient solutions. DESCENDING VACANCY Overall vacancy level in A and B class offices at the end of 2013 was 7.5%, which has decreased by 2.3 percentage points since the end of 2012. During 2013, vacancy of A class offices reduced to 2.5%, while vacancy level in B class office premises was decreased down to 8.5%. The vacant premises are defragmented between different buildings therefore companies searching for more than 1,000 sq. m experience difficulties of finding the right premises for their business operations and switch to considering quality B class offices within a central business district. A class office vacancy is expected to remain low until new projects are delivered to the market. It is forecasted that a supply of B class office areas will be provided to the market in mid-2014 when State Rev-
concluded since the beginning of 2013 has not significantly changed compared to 2012.
enue Service will move to Ezerparks in Riga and will vacate ca 20-30 thous. sq. m (including 7,000 sq. m at SWH Office complex at Skanstes, 7,000 sq. m at Jeruzalemes str. and 4,000 sq. m at 11.Novembra krastmala).
FUTURE OUTLOOK Taking into account that no new speculative office building construction is currently undergoing within A and B class segments in the city centre of Riga, the situation with the office supply in the city centre will remain the same for the next 2 or 3 years. Thus, the only opportunity for the tenants in need for new offices in the city centre will be monitoring the market for possible lease expiries within the existing stock of offices. Therefore it is time for the tenants who plan their move in a 6 to 12 month period to actively consider the remaining opportunities in the city centre in Riga while it is still possible to negotiate more or less adequate commercial terms.
RENTAL RATES Modern office rent rates remained stable throughout the year although there has been an increase of up to 10% of the rent rate bottom limits. At the end of 2013, the average market rent rates for prime office premises in Riga’s centre were in the range of 1215 EUR/sq. m/month, while rent rates in B class offices varied between 8-11 EUR/sq. m/month, depending on the location. The average asking price in Riga is the lowest among three Baltic countries. Currently, Riga also has the broadest offering of vacant B class office premises. Despite the fact that owners’ expectations about rent levels have risen, the average rent level for the transactions
Office Rents | Riga
Office Vacancy | Riga
EUR/sq. m/month 25
Percent 30 25
20 20 15
15 10
10 5 0
5 2004
2005
A class, %
Source: Newsec
2006
2007
2008
B class, %
2009
2010
2011
Total vacancy, %
2012
2013E
2014E
2007
A class
Source: Newsec
2008
2009
A class Max
2010
2011
B class
2012
B class Max
2013E
2014E
Latvia
Baltic Property Market Report • Baltic States • 2014
34
Industrial market
Lack of new supply and improving overall economic situation have led to rather significant vacancy rate decrease
The most significantly hit by the crisis, Latvian industrial market started to revive from 2011 due to the import/export growth and the increase in industrial production and transit services. 2013 was characterized by a growing demand for warehouse and production premises, whilst the shortage of vacant quality premises limited the number of take-up transactions. The demand for logistic premises in and around Riga has increased significantly following the economic recovery.
velopers are ready to develop only builtto-suit logistic properties in the market; therefore the growth of the speculative space supply is not considered likely in the next couple of years. Buildings currently in the planning stage most probably will not enter the market in 2014 unless they find an anchor to sign a prelease. The supply of a qualitative stock exceeding 1,000 sq. m has become extremely limited. The shortage of big-size, vacant premises will lead to an upward pressure on rent rates and the commencement of new built-to-suit projects construction in the near future. Around 40% of the total stock is located within the Riga city borders. The other 60% are located around the Riga Ring Road (near Kekava, Olaine, Marupe, Salaspils and Jelgava).
LIMITED SUPPLY The supply of warehouse and logistics space in Riga and its region consists of almost 740,000 sq. m (out of which 25% are “built-to-suit” projects designed and built for specific tenant or user requirements and needs) at the end of 2013. Total stock has not increased during 2013. The crisis has clearly revealed good and bad projects, as well as has attributed a crucial role to a professional asset management. De-
RENTAL RATES In 2013 the asked rents of modern A class industrial space reached 3.5-4.5 EUR/sq. m/month. Rates in prime loca-
Ths. sq. m 1,000
Percent 60 50
800
40
600
30 400 20 200
10
2007
Stock
Source: Newsec
2008
2009
ZERO VACANCY The vacancy rate of industrial premises in the end of 2013 reached the level of 5%. The vacancy rate of most modern A and B class industrial centres has reached zero. The vacancy rate and rent rates are very dependent on the location, facilities management and technical quality of the particular industrial park. Now there is a shortage of industrial premises for medium and large areas. That is the reason why the companies are starting to look for land
W&L Market | Latvia
W&L Market | Latvia
0
tions have increased by 5-10% in 2013 due to an increasing activity of relocation or expansion by the major players. B class warehouse space rents are lower. However, they increased by as much as 25% in comparison with 2011 and now account for 2.5-3.5 EUR/sq. m/month. Rental rates in Latvia are the lowest if compared among the Baltic countries. The rental rates are forecasted to remain stable with a slight increase next year.
2010
Stock growth, % yoy
2011
2012
2013E
2014E
0
Ths. sq. m 180
Percent 35
160
30
140 25
120 100
20
80
15
60
10
40
5
20 0
2007
2008
Absorption
Source: Newsec
2009
New supply
2010
2011
Vacancy, %
2012
2013E
2014E
0
Latvia
Baltic Property Market Report • Baltic States • 2014
35
Several developers has started the construction of new industrial premises and this will affect the industrial market in 2014 plots in good locations for new „built-tosuit” industrial centres. INCREASING DEMAND 2012 was characterised by an increasing activity of small and medium tenants’ rotation, as well as a few large lease transactions. Some production companies switched from 3PL operators to own logistics operations (due to the quality of the outsourced services). The H1 of 2013 was characterised by a growing demand for warehouse and production premises, whilst the shortage of vacant quality premises limited the number of take-up transactions. The greatest demand was observed for mid-sized warehouses (500-1,000 sq. m) with a good location and competitive, modern technical equipment. There is a high demand for 1,000-5,000 sq. m light production facilities. In the H2 of 2013 was increasing demand of logistic companies which were looking for logistic premises with “cross-dock” function for lease. The most of absorption of the
industrial premises held in during 2HY of 2012 and 1Q of 2013 reaching about 70,000 sq. m. The major lease transactions were concluded for the industrial premises in the centres, outside the city of Riga. Russian companies are continuing to play very important role in demand of logistic premises in Latvia, together with local companies leasing the premises for their needs. Due to the slowdown of the Russian economy we forecast the growing interest from Russian logistic companies to optimize their costs. FUTURE DEVELOPMENTS Expanding Baltic scale retailers and distributors faced difficulties in finding the premises for relocation due to the shortage of modern industrial premises suited for their needs. The potential development pipeline for 2014/2015 might include three projects. Balt Cargo Solutions, which plans to put into operation 24,000 sq. m premises for own and speculative use. VGP Group has
Warehouse Rents | Riga
6 5 4 3 2
2007
2008
Rental rate Avg
Source: Newsec
Logistic company Sanitex has development plans across the all three Baltic countries. Sanitex has plans to develop 40,000 sq. m A class logistics centre in Kekava (the 1st stage development with 24,000 sq. m is currently under construction and will be finished in 2014) including dry and refrigerated warehouse. Export of goods is usually going through the ports directly to the enduser in Russia, Scandinavia, Germany or other European countries. Projected logistics corridor via Riga to Moscow would strengthen attractiveness of the Riga port territory and increase warehouse and logistics space development in the long run. Synergy of ro-ro ferries and the port would increase logistics activities between Latvia and Nordic countries and trigger industrial space development as well. The area of Riga Freeport started to grow in 2012, and continued in 2013. FULL SPEED RECOVERY
EUR/sq. m/month 7
1
announced their plans to develop VGP park Kekava with 40,000 sq. m in total. The delivery of these projects to market will highly depend on the mutual agreement.
2009
2010
Rental rate Min
2011
2012
2013E
Rental rate Max
2014E
Positive economic indicators and the demand by the Latvian logistics sector could signal to developers that the market could withstand an onslaught of construction and new warehouse premises. Land plots that permit industrial and warehouse development could become objects of interest for end-users.
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Hotel market
In 2013 several three-star hotels requalified as four-star hotels
In 2013 along with the economic recovery and increasing flow of tourists, the hotel market has continued to evolve - it was observed tourist growth, increase in total number of hotels and room rates, as well as the number of persons served in hotels and other accommodation establishments. In 2013, total number of visitors in hotels and other accommodation establishments grew by 12% in Latvia and almost 16% in Riga city, comparing to 2012. Number of foreign visitors showed significant increase in growth rates. The estimated increase in 2013 was 14% comparing with the year 2012. International visitors traditionally account for around 65-70% of total hotel visitors in Latvia. In Riga this proportion is calculated at about 87% and hasn’t changed for the last four years.
INCREASING SUPPLY
DEMAND STRUCTURE AND CHANGES
According to the Association of Hotels and Restaurants of Latvia there were 64 rated hotels in Riga in 2013 (85% of them 4 and 3 star hotels). In 2013 the total hotel stock has increased by two four stars hotels (the Astor Hotel and Wellton Centrum Hotel & Spa) comprising additional 180 rooms in Riga city. Another hotel developments (Mercure Riga Centre hotel 4* and Wellton Valnu Hotel 4*) is currently under construction and will increase total hotel supply by 360 rooms during 2014. The largest international hotel chain operating in Riga is Rezidor Hotel Group, which has 1,259 hotel rooms under management in Riga. In 2013 several three-star hotels requalified as four-star hotels. Number of two-star hotels increased as well. Some owners of guest houses and motels improved the concept till hotel level. The hotels upgrade trend allowed an upward pressure on average room rate.
Hotels | Riga
In 2013, the majority of foreign visitors came from Russia (24%), followed by Germany (11%) and Lithuania (9%). During 2013, the largest increase of tourists was noticed from the Belarus (46% growth), neighbouring Russia (35%) and USA (21%), however, a decrease in the number of tourists from the Nordic countries, such as Denmark (-8%) and Finland (-15%) was observed. OCCUPANCY INCREASE The flow of tourists during 2013 has increased occupancy rates in hotels of Latvia and Riga up to 42% and 52% respectively. Number of international tourists visiting Latvia continues to grow. Average length of trip to Latvia for more than 70% of tourists still does not exceed 1.2 days - that shows activity among business tourists, who are coming to Latvia for short business trip, but not for long stay.
Demand and Occupancy of Hotels | Latvia Ths. visitors
5 Stars 4 Stars 3 Stars 2 Stars 1 Star
Percent
2,000
50
1,600
40
1,200
30
800
20
400
10
0
0 2005
2006
Local visitors
Source: Association of Hotels and Restaurants of Latvia
Source: Newsec
2007
2008
2009
Foreign visitors
2010
2011
Occupancy, %
2012
2013E
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The development of new hotels has started in 2013 and will continue in 2014 ROOM RATES
HOTEL DEVELOPMENT
Hotel revenues continued to increase in 2013 driven by the consumption and GDP growth, the increasing flow of tourists and the hotel occupancy. Latvia was also among the countries that attracted some interest from foreign tourists as a shopping destination. In general, all the professionally managed hotels in the city centre managed to boost their occupancy levels reaching the performance level of 2008. Along with the economic recovery and increasing flow of tourists, average room rates, although varied from season to season, experienced a significant increase in 2013. Hotel room rates are dependent on the season. At weekends and during the events room rates are much higher than during a business week. 3-star hotel prices have remained stable, while the 5-star and 4-star superior rates increased by 20-25% since the beginning of 2013.
In 2012/2013 the local hotel chain Wellton was expanding and at the end of 2013 united five Latvian Hotels - Gertrude, Elefant, Old Riga Palace, Terrace Design Hotel and Centrum Hotel & Spa. Wellton chain plans to open one more hotel during 2014-Wellton Valnu Hotel (170 rooms) and Minstereja Hotel (300 rooms) in 2016. Furthermore, the Semarah hotels group was very active in Latvia this year, bringing under its own operator the Metropole Hotel in the Old Town and three hotels in Jurmala. Currently, these hotels are under reconstruction, and the Metropole Hotel is scheduled to open in the Q1 of 2014. Marriott, Kempinski and Mercure have announced their plans to enter Riga hotel market. The Mercure hotel development is currently under construction and will be opened during the Q2 of 2014. The Grand Hotel Kempinski Riga (236 rooms) is planned to
Demand and Occupancy of Hotels | Riga Ths. visitors
Percent
1,200
70
1,000
60 50
800
40
600
30 400
20
200
10
0
0 2005
2006
2007
Local visitors
Source: Statistics Latvia
2008
2009
Foreign visitors
2010
2011
Occupancy, %
2012
2013E
be opened in the middle of 2014. The development of a technical project for the Marriott Hotel Riga has started and the implementation of this project has been pending for several years. RIGA IN 2014 In 2014, Riga will be the European Capital of Culture, which will increase the number of tourists to Latvia. This will increase the hotel occupancy rates, boost the number of visitors and is expected to have an upward pressure on room rates as well. In 2014, Riga will not only be the European Capital of Culture, but also the World Capital of Choral Music thanks to the 8th World Choir Games – the world’s largest choir competition, which will take place in Riga in the summer of 2014.
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Residential market
Annual number of transactions increased by 16% and comprised of more than 9,400 during 2013
The Latvian residential market has split into two segments: the local population market and non-residents’ market. In the first market segment, there has been no significant increase in the activities observed with the minimum price upward correction, while the non-resident market has demonstrated a sharp increase in prices in a short period of time. At the moment, management companies of bank-owned property, play an important role in the housing market ensuring to their clients favourable credit terms and lower apartment prices.
prised more than 9,400 deals. Around 15% of transactions took place in Riga’s centre. The number of total transactions in non-centre districts of Riga has risen. The annual number of transactions in Riga city and Pieriga region increased by 30% in 2013, compared to 2012.
the end of 2013 reached the average price 1,300 EUR/sq. m (the end price for a user, including taxes). Prices in other segments (old construction apartments) showed a slight increase in average price as well.
INCREASING PRICES
Demand for residential real estate remains high in Riga and Pieriga region. The capital city and region around this city is expected to maintain its leading position. Other regions represent much smaller markets and activity is forecasted to remain at the same level. The overall increase in transactions in newly developed projects was caused by the banks’ subsidiaries selling the apartments packed with parent banks’ special mortgage offers. High demand in residential segment (especially with transactions of apartments) is observed from non-residents due to the continuing interest in obtaining temporary residence permits in Latvia. Transaction number is mainly influenced by overall economic situation during the last years, economic development and by expectations. Highest activity during 2011-2013 was seen in economic apartment sector with average transaction up to 50,000 EUR (in 2013 it was 75% of all transactions with apartments in Riga). It is expected to prolong during 2014-2015.
There was also a slight increase of average prices per square meter for new projects in Riga’s centre – these grew by 6% during the year. However, new residential projects, both central and non-central, still accounted for just 1618% of total number of transactions, so remained very sensitive to the supply. Despite of shortage of good supply in Riga city, the non-residents were seeking for apartments located outside the Riga city centre in other Riga district’s or in Riga planning region for a temporary residence permit or a living residence in Latvia. Due to this fact the average prices for new non-central apartments increased by 10% and in
RIGA AND RIGA REGION IS BOOMING The activity in the housing market in 2013 has grown rapidly. The annual number of transactions in Riga city increased by 32% in 2012, compared to 2011, and comprised more than 8,100 deals. The annual number of transactions in Riga city increased by 16% in 2013, compared to 2012, and com-
Residential Market | Riga Units 20,000
EUR/sq. m
16,000
1,600
12,000
1,200
8,000
800
4,000
400
0
2,000
2005
2006
2007
Number of transactions
Source: Land Book
2008
2009
2010
2011
2012
Average price - new construction Average price - old construction
2013E
0
SENSITIVE DEMAND
NEW SUPPLY At the moment, a lot of new projects are being launched into the market
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High demand in residential segment is observed from non-residents due to the continuing interest in obtaining temporary residence permits in Latvia compared to a few years ago. New projects by Merks, NCC, NCH, Larix Property, Pillar, R.Evolution City, Dekarta Property are expected to be commenced in the forthcoming years. In the city centre, developers are mostly focusing on the most solvent audience – non-residents seeking either for a temporary residence permit or a living residence in Riga. However, rapidly growing supply in Riga’s centre may surpass demand. FORECAST Inspired by the increasing demand from non-residents and the successful sale of the existing stock to this audience, more and more developers are commencing the construction of new residential projects in the city centre. Due to an expected rapid increase of supply in the city centre, the price growth is expected to slow down with ca. 5-6% annual growth forecasted over 2014. It is expected that prices will remain relatively stable over the period. A slight increase in the average price in 2014 could be expected in prestigious locations for high class properties, mainly - due to the continuing interest in obtaining temporary residence permits in Latvia. Prices of old construction will remain stable during 2014. Number of deals is expected to increase by 5-10% during 2014 following a noticeable rebound in 2012 and 2013.
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Legal and tax overview
Foreigners are prohibited to acquire agricultural land directly or through the company.
Corporate Presence
What is the minimum authorised capital in a private company?
What is the most common type of corporate presence? The most common type of corporate presence is limited liability company (a private company) (in Latvian - Sabiedrība ar ierobežotu atbildību or SIA) and a joint stock company (in Latvian - akciju sabiedrība or AS, the same as in Estonian aktsiaselts or AS), whose owners also enjoy limited liability. Joint stock companies have more extensive corporate governance rules compared to a limited liability company. However, a joint stock company may issue different types of shares unlike a private company. The below overview only covers private companies as the most common company type. Describe the management structure of the private company. Are there any participation restrictions applicable to the foreigners? It shall be managed only by the Board of Directors and the shareholders. In addition, the Supervisory Board can be formed. Supervisory board is imposed on the joint stock company. There are no participation restrictions applicable to the foreigners. Any foreign citizen, irrespective of his/her origin, may be freely elected either to the Supervisory Board or the Board of Directors of a private company.
As of 1 January 2014 the minimum authorized share capital of a private company is EUR 2,800 and minimal authorized share capital for a joint stock company is EUR 35,000. Are there any requirements for the number of shareholders in a private company? The minimum number of shareholders is 1 and the maximum number is unlimited. Are there any specific requirements for transfer of the shares in a private company? In case the shares of a shareholder are sold, other shareholders have the right of the first refusal. A shareholder may make a gift of, exchange, or otherwise alienate shares (except sell) only with the consent expressed in the decision of the shareholders, unless it has been otherwise specified in the Articles of Association. If a shareholder alienates shares, the subsequent division of the register of shareholders shall be made. Each division shall be certified by the chairperson of the Board of Directors or an authorised member of the Board of Directors with his or her signature and by the alienor of shares and the acquirer of shares with his or her signature. The signatures of the chairperson of the Board of Directors or an authorised
member of the Board of Directors, the alienor and the acquirer of shares shall be notarised. What are the major fees involved in the incorporation of a private company? The notary fee for notarization of the form of application to the Register of Enterprises is EUR 26 per person. The form of application to the Register of Enterprises shall be signed by all of the incorporators. The notary fee for certifying signatures of the Member of the Board of Directors is EUR 19.02 if signed by a foreign person with no personal identification number in Latvia, and EUR 26.11 if signed by person with an identification number in Latvia. Notary fee for certifying document copies is EUR 2.5 per page. Necessary certifications by the notary public usually take 1 – 2 business days. The costs for opening a start-up account will depend on a Bank. State fee for the registration in the Commercial Register is EUR 143. Fee for publication of announcement in the official gazette Latvijas Vēstnesis is EUR 26. Acquiring Real Estate Are there any legal restrictions on the ownership of real estate (interests in entities which own real es-
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The law allows to acquire agricultural land by persons from EU Member States starting from 1 May 2014. tate) by foreign investors? Restrictions for persons from other EU Member States Until April 30, 2014, citizens of other EU Member States and legal persons registered in other EU Member States are prohibited to acquire ownership of agricultural land and forest land in Latvia. Amendments to the law are submitted to the Saeima (the Parliament) of the Republic of Latvia stipulating extension of the deadline of 30 April 2014 by which citizens of other EU Member States and legal persons registered in the other EU Member States are prohibited to acquire ownership of agricultural land and forest land in Latvia, i.e. until 30 April 2020. It is impossible to predict whether these amendments will be adopted. The restriction does not apply if a citizen or legal person registered in other EU Member State (i) would like to do business in Latvia as a self-employed farmer; and (ii) throughout the time period of three consecutive years has been living in Latvia; and (iii) has already been engaged in agricultural business in Latvia throughout a time period of three consecutive years. Restrictions regarding (non-EU countries)
foreigners
Foreigners from non-EU countries are prohibited to acquire:
• land
within city limits (urban land
title) to: (i) land in state frontier areas; (ii) protected coastal areas of the Baltic Sea and Riga Bay, and other public bodies of water, except for the areas where construction is permitted according to the municipal territorial plan; and (iii) agricultural and forest land falling within city limits and as indicated in the municipal territorial plan.
• rural land title to: (i)land in state frontier areas; (ii) land in nature reserves and zones of other protected territories in nature reserves; (iii) land in protected coastal areas of the Baltic Sea and Riga Bay; (iv) land within the protected zones of public bodies of water, except for the areas where construction is permitted according to the municipal territorial plan; (v) agricultural and forest land as indicated in the municipal territorial plan; and (vi) land within mineral deposits of national importance. Note: Foreign (non-EU countries) persons are not prohibited to acquire shares in a company which owns real estate in Latvia. However, there are certain restrictions on the companies themselves in connection with acquisition of land in Latvia. Land in Latvia can be acquired by a capital company registered in the Republic of Latvia or another EU Member State:
• where more than a half of the share capital is owned by Latvian citizens, citizens of the EU, Latvian state or municipality – by each individually or several of the aforementioned jointly; • where more than a half of the share capital is owned by natural persons or legal entities from those countries with which the Republic of Latvia has entered into international treaties on facilitation or protection of investments; • where more than a half of the share capital is owned by several entities referred to in the above paragraphs (i) and (ii) jointly; • which is a public joint stock company, and its stock is listed on the stock exchange. If any changes in the above mentioned preconditions occur after acquisition of the real estate through a capital company, then in order to maintain the ownership the change must be notified to the city or county council, which grants or denies permission to continue to hold an ownership over the particular property. Are pre-acquisition agreements commonly used in your jurisdiction? What is their legal effect and enforceability? Pre-acquisition agreements are common in Latvia. Often prior to acquiring real estate a purchaser is willing to perform due diligence of the real estate. The pre-agreement serves as a confirmation that the purchaser wish-
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Joint owners have pre-emptive rights to acquire imaginary parts of the real estate, if other joint owner sells his or her part of the real estate. es to buy the property, but is, nevertheless, retaining the possibility to refuse the property if any circumstances not acceptable for the purchaser are discovered. The essence of pre-acquisition agreements is rather that of a conditional agreement aimed at conclusion of the purchase agreement in the future. Pre-acquisition agreement does not entitle to claim the real estate, even if identified and for which the price has been agreed upon in the pre-acquisition agreement, but merely entitles to claim conclusion of the purchase agreement regarding the real estate. The liability of the party for failure to comply with the pre-acquisition agreement may arise not for the failure to deliver the property or for failure to pay the purchase price, but rather for the failure to conclude the purchase agreement, and this liability may be expressed in compensation for losses. It is often the case that the parties in pre-acquisition agreements state the performance of particular activities before the conclusion of the purchase agreement and the contractual penalties, if the other party due to unjustified reasons refuses to conclude the purchase agreement. Describe formal requirements for real estate sale and purchase agreement According to the applicable laws and regulations of the Republic of Latvia,
the ownership title can be transferred only if the real estate is registered in the Land Register (except for some simple structures which are not subject to the mandatory registration). In addition, it is the presumption of law that a person (natural person, legal entity, state or municipality) registered with the Land Register as the owner of the real estate is considered to be the lawful owner having full control of the property. In any transaction involving the transfer of the ownership title, it is of the utmost importance to have the property registered in the name of the buyer as soon as possible in order for the buyer to obtain all rights of the owner with respect to third parties. As a real estate purchase agreement should be filed with the Land Register as part of the items needed to register the changes in the ownership title, this agreement must be expressed in writing. One original copy of the purchase agreement must be filed with the Land Register in order to register the changes. Can a sale and purchase agreement of real estate or shares of an entity owning real estate be made in a foreign language? The law stipulates that in order to register the title to the purchaser documents have to be submitted to the Land Register in the official language (Latvian). In case if the contract is not concluded in Latvian, the contract
along with its translation into the official language, certified by a notary, has to be submitted to the Land Register. In practice bilingual contracts are often made – in Latvian and a foreign language – stipulating that the text in Latvian shall prevail. In such case the contract with a notarized translation into the official language does not have to be submitted to the Land Register. Sale and purchase agreement of the shares of an entity might be made in any language. Does any third person (governmental authority, etc.) have a pre-emptive right to acquire real estate subject to sale? Latvian law recognizes the following pre-emptive rights :
• if
the real estate is located in the territory of the municipality, then the respective municipality enjoys the pre-emptive right (with certain exceptions, such exceptions include selling of the apartment or selling ownership share of the real estate (i.e. without selling the whole real estate)); • co-owners of the real estate enjoy the pre-emptive right; • an owner of a building has the preemptive right, if the building is located on the land owned by another person and the land is an alienated property in accordance with the data of the Land Register;
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The seller is obliged to disclose to the buyer all major encumbrances with respect to the real estate subject to sale. • pre-emptive
right is contracted under an agreement; • within the scope of the de-nationalization process, former owners of the land (if they have not received equal land plot or compensation) have the pre-emptive right to acquire (among other things) buildings and construction objects that are located on the land plot. Describe the moment of acquisition of ownership to real estate The ownership title to the real estate passes over from the moment it is passed over to the buyer in accordance with the stipulations of the agreement between the contracting parties. In order to perfect the sale and purchase of the real estate as against all third parties, the transfer of the ownership title must also be registered with the Land Register. Does a seller have a statutory disclosure or warranty obligation? The Civil Law of the Republic of Latvia establishes the duty of the seller to disclose to a buyer all defects and encumbrances known to the seller - both physical and legal defects that could be reasonably expected to be known by the seller. If the seller fails to comply with such obligation and is not able to prove that the buyer was aware or must have been aware of the respective defects or encumbrances at the moment of the sale, the buyer can submit a claim for the in-
demnification of losses or annulment of the transaction. The buyer cannot rely on this particular right if the seller has properly notified the buyer of such defects or encumbrances or the buyer could have obtained the necessary information from the public registers. What is the effect of transfer of real estate on contractual and other rights, obligations and warranties? Do these pass over along with the title to real estate? Encumbrances registered in the Land Register (for instance, servitudes, etc.) are not effected in the event of the change of the owner and remain binding on the new real estate owner as well. In addition, the parties may individually agree on other contractual commitments concerning the property in the course of transaction, and they are either ended or transferred to the new owner. If a lease agreement is registered in the Land Register, then it is binding on the new owner, and the new owner can terminate the lease only under the procedure established by the lease agreement itself or by laws and regulations applicable to any lease. If the lease agreement is not registered in the Land Register and the new owner decides to terminate the lease, the former owner is liable for the damages arising out of premature termination. Nevertheless, the new owner must respect and grant a reasonable time to vacate the premises.
A lease agreement of residential premises is binding upon the new owner irrespective of whether it is registered with the Land Register or not, and the new owner may terminate the lease agreement only under procedure set out in the laws and regulations however the list of such cases for termination is strictly limited and the procedure of termination is strictly regulated. Note: Any existing construction documentation (technical designs, construction permits, guarantees, etc.) related to the real estate must be re-registered in the name of the new owner. What are the conditions for termination of real estate sale and purchase agreement? As any other commercial agreement, real estate sale and purchase agreement may be freely terminated by the mutual agreement of the parties, except if such actions can influence the rights of any third party. Unilateral withdrawal from a purchase agreement is not permitted even if the other party does not perform its obligations. As an exception, a purchase agreement may be unilaterally terminated pursuant to a claim in the following cases:
• where the party has been compelled to enter into the purchase agreement through the acts of bad faith of the other party, or by fraud or duress; or
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Only lease agreements of the real estate registered within the Land Register are binding to acquirer of the real estate. • due to the defects in the purchased property that, based on the circumstances, could not have been reasonably expected to be known to the buyer; or • due to the excessive loss suffered by one of the parties; or • if the seller has lost its interest in the performance of the contractual obligations due to the buyer’s payment delay; or • on other grounds set out in the purchase agreement (the parties are free to establish any other grounds for the unilateral termination of the purchase agreement either through court process or outside of court). What are the fees for notarisation of real estate sale and purchase agreement?
action amount which exceeds EUR 1,424; • if the transaction amount is from EUR 7,116 to EUR 28,458, then EUR 72 plus 0.7% of the transaction amount which exceeds EUR 7,115; • if the transaction amount is from EUR 28,459 to EUR 71,145, then EUR 236.34 plus 0.5% of the transaction amount which exceeds EUR 28,458; • if the transaction amount is from EUR 71,146 to EUR 142,288, then EUR 471.11 plus 0.3% of the transaction amount which exceeds EUR 71,145; • if the transaction amount is more than EUR 142,289, then EUR 705.89 plus 0.1% of the transaction amount which exceeds EUR 142,288. Commercial Lease
The law stipulates that contracts based on which title to the real estate is changed may be concluded under procedure of a notarial deed or under private procedure. Privately concluded transaction on acquisition of real estate does not have to be certified by the notary. If the transaction on acquisition of real estate is concluded under procedure of notarial deed, then the following fees are charged for making the notarial deed:
• EUR 15.65, if the transaction amount is up to EUR 1,424; the transaction amount is from EUR 1,425 to EUR 7,115, then EUR 15.65 plus 0.9% of the trans-
• if
What are the formal requirements for the execution of a lease agreement? There is no compulsory legal form for commercial lease agreements. Therefore, lease agreements can be entered into in a freely chosen form at the discretion of the contracting parties. If the lease rights will be registered with the Land Register, then the requirement for written form of the lease agreement shall be complied with. The lease becomes effective as of the date indicated in the lease agreement and it does not necessarily need to coincide with the date of signing.
Registration of the lease agreements with the Land Register is not compulsory. However, it is advisable in case the lessee wishes to ensure that the lease agreement will be binding in respect of the third parties and will remain effective in the event that the lessor changes. Registration in the Land Register can only be done by agreement thereon by both the lessor and the lessee. Are there any statutory restrictions on a lease term? There is no statutory requirement as to the term of commercial lease. It depends solely on the needs and agreement of the contracting parties. If the lessee wishes to create autonomous pieces of property on a leased land plot (construct a building which is a separate property and is not owned by the land owner), then the minimum validity period of the lease agreement is 10 years; furthermore, the lease right has to be registered with the Land Register. It is contemplated that in future legal framework will change restricting further formation of joint property (when land and building is not a single property, while considered separate and autonomous pieces of property), because 2 draft laws have been submitted to the Saeima (the Parliament) of the Republic of Latvia which stipulate that:
• further on, construction of residen-
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Rent agreement is binding to acquirer of the real estate even if the rent agreement is not registered within the Land Register. tial buildings on land owned by another person will not be allowed; • it will be possible to construct nonresidential buildings and engineering communications on other’s land only on the grounds of such a contract that vests the eligible person with right to construction development for a period of time established in the contract which may not be shorter than 10 years and provided that after maturity of the contract for construction rights the buildings shall be deemed to be appurtenance of the land and property of the land owner, unless the parties have agreed on demolition of the building. Does a tenant have a statutory right to extend or renew its lease? In respect of commercial lease, the law does not provide for the rights of a lessee to extend or renew the lease term; however, such rights could be individually agreed upon in the lease agreement. Rent and its adjustment: are there any statutory restrictions on the amount of rent? What is the general market practice? There are no statutory restrictions on the amount of the rent under commercial lease contracts. Parties usually agree on a fixed fee payable on a monthly (sometimes on a quarterly) basis in advance. It is a common practice in Latvia that the rent is adjusted annually based
on the consumer price index or other formula agreed individually by the involved parties. Turnover rent quite often is introduced in major retail leases in addition to the fixed (base) rent. Alienation: what are the rights of the tenant and the landlord with respect to assignment, sub-lease or placing a charge over a lease? The right to assign In accordance with provisions and principles of the Civil Law, the lessor can freely assign the lease (for instance, in case of the change of ownership) without any prior consent of the lessee. The lessee may assign the lease upon prior consent of the lessor. The right to sublease The lessee may sublease the property only if such rights are agreed in the lease agreement or upon prior consent of the lessor and the terms and conditions of sublease may not provide for broader rights in respect to the object of the lease than those provided for under the main lease agreement (for example, cannot exceed the term of the main lease agreement). What is the common form and length of eviction? The Civil Law expressly prohibits arbitrary eviction of the lessee, even if such right is included in the lease agreement. Regardless of the fact that any of the parties may have the right to unilaterally withdraw from or request termination of the lease agree-
ment, the lessor must allow a reasonable time period for vacation of the leased premises. If the premises are not vacated, the lessor must claim at court for eviction of the lessee, as well as for the recovery of rent and damages. A person who fails to comply with the requirements regarding the vacation of leased premises must compensate all damages. What are the restrictions on the transfer of title on real estate subject to lease? Latvian laws and regulations do not provide for specific restrictions. The lessor is free to sell or otherwise transfer or encumber the leased property. Restrictions could be imposed as a result of pre-existing contractual relationships, for example, providing for the rights of first refusal to the lessee to the object of lease in case of a sale thereof. How does the transfer of real estate affect the tenant’s rights and obligations? Change of the lessor of the real estate may not serve as reason for the lessee to terminate the lease and the lessee must continue exercising its rights and fulfilling its obligations based on the initial lease agreement. In the event that the lease agreement is not registered with the Land Register, the new owner of the real estate is not bound by the lease agreement and may terminate in accordance with procedure
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If the lessee wishes to create autonomous pieces of the property (to construct new buildings and register as the autonomous real property), lease agreement has to be registered within the Land Register and the lease term cannot be less than 10 years. set by Latvian laws and regulations.
for decision-making.
Construction
Below procedure prescribed by the new Construction Law which will come in effect on 1 May 2014 is described.
Describe the common stages of construction (development) process Territorial planning Usually, the territorial plan of the local government and, if developed or required by the laws and regulations, also the detailed plan or local plan of the land plot establishing specific development regimes (requirements). According to documents of the territorial planning, the location of engineering communications, roads, infrastructure, etc. is designed and planned. Environmental impact assessment is required in case the planned construction falls within the list of particular activities established by the laws and regulations of Latvia and could constitute a possible environmental risk. As of 1 May 2014 the new Construction Law comes into effect in Latvia stipulating a different administrative regulation of the construction process. The construction documentation submitted to the competent authority before the effective date of the new law is subject to requirements of laws and regulations which were valid on the day of submission of the respective documentation insofar the new law does not stipulate more favourable requirements in respect of content of the construction documents and timelines
Application concerning intention of construction and construction permit The person initiates construction by filing an application to the construction board about the preliminary plan of construction (intention), as well as documents referred to in the General Building Regulation and the Special Building Regulation, also lodging a minimum draft of the construction design, except for cases when development of the respective design is not necessary.
of submission of the preliminary plan of construction to the construction board. Disputing of the building permit The decision on building permit can be disputed within 1 month. Disputing of the building permit suspends validity of the building permit. Disputing or appealing of a building permit issued for construction of objects of national interest does not suspend its validity. The building permit may be annulled in case the procedure of construction established by law is not complied with, construction work is not commenced within one year after the building permit is obtained, or other requirements set out by the law are not complied with.
If the preliminary plan of construction conforms with the territorial plan and the submitted documents comply with the laws and regulations a building permit is issued. A decision of the municipal authority on issuance of the building permit is an administrative act.
Designing work After the building permit is received development of a construction design is commenced. If the building permit is disputed, the designing may be continued during the period while the building permit is disputed or appealed at the customer’s risk.
The issued building permit does not grant the right to commence construction work. The issued building permit grants the right to commence fulfilment of conditions stipulated therein – obtaining of technical regulations and commencement of designing work.
If the construction design is developed in line with all requirements set out in the building permit and laws and regulations the construction board makes a notation in the building permit about fulfilment of all conditions for designing included in the building permit.
Depending on the preliminary plan of construction the building permit shall be issued within 7, 14 or 30 days as
In cases prescribed by law the customer (employer – according to FIDIC rules) has to ensure performance of
Latvia
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New and totally different administrative regulation of the construction process comes into the force in Latvia staring from the 1 May 2014. expert examination of the construction design. Performance of construction work The construction work can be commenced after the construction board has made the notation in the building permit about fulfilment of all conditions for designing referred there; fulfilment of conditions for commencement of construction work, and the building permit has become non-appealable. In cases prescribed by the law the customer has to ensure performance of author’s supervision and building supervision. Monitoring of construction Monitoring of construction is performed by the construction board and the building inspectors. The building inspector has the right to inspect and verify a building either during the construction work or its operation. The building inspector verifies whether the construction work is commenced in line with requirements of the laws and regulations, as well as whether the building or its parts are operated pursuant to the designed type of use. The construction work may be suspended if construction work not conforming to the construction design and laws and regulations is being carried out, if unwarranted construction or deviations from the construction design are discovered and in other cases es-
tablished by laws and regulations. The building permit may be annulled, if the customer fails to comply with provisions of the law or other statutory regulations regulating construction, if the conditions set in the building permit and laws and regulations are not fulfilled at all, are not duly fulfilled or are not fulfilled within the time period set in the building permit, as well as in other cases stipulated by law. Issuance of an occupancy permit Putting of the building into operation is performed by a special commission established by the local government which assesses the readiness of the building for operation and issues an act on acceptance of the building for operation. On the basis of the occupancy permit the ownership of the building is registered with the Land Register. Describe the main requirements for construction licencing As a general rule, any legal entity registered in the Republic of Latvia, also foreign legal entity having a licence (right) to carry out the construction works in its home country as well as a construction engineer is entitled to perform commercial activities in one or several fields of construction in which an individual for independent work in accordance with the laws would require a builder’s practice or architect‘s practice certificate (e.g. engineering research, design, construction expert-examination, construction
works management, construction supervision), a merchant shall register in the Construction Merchant Register. A merchant may apply for registration in the Construction Merchant Register if:
• the
merchant employs at least one architect, performer of engineering research, designer, construction expert, construction work manager or building supervisor on the basis of an employment contract and the relevant person has the right to independent practice in respective fields of construction or a member of the board of the merchant is a specialist (this condition shall not apply to partnerships, at least one member of which is a construction merchant, and to individual merchants who are specialists); • a specialist employed by the merchant is not concurrently a specialist in employment legal relations with more than two other merchants registered in the Construction Merchant Register. A merchant is not entitled to implement works in the field of construction in which it does not have a relevant specialist. Building practice or architect’s practice certificates shall be granted, the period of validity of certificates shall be extended or certificates shall be cancelled by competent certification authorities, a list of which has been published by the Ministry of Econom-
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Only registered real estate may be sold or otherwise disposed of.
ics. A certification authority shall register a building practice or architect’s practice certificate in the Building Practice and Architect’s Practice Certificate Register established by the Ministry of Economics. In order to receive a building practice or architect’s practice certificate, a person shall submit the following to a certification authority:
• an application regarding granting of
negotiated with the person who has ordered the performance of the construction works. Registration Does all real estate require to be registered? All real estate must be registered with the Land Register except for temporary structures, engineering structures and certain other structures exempt under law. Only registered real estate may be sold or otherwise disposed of.
the certificate; • documents verifying education (if a person has acquired the relevant education and professional qualifications in a foreign state, then a certificate of recognition of the foreign entity’s right to engage in similar type of the construction works in its home country); and • an approved list of construction activities, in implementation of which the respective person has participated. The employer, the commissioning party, the object and location thereof, the time of implementation of the works and the participation level of the person shall be indicated in the list. The list shall be confirmed by the employer and a certified specialist responsible for implementation of the respective works.
Ownership rights must be registered with the Land Register. Other rights (for instance, servitude rights, lease rights, encumbrances) are not mandatory registered; however, in practice persons enjoying such rights usually opt to register them to exclude risks and to ensure that their rights will be binding towards third parties and new property owners. Other rights, if not registered with the Land Register, will not be valid as against any third parties.
What are the statutory guarantee terms for construction works?
What is the procedure for registration of the ownership to real estate?
The minimum statutory guarantee term that must be applied regarding construction defects is 2 (two) years and the actual length of the term is
Registration procedure Based on the stipulations set by the purchase agreement, the party that is responsible to perform the registration
What rights (if any) to real estate are subject to registration? What are the consequences of failure to register?
procedure must submit the necessary documentation to the branch of the Land Register system based on the location of the property. The necessary documentation can also be submitted through the mail. If the documentation is correct and is submitted to the Land Register in accordance with the applicable laws and regulations, the Land Register registers the filed documents within 10 (ten) days. Necessary documentation in case of the standard transaction • Application to the Land Register. Parties will need to notarize the signatures on the application to the Land Register in order to change the ownership title. • Payment of the state fee. The applicable state fee may be paid in advance (please note that if the payment is made in advance, the requisite bank statement must be at least 2 days old) or at the Land Register at the time of submission (please note that the public authorities of Latvia do not accept cash). • Original copy of the purchase agreement. Please note that the additional necessary documentation can vary based on the individual situation. What time and costs are involved in the registration of real estate (rights thereto)? Registration time If the documentation is correct and is submitted to the Land Register in ac-
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Latvia has favorable tax regime for formation and management of the holding companies. cordance with the applicable laws and regulations, the Land Register registers the filed documents within 10 (ten) days. Registration costs Regarding costs, as the signatures on the application to the Land Register must be notarized, the services of the notary public for preparing and certifying the application will be approximately EUR 70. State fees of the Land Register vary based on the entry to be made. The substantially lower fees will be applied in registration of, for example, encumbrances and legal facts pertaining to the real estate. In order to register ownership title change based on the real estate purchase agreement, beginning as of 1 January 2014 the state fee will be calculated as follows:
• 2 % of the value of property consisting of land and buildings or property consisting only of a non-residential building or buildings and engineering installations associated therewith, while no more than EUR 42,686.15; • 6% of the value of the residential property (apartment), if the acquirer is a legal entity conducting business; • 1% of the value of the real estate if it is contributed in the share capital of a capital company; • 3% of the value of the real estate acquired on the basis of a donation agreement. Reduced state fees are applied if the
acquirer is a close relative (children, parents, spouse, brothers and sisters, half-brothers and half-sisters, grand children, great grandchildren and grandparents) – 0.5 % of the value of the real estate. State fees are not payable if re-registration of real estate in the Land Registry is necessary due to re-organization process. State fee for registration of real estate at the Land Register shall be calculated from the highest of transaction value or cadastral value. The state fee for corroboration of title with the Land Register is estimated by applying factor 1.5, if the documents for change of title are submitted to the Land Register no later than within 6 months as of execution date of a sale and purchase agreement (or another deed of transaction pertaining to change of title). How reliable is the registration system? By virtue of law, data recorded in the public register is deemed accurate and true (prima facie evidence) unless rebutted. The registration system is reliable, and it reflects all actual and historical data registered at the specific time. The registration duty is imposed on the parties to the transaction; therefore, conformity of the entries with the actual situation for the most part depends on activities of the par-
ties to the transaction. The data of the Land Register provides comprehensive information on real estate owner, leases registered, encumbrances registered in respect of the real estate, as well as court decisions, liens etc. Is the register publicly accessible? Data about cadastral numbers, addresses, owners, registered encumbrances and prohibitions is publicly accessible to any person without any restrictions. The documentation based on which the entries in the Land Register are made is not publicly available. The Land Register will only show as the public information the fact that the particular entry is made and state the basic information. Taxation Corporate Income Tax Tax rate and basis Latvia has an attractive corporate tax system. The corporate income tax (CIT) rate is maintained at a low rate of 15%. The tax basis is accounting profits adjusted for tax purposes. Latvian registered companies are taxed on their worldwide income. Capital gains Capital gains are taxed as ordinary income except for gains from the sales of shares which are exempt from taxable income. If real estate (or shares in a company
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Disbursement of dividends to a domestic company is not subject to corporate income tax. with Latvian real estate constituting 50% or more of its assets in the year of sale or in the previous year) is sold to a Latvian resident by a nonresident, the resident purchaser must withhold 2% withholding tax from the entire purchase price. Dividends Disbursement of dividends to a domestic company is not subject to corporate income tax. Dividends paid out to a non-resident legal entity are not subject to withholding tax. Exceptions apply to companies located in statutorily designated low tax zones. Dividends paid to natural persons are subject to 10% withholding tax except if such individual is resident in a statutorily designated low tax zone. Dividends paid to statutorily designated low tax zone are subject to 15% withholding tax (or if interim dividends are paid 30%). Interest From 2014 withholding tax will no longer apply to interest payments made to non-resident related companies provided that the recipient is not located in a statutorily designated low tax zone. Thin capitalization rules Thin capitalization rules are not applicable to interest paid to Latvian or EU banks, or to banks in double tax treaty countries. Deductibility of interest paid to other lenders is restricted based on a 4:1 debt to equity ratio, or if the interest rate exceeds more than 1.57 times the market average rates as determined by the Bank of Latvia.
and benefits paid. Tax losses carried forward Losses incurred through 2007 can be carried forward for 8 years. Losses incurred from 2008 can be carried forward indefinitely. Where a change of control occurs in the shareholders (more than 50%) a company can utilize its tax losses if it continues for five years the same business it carried on during the two years before the change of control. When companies are reorganized by merger or spin-off, it may be possible to continue utilizing losses accrued. Intra-group consolidation Latvian law does not provide for tax consolidation. From 2014 it will no longer be possible to transfer losses within a group. Individual Taxes Taxation of employment related income Salary and benefits paid to an employee resident in Latvia are subject to personal income tax and social insurance contributions. Personal income tax is withheld by the employer at a rate of 24% in 2014 (the rate is expected to be reduced to 23% in 2015 and 22% in 2016). In 2014 social insurance contributions are payable at a rate of 34.09% of which 10.5% is paid by the employee from gross salary and benefits received and 23.59% is paid by the employer on the gross amount of salary
Sale and lease of real estate Capital gains from the sale of real estate are subject to personal income tax at a rate of 15%. The gain is calculated as the difference between acquisition value and sale value. Exemptions apply to residential real estate which has been owned for a period of at least 5 years and has been the declared residence of the owner for at least 12 months prior to sale. If real estate (or shares in a real estate company) is sold by a non-resident to a resident that carries on business activity (company or individual) a 2% withholding tax of the sale amount (entire purchase price) applies. From 2014 sellers in jurisdictions with which Latvia has concluded a double tax treaty will be allowed to recalculate the tax based on a 15% tax of the actual gain (acquisition costs less sale value.) Income from leasing of real estate is generally treated as business activity and is subject to personal income tax at a rate of 24%. If an individual leases/rents real estate and holds the real estate as a personal capital asset without deducting business expenses for tax purposes, the income is taxed at a rate of 10%. In such case the individual is required to register with tax authorities as carrying on business activity and is required to submit the related lease agreements to the tax authorities. Sale of shares
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Non-residential lease payments are subject to 21% Latvian VAT.
Sale of shares in a real estate company is subject to capital gains at a rate of 15%. Taxation of self-employed individuals Income from self-employment (after deduction of valid business expenses) is subject to personal income tax at a rate of 24%. A self-employed individual must pay social insurance at a rate of 32.17% on a minimum amount equal to the mandatory minimal monthly salary but can choose to pay the social insurance on a higher amount. Value Added Tax (VAT) The standard rate of Latvian VAT is 21%. Certain supplies qualify for a reduced rate of 12%. Exports and transits as well as certain services treated as supplied outside Latvia may be zero rated (exemption with credit). Property leases are subject to 21% VAT. Renting property to individuals for residential purposes is exempt. The sale of land and buildings, other than unfinished, newly built or refurbished, is exempt. The sale of unused real estate is subject to 21% VAT on the sales price, while taxable value for sale of unfinished buildings is the difference between sales value and acquisition price. If a refurbished building is sold within one year of completion, VAT is charged on the difference between its selling price and value prior to refurbishment.
apply. Sale of building land is subject to 21% VAT. Input tax is recoverable on the development or refurbishment of buildings intended for taxable supplies. If the property is sold within a period of one to ten years of completion, then a portion of the VAT originally recovered must be repaid to the State. Resident taxpayers are required to register for VAT upon reaching a threshold of LVL 35,000 (approx. EUR 49,800) of taxable supplies during any 12 month period or upon reaching a threshold of acquisition of goods from another EU member state of LVL 7,000 (approx. EUR 10,000). Real Estate Tax The municipalities determine the real estate tax rate for property located in their territory based on binding municipal regulations. The rates can range from 0.2 to 3% based on the below maximum rates:
• 1.5% of the cadastral value of land, buildings and engineering structures; • 0.2-0.6% of the cadastral value of residential real estate or any part of a non-residential building that is functionally used for living; and • 3.00% of the cadastral value of uncultivated farmland. If a municipality has not set the rates by binding regulations the above rates
The cadastral value is determined by the Land Service considering the type, location and use of a particular property, transaction prices over the previous two years, and other factors. Although cadastral value should be approximated to the market price, cadastral value is not always up to date and may be lower than current market prices. Local municipalities calculate the tax charge and notify the taxpayer by sending a calculation and payment schedule. Newly constructed or reconstructed buildings used in business are exempt for one year after completion. Other relief is available under the Real Estate Tax Act or determined by municipalities. Land Tax There is no separate land tax in Latvia. The real estate tax is imposed on land and other types of real property. State-Owned Land Lease Tax There is no separate land lease tax in Latvia. In addition to the lease payment the lessee shall pay the real estate tax for leased land owned by.
ESTONIA
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ESTONIA Economic outlook
Estonia was successful in coming over financial crisis based on a balanced state budget, liberal trade and investment laws. SLOWDOWN IN GDP GROWTH Significant GDP growth of 2011 (+9.6% y-o-y) was followed by rather moderate 3.9% in 2012. In 2013 slowdown in Estonian GDP growth rate has continued. As a result of the 1st half of 2013, Estonian economy growth rate made up only 1.5% compared to the same period of 2012. Result of the 3rd quarter was even weaker (+0.4%). This was caused mainly by weak foreign demand (as a consequence of lack of confidence in Euro-zone) and decreased VAT receipt. According to the forecast by Newsec, the Estonian economy will grow by approximately 1.3% in 2013. In 2014 2015 economic growth is expected to be in range from 3.1 to 3.5%. FOREIGN TRADE AND DOMESTIC CONSUMPTION On the background of descending foreign trade volumes, Estonian GDP growth was driven by domestic demand. According to Statistics Estonia data, in 2011 retail sales volume was 10% above the number of 2010. Growth continued in 2012 at the same rate, followed by decrease of growth rate to 6% as a result of the 1st half of 2013. If in 2011 growth was driven by food segment, then since 2012 leading role was taken over by clothes and footwear sales. As a result of 2013,
Newsec forecasts 7% increase in Estonian retail sales, driven by food and beverage sales. After three years of consequent decrease, Estonian private consumption grew in 2011 and 2012 by 3.5% and 4.4%, respectively, although in 2013 increase in private consumption is below 4%, again. In 2014 - 2015 private consumption growth rate is expected to remain to the same level (approximately 4%). Inflation enhanced since 2011 and in 2013 consumer price index amounted for 3.2. Inflation is expected to stabilize at this level; in 2014 - 2015 we expect it at 2.7 - 3.2%.
followed by slowdown beyond. After rapid growth in exports and imports volumes in 2010 and 2011, growth rate demonstrated significant descending in 2012. Due to continuous turbulence in Euro-zone resulting in decreased foreign demand, as a result of 9 months 2013 Estonian exports volume have decreased by 1.5% compared to the same period of 2012. Decrease in imports made up 0.3%. As of total 2013, exports and imports volumes are expected to decrease by 2% and 1%, respectively. The most important partners of Estonia in exports in 2013 are continuously Finland, Sweden and Russia.
OPTIMISM AT LABOUR MARKET STABLE GROWTH IN FDI On the background of overall situation in Euro-zone, Estonian official labour market data looks comparatively optimistic. Having been made negative record of 17% in 2010, Estonian unemployment rate came down to 12.5% already in 2011. Positive trend continued in 2012 with 10.2% and 9% in 2013. Further improvement is expected: forecasted unemployment rate for 2014 and 2015 is 8.5% and 8%, respectively. Beyond that, unemployment rate is not forecasted to decrease below 7.5%. After two consequent years of descending (2009 and 2010), average monthly gross wage turned to growth again since 2011. In 2013 gross average wage made up 978 EUR per month in private sector and 1,099 EUR per month in public sectors, which is 7% and 6% above the numbers of 2012, respectively. Gross wage growth rate is expected to persist at this level in 2014,
In 2012, total amount of FDI in Estonia came over the record level of 2010, having been achieved 14.6 billion EUR (y-o-y increase by almost 12%). Moderate growth in FDI volume continues due to positive development of Estonian economy on the background of other countries of Euro-zone. In 2013 growth rate is expected to slowdown, remaining though positive. In monetary terms volume of FDI is expected to come over 15 billion EUR. Estonian economy is on the track, has been demonstrating ability to survive in stress situation and became less vulnerable. Well-balanced by itself, economic situation is to certain extent dependent on situation in Euro-zone. Given further developments in European economy will be positive, Estonia will be able to continue moderately positive economic development.
ESTONIA
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On the background of descending foreign trade volumes, Estonian GDP growth was driven by domestic demand Inflation and Private Consumption | Estonia
Economic Indicators | Estonia Percent 20
Percent 15
15
10
10
5
5
0
0 -5
-5
-10
-10 -15
-15
-20
-20
2007
2008
2009
2010
2011
GDP (% growth, fixed prices)
2012
2013E
2014E
2015E
2007
2008
2009
2010
2011
Inflation (yearly average %)
Employment (yearly change %)
2012
2013E
2014E
2015E
Private consumption (% growth)
Unemployment (% of labour force)
Source: Statistics Estonia, European Commission, Newsec
Source: Statistics Estonia, Newsec
Foreign Direct Investments | Estonia
Retail Trade | Estonia Yearly change, percent 50 40 30 20
mEUR 20,000
Percent 20
16,000
15
12,000
10
8,000
5
4,000
0
10 0 -10 -20 -30
0 2007
2008
2009
Trade, excl. motor vehicles
2010
2011
2012
2013E
Percent 50
14,000
40 30
12,000
20
10,000
10
8,000
0
6,000
-10
4,000
-20
2,000
-30 -40
Exports
Imports
2009
2010
2011
Exports growth, % yoy
Source: Statistics Estonia, Newsec
2010
2011
2012
2013E
Growth, %
Wages and Salaries | Estonia
mEUR 16,000
2008
2009
Source: Bank of Estonia, Newsec
Exports and Imports | Estonia
2007
2008
FDI, million EUR
Food and beverages Clothing and footwear
Source: Statistics Estonia, Newsec
0
-5 2007
2012
2013E
Imports growth, % yoy
Gross avg EUR/month
Percent 30
1,200 1,000
20 800 600
10
400 0 200 0 2007
2008
2009
Public sector Public sector growth %, yoy
Source: Statistics Estonia, Newsec
2010
2011
2012
Private sector Private sector growth %, yoy
2013E
-10
ESTONIA
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Retail market
Demand remained the highest for the spaces in large modern shopping centres during 2013
RETAIL MARKET HIGH RETAIL STOCK PER CAPITA
capita after Norway, Luxembourg and Sweden.
In the end of 2010 volumes of Estonian retail trade has turned to increase. In both, 2011 and 2012 retail trade volume increased by approximately 11% p.a. and achieved the level of 2007. In the first half of 2013, growth rate has slowed to 6%, and is not expected to come over 7% as a result of 2013. Total GLA of modern retail premises in Estonia is over 900,000 sq. m, over 600,000 sq. m out of which are located in Tallinn. The most active development of retail spaces took place in Tallinn in 2009 – 2010, when almost 30% of existent shopping centers area and over ¼ of existent food markets was added to the market. Among the new projects of 2013 were extensions of Mustikas, Rocca al Mare and Kristiine Shopping Centers as well as renovated Postimaja in City Center. As of 2013, Estonia holds 4th place in Europe by retail space sq. m per
ZERO VACANCIES, STABLE RENTALS Demand remains the highest for the spaces in large modern shopping centers. Vacancy in well-performing shopping centers of Tallinn is below 1%: random vacant spaces of below 100 sq. m appear in this segment from time to time. Supply in this market segment is still below demand. Occupancy rate at main shopping streets of Tallinn is also close to 100%. Vacancy in the old amortized premises persists at 8 – 10%. In the end of 2010 decline in rental rates has stopped. In 2011 considerable share of rental agreements terminated, which has caused some upwards movement in rentals. As of 2013 prime rent in Tallinn shopping centers goes up to 50 EUR/sq. m/ month, average rental exceeds 17
EUR/sq. m/month. In nearst couple of years, considerable growth is not expected due to forecasted increase in supply. In 2013, H&M has launched first three shops in Tallinn and is planning to expand its network in Estonia further. First Debenhams shop has been launched in Rocca-al-Mare. First River Island will be opened in Viru Keskus in spring 2014. Construction materials retailers, Bauhof and K-Rauta, are also expanding. New opportunities to open stores are available in recently renovated Mustika Shopping Center (expansion by 10,000 sq. m) and Sikupilli Shopping center with recent renovation, resulting also in insignificant extension. GROWING NEW SUPPLY Ülemiste Center has also started extension of 21,400 sq. m, which will be completed in 2014 Q3. Pro Kapital is planning to develop new shop-
Rental Rates and Vacancies | TalliNn 2007
2008
2009
2010
2011
2012
2013E
Trend Ω≈¬
up to 100/150 sq. m
25–55
20–50
15–40
15–40
15–45
17–50
17-50
¬
100/150-350/500 sq. m
15–30
12–30
9–25
9–25
10–29
10–30
10-30
¬
> 350/500 sq. m
9–17
8–15
6–13
7–15
7–15
8–16
9-16
¬
Anchor tenants
7–10
7.5–10
7–9
7–9
7–9
7–10
8-10
¬
up to 1%
up to 1%
up to 1%
up to 1%
up to 1%
up to 1%
up to 1%
¬
8–10%
9–10%
18–20%
15–20%
10–15%
8–10%
8–10%
¬
Rental rates, EUR/sq. m/month
Vacancy rates, % Well performing SC Other Source: Newsec
ESTONIA
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Although Estonia holds fourth place in Europe by retail space sq. m per capita, developers still see potential in Tallinn ping center (“Moekombinaat”) in Tallinn on the border of City Center and Lansnamäe, between existing Sikupilli and Ülemiste shopping centers. We expect this busy office and shopping area to become a “modern city-center”, especially taking into account possible development joint-station of Rail Baltica at Ülemiste. Taking into account this scenario, Moekombinaat is forecasted to be introduced to the market in the HY2 2016. Retail premises development has arrived to Põhja-Tallinn, where only food markets were developed so far. New shopping center with GLA of 10,000 sq. m is planned to be opened in autumn 2014 at Stroomi. Kaubamaja has also decided to move out of City Center to Haabneeme (Viimsi Parish), where new shopping center of ca 10,500 sq. m is to be completed in 2015. Finnish real estate owner and developer Citycon (a new owner of Kristiine Center) does not exclude further extension of Kristiine and Rocca-al-Mare SC. Con-
struction works at Ameerikanurga Retail Park Tallinn border are temporarily stopped. Largest planned retail premises development Gate Tallinn with total gross area of 240,000 sq. m by Trigon Capital is also postponed on undefinite time. Further development in retail segment will depend on demand from the side of large foreign retailers and purchase power of the local (descending) population. Despite the fact that Estonia holds fourth place in Europe by retail space sq. m per capita, developers still see potential in Tallinn: new retail premises supply of 2014 is expected to exceed volume delivered in 2013 more than twice. Significant changes in vacancies and rentals are not expected in short prospective.
Supply of Shopping Centres | Tallinn
Prime Retail | Tallinn
Ths. sq. m 500
Sq. m 1,000
400
Percent
EUR/sq. m/month 25
10
800
20
8
300
600
15
6
200
400
10
4
100
200
5
2
0
0
0
2004
2005
2006
Existing stock
Source: Newsec
2007
2008
New supply
2009
2010
2011
Sq. m/1,000 inh.
2012
2013E
2014E
0 2007
2008
Rental rates
Source: Newsec
2009
Vacancy
2010
2011
2012
2013E
2014E
ESTONIA
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Office market
Tenants activity has moved to outskirts as they pay more attention to side-costs
NEW SUPPLY IS DESCENDING
development are Ülemiste City on the border of City Center and Lasnamäe and Tehnopol in Mustamäe. Developers are cautious; as of end of 2013, ca 14,000 sq. m of new offices is announced to be delivered in Tallinn in 2014. Among them are new building in Ülemiste City with 9,800 sq. m and first Green Office Building in Estonia with 2,500 sq. m of rentable space.
The modern office stock in Tallinn accounts for ca 600,000 sq. m, of which ca 540,000 sq. m is speculative. Over 30% of Tallinn office spaces are located in CBD, another 25% - in City Center. City Center remains the major office development area although development activity is moving to outskirts - Lasnamäe, Mustamäe and Haabersti. Due to favorable location between City Center and Tallinn Airport, Lasnamäe is the most important office area among outskirts, hosting over 20% of total office spaces. After rather low office development activity in 2010 and 2011, over 30,000 sq. m of new office space were launched in Tallinn in 2012 - mostly in outskirts. In 2013 below 30,000 sq. m of new offices were delivered, including Selvaag office building in City Center (4,000 sq. m of rentable space) and opening in December Navigator in CBD (7,000 sq. m of rentable space). Large long-term projects under active
MODERATE GROWTH IN RENTALS Most demanded are continuously premises up to 150 sq. m at prime location with good parking possibilities. In Tallinn CBD, it is practically impossible to find vacant spaces of over 500 sq. m. Highly demanded are quality B class spaces located in City Center or in close vicinity to it. Tenants pay more and more attention to side-costs (such as parking, heating and transportation). Deficit in prime quality and central location segment prevailed in 2012 is deciding. Demand for office spaces is expected to be satisfied with new
Derived from deficit, moderate growth in rentals continued in 2013: Tallinn monthly prime rent made up 17 EUR/ sq. m. Average rent in CBD was 12 EUR/sq. m/month. Average vacancy rate is below 6%. In CBD and several office buildings on the border of the city center and outskirts (short distance to the City Center and free parking) is below 4%. The largest potential office development with an area of 40,400 sq. m, start-time of which is currently unknown, is located in CBD between Swissotel and Radisson SAS (Maakri Street). In 2012, detailed planning for construction of 10-floor office building at Rävala bvd in CBD has been established. Switch of owner of Baltika Moetänav Quarter in City Center allows expecting start of development process there. Projecting process at Admiraliteedi has been started. Office
Office Market Indicators | Tallinn
Office Stock | Tallinn Ths. sq. m 700
Percent 30
600
Ths. sq. m 120
25
100
20
80
Percent 20
15
500 400 300 200
15
60
10
40
5
20
0
0
10
5
100 0
projects introduced during 2013.
2004
2005
Stock
Source: Newsec
2006
2007
2008
Stock growth, % yoy
2009
2010
2011
2012
2013E
2014E
2004
2005
Absorption
Source: Newsec
2006
2007
2008
New supply
2009
2010
2011
Total vacancy, %
2012
2013E
2014E
0
ESTONIA
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Tallinn office market is close to saturation
and retail development (total 180,000 sq. m) is planned to Filtri Rd. area close to City Center. Tallinn office market is close to saturation, where demand and supply of office spaces will come to balance. This will hold average vacancy in 2014 to the level of previous year with insignificant downwards correction in A class. In 2014 increase of 3% in upper class office segment rent is expected.
Office Rents | Tallinn
Office Vacancy | Tallinn
EUR/sq. m/month 25
Percent 25 20
20
15 15 10 10
5 0
5 2004
2005
A class, %
Source: Newsec
2006
2007
2008
B class, %
2009
2010
2011
Total vacancy, %
2012
2013E
2014E
2007
A class
Source: Newsec
2008
2009
A class Max
2010
2011
B class
2012
B class Max
2013E
2014E
ESTONIA
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Industrial market
During recent years the companies were building and renovating premises mainly for own use
CONCENTRATION AROUND TALLINN
opment potential. In 2011 - 2012 total real estate investments by Estonian business companies increased by 20% and 15%, respectively. Total amount invested during 2012 made up approximately ¾ of the amount invested during precrisis year 2008. In the 1st half of 2013 total amount of real estate investments increased by 8% compared to the same period of 2012. During recent years, growth took place only in the field of construction – the companies were building and renovating premises mainly for own use. Total area of industrial and warehousing premises delivered to the market annually after 2008 dropped approximately two times. In 2012, most of new construction was carried out for own need, and volume of new speculative spaces made up only 25,000 sq. m. In 2013 volume of new speculative development in this market segment came down to 10,000 sq. m. Speculative development volume of 2014 is forecasted to climb back to the level
Activity in the industrial and warehouse real estate market segment started modest increase since the second half of 2010, along with started recovery in terms of export and transit. Trend of concentrating industrial, warehousing and logistics premises into industrial parks persists in Estonia since mid-2000-ies. Over half of industrial parks in Estonia are situated in Tallinn vicinity (Harju County), close to Tallinn Airport, largest ports and main motorways. The largest industrial parks in this area are Tänassilma, Jüri, Mõigu. Another two comparatively large regions with developed industrial and logistics infrastructure are Tartu and Pärnu Counties, followed by Central and Southern Estonia. Share of industrial facilities located in Ida-Viru County, along the northern coast of Estonia, is currently small, but this region has great devel-
of 2012. Over 80% of new facilities in Estonia are delivered in Tallinn and Harju County. DEMAND FOR QUALITY PREMISES In 2013 deficit in the segment of quality industrial and warehousing premises persists. Major demand lies in the larger spaces segment (1,000 – 3,000 sq. m). This situation may get some ease in 2014, as growing heating and electricity prices accompanied with increase in wages may bring down attractiveness of Estonia for foreign manufacturers. Difference between rental rates in new/renovated and old industrial and warehousing facilities located in Tallinn and Harju County remains around two times, rentals level has been stable since late 2011. Prime rental level goes up to 5 EUR/sq. m/month. At secondary locations rental rates are below 3 EUR/sq. m/month. The largest new development in this segment is Lookivi logistics park by NCC, situ-
W&L Market | Estonia
W&L Market | Estonia Ths. sq. m 800
Percent 40
Ths. sq. m 200
600
30
150
400
20
100
200
10
50
Percent 25 20 15 10
0
2007
Stock
Source: Newsec
2008
2009
2010
Stock growth, % yoy
2011
2012
2013E
2014E
0
0
5
2007
2008
Absorption
Source: Newsec
2009
New supply
2010
2011
Vacancy, %
2012
2013E
2014E
0
ESTONIA
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Speculative development volume of 2014 is forecasted to climb back to the level of 2012 ated near Jüri by Tallinn-Tartu highway. There is altogether approximately 128,000 sq. m of building right on three properties. Further developments in Estonian industrial and warehouse market segment are to certain extent dependent on foreign investments inflow in respective sectors of economy. Low supply of new premises is expected to somewhat raise the rental level in 2014 and (insignificantly) reduce vacancies.
Warehouse Rents | Tallinn EUR/sq. m/month 6 5 4 3 2 1
2007
2008
Rental rate Avg
Source: Newsec
2009
2010
Rental rate Max
2011
2012
2013E
Rental rate Min
2014E
ESTONIA
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Hotel market
2013 appears to be a beginning of stabilization phase in terms of number of incoming tourists
RENOVATION WORKS AT LARGE HOTELS
rooms has been demolished and will be opened again in 2015 as Hilton. EFTEN, who acquired historical hotel Palace located on the main square has also closed the hotel for renovation. French Accor is planning to construct new hotel in Tallinn City Center close to Passanger Port.
Total number of accommodation establishments (including hotels, hostels, guest houses, B&B, rental apartments) in Estonia is over 1,200, of which 122 are located in Tallinn. Estimated number of hotels in Estonia is 123, of which approximately half is concentrated to Tallinn and surrounding it Harju County. 13 hotels are situated in the second largest Estonian city of Tartu, 12 in the resort city of Pärnu, 10 – at Saaremaa and other islands. Major part of the hotels is not rated (including such international brands like Swissotel, Radisson Blue, Sokos). Classified hotels have mostly 3 stars; 6 out of 8 4-star hotels are situated in Tallinn; 2 of 3 highest (5-star) class hotels are also in Tallinn. In 2011, Estonia has joined the Hotelstars rating system, which is expected to raise the number of rated hotels. Several large hotels in Tallinn are currently off the stock being under renovation: Park Hotel&Casino with 120
sult of 2009. As of 9 months 2013, average occupancy rate in Estonian hotels made up 44% (almost equal to 45% in the same period of 2012). In Tallinn, hotels were occupied from January to September 2013 at 63% in average (level of 2012). Due to hot summer in 2013, SPA hotels located at Saaremaa were occupied at 70-90%. After two consequent years of decline, average Estonian ADR started to increase again in 2011, having been grown in 2013 over 31 EUR per night (over the top level of 2008). In Tallinn hotels, ADR is approximately 10% over Estonian average. Started in 2011 new period of positive development in Estonian hotel sector was caused by several reasons - status of Tallinn as European Culture Capital, opening of Tallinn-Helsinki-St. Petersburg ferry-line and rapid development of Tallinn Airport created additional tourists inflow. Hotel sector further development is dependent on the economic situation in Europe. Frequent nature disasters
STABILIZATION IN TOURISTS INFLOW After downturn caused by economic crisis, in 2010 trend in Estonian hotel market has turned to positive: in 2010 and 2011 foreign and domestic demand increased by 12% and 13%, respectively. 2012 has become the best year ever in terms of hotel sector activity: total number of tourists accommodated has achieved 2.8 million. 2013 appears to be a beginning of stabilization phase: y-o-y growth made up only 3%. Average occupancy rate turned to growth in 2010, being reached 46% in 2012 (almost back to the level of 2006), which is 10 points above the lowest re-
Hotels | Tallinn
Demand and Occupancy of Hotels | Estonia Ths. visitors
Percent
3,500
60
3,000 5 Stars 4 Stars 3 Stars 2 Stars
50
2,500
40
2,000 30
1,500
20
1,000
10
500 0
0 2005
2006
Local visitors
Source: Estonian Hotels and Restaurants Association
2007
2008
2009
Foreign visitors
Source: Statistics Estonia
2010
2011
Occupancy, %
2012
2013E
ESTONIA
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Changes are to start in Estonian hotel segment in 2015 with entering of new international hotel chains in Asia and political troubles in NorthAfrica may affect positively European tourists flow in Baltic/Nordic direction. To certain extent further development of hotel sector in Estonia depends on development of national flying company Estonian Air, which is cutting the number of aircrafts and implements staff reduction. Restrained growth in hotel segment is expected in 2014 in terms of occupancy rates and ADR. No new delivery is expected. Changes are to start in 2015 with entering of new international hotel chains.
Demand and Occupancy of Hotels | Tallinn Percent
Ths. visitors 1,600
70 60
1,200
50 40
800
30 20
400
10 0
0 2005
2006
Local visitors
2007
2008
2009
Foreign visitors
Source: Statistics Estonia
2010
2011
Occupancy, %
2012
2013E
ESTONIA
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Residential market
Developers are cautious, undertaking rather small-scale projects in upper price range
GROWING MARKET ACTIVITY
DEVELOPERS ARE CAUTIOUS
Estonian residential market is driven to certain extent by Tallinn market, were approximately half of the all transactions is concluded. Apartments market activity peaked in Tallinn in 2005 – 2006, being achieved 1,100 transactions per month. After dramatic downfall in 2007 market has started moderate growth in 2010. After new small drawback in 2011 caused by “Euroshock” and turbulence in Euro-zone, upwards movement in terms of number of transactions concluded continued in 2012 and 2013. In 2012 market activity increased by 20% compared to previous year. During ten months 2013 y-o-y growth in transaction activity in Estonian residential segment made up 14%, having been achieved a level of 2003 2004. In 2013 total value of transactions came over 800 million EUR, which means 25% increase compared to 2012.
In Tallinn, the largest residential market of Estonia, new apartment construction volume peaked in 2007, when over 500,000 sq. m p. a. (9,800 apartments) were commissioned. Since 2008 residential construction activity has started to shrink. During 9 months of 2013 volume of construction premises issued (in sq. m) exceeded the same indicator of 9 months 2012 by 16%, which is the highest growth rate since 2006. 2,230 new apartments were committed in Tallinn during 3 quarters of 2013. Developers are not willing to take risks, so new residential projects are rather small – 30 flats per project in average. Larger projects (40 – 70 flats) are developed outside of City Center, in lower price segment. In City Center, where new apartment prices go up to 4,000 EUR/sq. m, there is a number of projects with 10 - 20 apartments. On the other hand, most demanded are new apartments priced in range of 1,600 – 1,800 EUR/sq. m, but on the
Residential Market | Tallinn Units 16,000
EUR/sq. m
2,000
12,000
1,500
8,000
1,000
4,000
500
0
2005
2006
2007
Number of transactions
Source: Estonian Land Bord
2008
2009
2010
2011
2012
Average price - new construction Average price - old construction
2013E
0
side of offer there are mostly City Center and Põhja-Tallinn projects, where prices start from 2,000 EUR. If before crisis significant share of new apartments buyers made up foreigners, then today interest from the side of foreign private persons towards investing into Estonian residential real estate has decreased remarkably. In 2012 average apartment sq. m price growth made up in Tallinn 3% compared to 2011. As of the 3rd quarter 2013, average sq. m price in Tallinn increased by 16% compared to the same period of 2012. Average sq. m price remains the highest in City Center (which includes such highly valued areas as Old Town and Kadriorg). In the 3rd quarter of 2013 average price here accounted for 1,658 EUR/sq. m, having been increased by 13% compared to the same period of 2012. This is a price level of early 2006, which is 20% below the “boom” price level. Considerable increase in price in the nearest future is not forecasted. Estonian banks are still cautious towards both, financing residential development projects and housing lending. Number of “bankable” households without existing liabilities is shrinking. Developers are cautious, undertaking rather small-scale projects in upper price range, whereas demand lies mostly in mid-price range. Setting restrictions by Swedbank on loan and deposit portfolios for Baltic daughter-companies may influence households’ ability take new mortgages. This may bring down development activity and increase deficit in new apartments segment.
ESTONIA
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Legal and tax overview
Establishment of a company in Estonia is easy and cheap.
Corporate Presence
or a three-tier governance structure (as in public companies) entailing:
What is the most common type of corporate presence? The most common type of investment vehicle among both foreign and local investors is a private limited liability company (in Estonian osaühing or OÜ), which is analogous to a Latvian SIA, German GmbH, French SARL or BV in the Netherlands. The owners of the private company (shareholders) enjoy full limited liability. The other common investment vehicle type is a public limited liability company (in Estonian aktsiaselts or AS), whose owners also enjoy limited liability, but it has a higher minimal share capital level (EUR 25,000 compared to EUR 2,500 in case of private companies) and more extensive corporate governance rules compared to a private company. However, a public limited liability company may issue different types of shares unlike a private company. The below overview only covers private companies as the most common company type. Describe the management structure of the private company. Are there any participation restrictions applicable to the foreigners? The private company (OÜ) can have a two-tier governance structure consisting of:
• Shareholders; • Management Board,
• Shareholders; • Supervisory Board; • Management Board. It is not obligatory to form a Supervisory Board in a private company. Supervisory Boards are formed quite often in larger private companies or if there are several shareholders in order to implement specific corporate governance rules agreed between the shareholders in shareholders’ agreements. The executive body of a private company is the Management Board whose members represent and manage the company, deal with the actual every day running of the company. The Supervisory Board is responsible for strategic management of a company and election of the Management Board. The Supervisory Board plans the activities of a private company, organises the management and supervises the activities of the Management Board. The consent of the Supervisory Board is required for conclusion of transactions by the Management Board which are beyond the scope of everyday economic activities. Shareholders adopt certain decisions in respect of a private company, e.g. approving of annual reports, payment of dividends, mergers, liquidation, division, increasing or decreasing share capital, etc. Shareholders elect and
recall the members of the Supervisory Board and in case there is no Supervisory Board – members of the Management Board. Specific corporate governance rules may be adopted internally and also set forth in the Articles of Association of a company. Estonia’s corporate laws do not restrict in any way the participation of foreigners in the management of Estonian companies. Any foreign citizen, irrespective of his/her origin, may be freely elected either to the Supervisory Board or Management Board of a private company in accordancewithgeneral rules concerning board members. What is the minimum authorised capital in a private company? The minimum authorised share capital of a private company is EUR 2,500. Are there any requirements for the number of shareholders in a private company? The minimum number of shareholders is 1 and the maximum number of shareholders is unlimited. It should be noted that in case of a private company each shareholder has shares with a specific nominal value, e.g. if the share capital is EUR 2,500 and there are two shareholders, then each shareholder owns shares with a nominal value of EUR 1,250.
ESTONIA
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Foreigners can acquire real estate in Estonia on conditions similar to Estonian residents. Are there any specific requirements for transfer of the shares in a private company? A shareholder may freely transfer shares to another shareholder. Upon transfer of shares to a third person, other shareholders have a right of pre-emption within one month after having received the shares sale and purchase agreement. The seller shall submit the shares sale and purchase agreement executed between the seller and the third party (purchaser) to the Management Board of the company who shall promptly notify other shareholders of entry into the share purchase agreement. The Articles of Association may prescribe that the transfer of shares is permitted exclusively in case of the fulfilment of an additional condition, primarily that a resolution of the other shareholders, the Management Board, the Supervisory Board or another person is required to transfer a share. It may also be stipulated in the Articles of Association that the right of pre-emption does not apply upon the transfer of shares. Share transfer agreement of a private company must be in a notarized form. In case the shareholders’ list is kept by the Estonian Central Register of Securities (ECRS), i.e. the shares of a private company are registered in the ECRS, notarization of share transfer agreement is not required. What are the major fees involved in the incorporation of a private com-
pany? The registration of a private company involves the following notary fees and state fees:
• notary
fees for examination and certification of incorporation documents depends on the share capital of the company. In case share capital is EUR 2,500 the notary’s fees would amount to EUR 21 plus VAT, in case the share capital is EUR 25,000 the notary’s fees would amount to EUR 45.40 plus VAT; • state fee for registration of the company with the Commercial Register is EUR 140.60. Acquiring Real Estate Are there any legal restrictions on the ownership of real estate (interests in entities which own real estate) by foreign investors? Generally, foreigners have a right to acquire real estate similarly to Estonian residents. However, there are two main exceptions when acquisition of real estate by foreigners is restricted:
• Acquisition
of real estate in border regions of Estonia. Citizens or legal persons of countries which are not contracting party to the European Economic Area (EEA) Agreement need a permission of the Government to acquire such real estate. The permission is issued only due to the reasons significant to the state. • Acquisition of land plots, which in-
clude more than 10 hectares of agricultural or forest land. Such land plots can be acquired only by: (i) Estonian citizens and citizens of another country which is a contracting party to the EEA Agreement or a Member State of the Organisation for Economic Cooperation and Development (OECD) without any restrictions; (ii) legal persons of the OECD or EEA Contracting State if the legal person has been producing agricultural products/doing forest management for 3 years immediately before the acquisition of the land plot or upon the authorization of the county governor; (iii) legal persons from other than the OECD or EEA Contracting State can acquire forest or agricultural land only with the authorisation of the county governor and if: a) the entity has been producing agricultural products/ engaged in forest management in Estonia for at least one year and b) a branch of the legal entity is entered in the Estonian Commercial Register. Any other land plots can be acquired without restrictions. There are no restrictions imposed on foreigners (irrespective of their origin) to acquire interests in Estonia-based entities which own real estate. There are no limitations to the maximum area of agricultural or forest land owned by a foreign investor.
ESTONIA
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All real estate transactions require notarization.
Are pre-acquisition agreements commonly used in your jurisdiction? What is their legal effect and enforceability?
quests, a notary may prepare a notarial agreement in another language if the notary is sufficiently proficient in the corresponding language.
According to Estonian law the preacquisition agreements have to be notarized in order to be enforceable. Notarized pre-acquisition agreements or notarized contracts under the law of obligations (that do not include real rights agreement and can therefore be conditional) are commonly used in complicated transactions. Additionally, in some cases pre-acquisition agreements are concluded without notarization, however, such agreements are not enforceable.
All applications to the Land Register must be submitted in Estonian, i.e. an official translation of the application and real right agreements is needed before the submission.
Describe formal requirements for real estate sale and purchase agreement The notarization requirement applies to a sales agreement as well as a real right contract on transfer of ownership to real estate. Usually, these two agreements are included in one document, which furthermore contains the application for the Land Register to register the change of the ownership. In order to complete the sale and purchase of real estate, the transfer of the ownership must also be registered with the Land Register of Estonia. Can a sale and purchase agreement of real estate or shares of an entity owning real estate be made in a foreign language? Yes, if a party to a notarial act re-
Does any third person (governmental authority, etc.) have a pre-emptive right to acquire real estate subject to sale? The most significant pre-emptive right under Estonian law is the one belonging to the co-owners. With one exception this pre-emptive right is applied to any sale of a legal share of real estate held in co-ownership. The only exception is the apartment ownership where, in case of the sale of an apartment, owners of other apartments located in the same building have no preemptive right. In addition to the co-owners’ preemptive right, several laws provide for further pre-emptive rights. According to the Heritage Conservation Act, the state and a local government entity have the right of pre-emption for real estate under heritage protection. The Nature Conservation Act stipulates the right of pre-emption for the state in respect of certain natural conservation areas as well as land plots located in coastal building exclusion zone and restricts the use of real estate in these areas. According to the Principles of
Ownership Reform Act, tenants who live in a restituted building have a joint right of pre-emption to that building. Describe the moment of acquisition of ownership to real estate The title to real estate is acquired upon the respective entry in the Land Register. Does a seller have a statutory disclosure or warranty obligation? Generally, a seller is required to disclose any relevant aspect of the target. Otherwise, the seller will be liable for any defects that may not be discovered in the course of usual inspection. What is the effect of transfer of real estate on contractual and other rights, obligations and warranties? Do these pass over along with the title to real estate? In case of a transfer of real estate, all real rights and obligations in respect of the real estate pass over to the acquirer. Also rights and obligations under the lease agreements pass over along with the title. Any other contractual rights and obligations may be assigned to the acquirer of real estate upon agreement. Contractor’s or designer’s warranties/ guarantees in respect of a newly constructed building remain valid upon transfer of real estate. What are the conditions for termina-
ESTONIA
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Lease agreements survive transfer of ownership of any real estate.
tion of real estate sale and purchase agreement? Real estate sale and purchase agreement can be terminated:
• by mutual agreement of the parties; • by either party’s withdrawal if the other party commits a breach of the agreement and fails to rectify the same in due course (the parties may agree on what is considered to be a breach under the agreement; otherwise, the material breach is to be determined based on statutory provisions); • on other withdrawal grounds set out in the agreement. What are the fees for notarisation of real estate sale and purchase agreement? A notary fee charged for certification of a real estate sale and purchase agreement depends on the value of property. For example, if the value of the real estate is EUR 1 million, then the notary fee is approximately EUR 3,000; if the value of the real estate is EUR 10 million, then the notary fee is approximately EUR 11,000. Parties to a real estate sale transaction are free to agree whether the notary fee is to be covered by both of them or by a particular party.
ment? There are no mandatory formal requirements for the execution of commercial real estate lease. A tenant may demand from the landlord making an entry on the lease in the Land Register. Such entry in the Land Register secures tenant’s rights in case of transfer of the real estate by excluding new landlord’s right to terminate the lease due to the change of ownership. Are there any statutory restrictions on a lease term? No. However, if a lease agreement has been concluded for a term exceeding 30 years, then after the first 30 years, either party may terminate the agreement without indicating a reason, by giving the other party a three-month prior notice. Does a tenant have a statutory right to extend or renew its lease?
• lease term is at least 3 years; • rent is increased not more
often
than once a year; and
• limits or principles of calculation of increase are set forth in detail in the lease agreement. General market practice is that in case of commercial premises, rent is increased (adjusted) annually according to the consumer price index. Alienation: what are the rights of the tenant and the landlord with respect to assignment, sub-lease or placing a charge over a lease? A tenant may assign the lease only upon landlord’s consent. Also sub-letting is allowed only on landlord’s consent, but the landlord may not withhold its consent without a material reason.
No. However, in case of residential lease, a tenant may claim extension of the lease term for up to 3 additional years, if terminating of the agreement would bring along serious results for the tenant or his/her family.
There are no restrictions on encumbering a lease with a pledge or a similar right.
Rent and its adjustment: are there any statutory restrictions on the amount of rent? What is the general market practice?
First, the landlord should file a claim to the court demanding the premises out of the tenant’s possession back to the landlord. A court resolution in effect can be enforced by a bailiff on the landlord’s request. In frames of the execution proceedings, the bailiff first gives to the tenant a term of up
Commercial Lease What are the formal requirements for the execution of a lease agree-
In case of residential lease, an agreement on periodical increase of rent is valid only if:
There are no statutory restrictions on the amount of rent.
What is the common form and length of eviction?
ESTONIA
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Real estate development process has a clear step-by-step regulation.
to three months to voluntarily comply with the court resolution and leave the premises. After this term has passed without success, then the bailiff will evict the tenant, if necessary, with the help of the police.
plan enacted by the rural municipality entity. A detailed plan sets forth specific requirements for the construction works, such as intensity of construction, maximum allowed height of buildings, etc.
What are the restrictions on the transfer of title on real estate subject to lease?
Environmental impact assessment Environmental impact assessment will need to be performed when the planned constructions falls within the list of particular activities established by the laws.
There are no such restrictions. In case of transfer of the title to real estate subject to lease, the lease will remain in force. How does the transfer of real estate affect the tenant’s rights and obligations? The tenant’s rights and obligations remain in force in case of the transfer of real estate. A new landlord may terminate the lease agreement, by giving a three-month prior notice, within three months as of the date of acquiring real estate, unless the lease agreement is registered with the Land Register. A residential or commercial lease agreement can be terminated only if the new landlord strongly needs these premises for its own needs. Construction Describe the common stages of construction (development) process Enacting of a detailed plan In densely populated areas (such as towns), any developing and construction works are subject to a detailed
Designing works The design of a building is prepared in accordance with the designing conditions issued by the rural municipality entity. If the rural municipality entity has enacted a detailed plan, then the designing conditions are issued in accordance with such detailed plan. In certain cases, expertise of the design documentation is required. The construction permit The construction permit is issued in respect of a specific land plot and not to a certain natural or legal person. The validity period of a construction permit is not limited, but a construction permit becomes invalid if the construction works are not commenced within 2 years as of the date of issuance. Carrying out of the construction works As a rule, supervision of the owner should be carried out by a competent person during the construction works. The process of construction works should be covered with a record of
construction works, reports on covered works, minutes of working meetings, as-built drawings and certificates of building materials. Applying for authorisation for operation After completion of the construction works and before the commencement of operation of the newly erected or reconstructed building, the owner must apply for authorisation for use. The respective certificate is issued by the rural municipality entity if the construction works have been carried out duly in accordance with the design documentation. Describe the main requirements for construction licencing In order to be permitted to perform construction work a person must:
• be
registered as an undertaking (a company or a sole proprietor); and • be registered in the register of economic activities by filling a specific application with information on the planned field of activities, information on competent person(s), contact details etc.; and • have a corresponding legal relationship with a competent person (a person who is holding a professional qualification and has completed a higher education in an appropriate field and has three years’ experience in positions related to his or her profession ) or, if the person is a sole proprietor, he or she must be a competent person.
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Estonia has a strong land register system ensuring the legal certainty of real estate ownership. The above requirements also apply to: design works;
• conducting site investigations; • conducting energy audits; • owner supervision; • expert assessments of building
design documentation; • expert assessment of construction works; • issuing energy performance certificates; • engaging in project management. What are the statutory guarantee terms for construction works? Under Estonian law, statutory construction guarantee is an obligation assumed by a building contractor to ensure that building operations performed by the contractor comply with the terms of the corresponding contract and that the construction works or any part thereof built by the contractor will, if used for its intended purpose and properly maintained, retain for a specified period of time the safety and usability properties and the high quality required for the use of the construction works as a whole or of any part thereof. The following statutory guarantee terms are applied for construction works:
• Construction guarantee – for at least 2 years from the date on which the building is completed; • Guarantee for equipment permanently incorporated in the construc-
tion works in the course of construction – for at least 6 months. Registration Does all real estate require to be registered? Yes. What rights (if any) to real estate are subject to registration? What are the consequences of failure to register? All real (in rem) rights to real estate are subject to registration, including ownership right, servitudes, real encumbrances, mortgages, building rights and real pre-emption rights. The real rights are created and cease to exist only upon registration thereof with the Land Register. Pre-emption rights under Estonian law, such as co-owners’, municipality’s and state’s pre-emption rights, are not subject to compulsory registration. What is the procedure for registration of the ownership to real estate? Along with the agreement for transferring of the ownership (real right agreement), a specific notarized application to the Land Register is signed. Both real right agreement and application for the registration of the ownership is submitted to the Land Register by the notary. The registration procedure may take up to one month as of submission. What time and costs are involved in the registration of real estate (rights
thereto)? Notary’s fees (including deposit fees if notary’s account is used) and state fees need to be paid. The amount of the notary fees depends on the value of the real estate (or rights thereto). For example, if the value of the real estate is EUR 10 million, then the notary fee is EUR 11,000. Registering the title of the new owner to real estate may take up to a month as of the submission of a notarized application to the Land Register. If the former real estate is divided into separate real estates, then the registration of the new real estate may take up to three months. Note that in addition to the notary fee and in order for the transfer to be registered in the Land Register, a state fee must be paid. State fee is charged for the registration of ownership with the Land Register. The amounts of the state fee mainly depend on the transaction and the value of property. The state fee cannot exceed the established cap of EUR 2,556.46 irrespective of the transaction value. How reliable is the registration system? The registration system is reliable, and a bona fide third party can rely on the correctness of the data of the Land Register. Is the register publicly accessible?
ESTONIA
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Corporate profits are not taxed until distributed.
Yes. Information from the Land Register regarding data of the land plot, ownership, encumbrances and mortgages can be accessed by any person electronically from the e-Land Register for a small fee (EUR 8) or at the Land Registry departments. Verification of identity is needed. Taxation Corporate Income Tax Tax rate and basis Estonian corporate income tax system is rather unique since only profit distributions are taxed. Retained (reinvested) earnings are not subject to corporate income tax until distributed. Therefore, Estonian corporate income tax system shifts the moment of corporate taxation from the moment of earning the profit to the moment of its distribution (deferred corporate income tax). Corporate income tax is charged on direct profit distributions such as dividends, and on implicit distributions including fringe benefits, gifts and donations, and expenditures/payments not related to the business activities of the company. The above profit distributions are taxed at company level with income tax at the rate of 21/79 (approx. 26.6%) from the net amount of the distribution, which is equivalent to 21% from the gross amount. An amendment has been introduced
into Estonian Income Tax Act on 1 January 2012 according to which the income tax rate will be lowered to 20% starting from 1 January 2015. The same corporate income tax rules apply with respect of foreign companies’ permanent establishments located in Estonia, i.e. permanent establishments are not taxed with income tax until profits derived by such permanent establishments are withdrawn from Estonia by the foreign parent companies. Note that under certain conditions profit distributions are not subject to corporate income tax (e.g. dividend payments made at the expense of dividends or permanent establishment profits received from other EEC countries, provided participation criteria are fulfilled). Capital gains Profits of Estonian resident companies, including those received in the form of capital gains, are taxed only upon the distribution of such profits. There are no tax reliefs available for the distributions of profits at the expense of capital gains. Capital gains of a foreign entity from the sale of real estate located in Estonia and also rental payments received by non-residents for the lease of immovable property located in Estonia as well as movable property subject to registration in Estonia are subject to Estonian withholding income tax at the rate of 21%.
Income tax is not, as a general rule, imposed on gains received by nonresident companies from the sale or exchange of shares in Estonian companies. There is, however, an exception which relates to the sale of shares in real estate companies, i.e. companies where at the time of transfer or during some period during two years immediately preceding the transfer, more than 50% was directly or indirectly made up of immovable property or structures as movables, located in Estonia, and in which the non-resident at the moment of transfer held at least a 10% shareholding. Capital gains from the sale of shares in a real estate company are taxed at the general income tax rate of 21%. Dividends There is no withholding tax on dividend distributions, irrespective of the residence of the recipient or the recipient’s legal status (i.e. legal person or individual). In other words, profits are only taxed upon distribution with corporate income tax as described previously. Interest Until 31 December 2013, there was no withholding tax on interest payments to non-residents provided that the interest charged did not significantly exceed the arm’s length rate at the time the debt was incurred and the interest payments were made. Starting from 1 January 2014, there is no withholding tax on interest payments to non-residents (unless transfer pricing regula-
ESTONIA
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No income tax is imposed on sale of real estate used for residency purposes. tions apply).
held by the employer):
Thin capitalization rules Estonia has no thin capitalization rules.
• Income
Tax losses carried forward Due to the fact that the classical system of corporate taxation, where corporate profits are taxed upon their accrual, is not used in Estonia, there is also no need for and there are no loss carry forward rules in Estonia. Intra-group consolidations Intra-group consolidations are, as a rule, tax neutral, i.e. if no profits are distributed out of the company/companies in the course of the intra-group consolidation no tax consequences arise. Individual Taxes Taxation of employment related income Payroll taxes subject to payment in Estonia from salaries or similar monetary remuneration (e.g. additional remuneration, bonuses, holiday pay, compensation upon cancellation of employment contract, etc.) are as follows: Taxes payable by the employer:
• Social
tax: 33% from the gross amount; • Unemployment insurance premium (employer’s part): 1% from gross amount. Taxes payable by the employee (with-
tax: 21% from the gross amount, from which relevant deductions are made (including basic monthly exemption of EUR 144, employee’s unemployment insurance premium and mandatory funded pension premium); • Unemployment insurance premium (employee’s part): 2% from the gross amount; • Mandatory funded pension premium: 2% from the gross amount (obligatory for employees, who were born in 1983 or later; optional for employees who were born before 1983). The taxable period for payroll is a calendar month, and the taxes must be reported and paid to the tax authority by the tenth (10th) day of the month following the taxable period. Sale and lease of real estate Generally, capital gains from the sale of real estate are subject to a 21% personal income tax. Full exemption from personal income tax is applied on the income of both resident and non-resident individuals derived from the sale of real estate, which is used for residency purposes. This tax exemption is not applied to more than one transfer in two years. Some further tax exemptions, as well as certain deductions from taxable income (for example housing loan interest, training expenses, etc.) are provided by domestic law.
Rental income received either by a tax resident or non-tax resident of Estonia from the lease of immovable property located in Estonia is subject to income tax at the rate of 21%. Note, that rental income from the lease of movable property (in the case of resident persons) and movable property, which is subject to registration in Estonia (in the case of non-resident persons) is also subject to income tax at the rate of 21%. Sale of shares Capital gains derived by an Estonian resident individual from the sale of shares are generally subject to income tax at the rate of 21%. Capital gains of a non-resident from the sale of shares are generally not subject to taxation in Estonia except for capital gains derived from the sale of shares in a real estate company, i.e. companies where at the time of transfer or during some period within two years immediately preceding the transfer, more than 50% was directly or indirectly made up of immovable property or structures as movables, located in Estonia, and in which the non-resident at the moment of transfer held at least a 10% shareholding. Capital gains from the sale of shares in a real estate company are taxed at the general income tax rate of 21%. Taxation of self-employed individuals Income generated by a self-employed individual from his/her individual busi-
ESTONIA
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The only state tax applying to real estate in Estonia is the land tax, which is relatively low. There is no real estate tax as such. ness activity is subject to personal income tax at the rate of 21%. A self-employed individual, who is registered as such in the Estonian Commercial Register, is allowed upon calculation of the taxable base to deduct from the income derived, expenses related to his/her business activities, provided that such expenses are duly documented (except for certain expenses, deduction of which is not allowed under applicable law). Self-employed persons, who had derived income during the taxable year, are obliged to make quarterly advance income tax payments during the next year (3 quarterly payments on the 3 quarters following submission of the annual income tax return). Profit of the self-employed individuals is subject to social tax at the rate of 33%, whereas a minimum social tax obligation calculated from the minimum monthly limit determined annually by the state budget, is subject to payment regardless of the amount of income received. Advance social tax payments have to be paid quarterly. Value Added Tax (VAT) Estonian VAT legislation is based on the Council Directive 2006/112/EC (recast of the Sixth Directive of the Council of the European Community (77/388/ECC)). VAT is levied on the supply of goods and services at the standard VAT rate of 20%. The reduced rate of 9% applies to books, periodicals, certain listed medicines and
accommodation services. VAT rate on the export of goods and certain services is 0%. Some supplies are VATexempt, such as insurance, banking, financial services. In Estonia a person (including a selfemployed person) is obliged to register as a VAT-liable person if the amount of taxable supply from the beginning of the calendar year exceeds the amount of EUR 16,000. However, voluntary registration is possible also prior to reaching the aforementioned threshold. As a rule, immovables are tax exempt in Estonia. However, there are certain exceptions, with respect of which the general VAT exemption does not apply and which are taxed at the general VAT rate of 20%. These exceptions are as follows:
• An
immovable if an essential part thereof is a construction works, or a part of a construction works, which is to be transferred prior to the commencement of use of the construction works or a part thereof; • An immovable if an essential part thereof is a construction works which has been significantly improved, or part of such construction works, which is to be transferred prior to the post-improvement resumption of use of the construction works or the part thereof; • Land plot if the plot does not contain any construction works. The building is deemed to be significantly renovated if the costs related to the improvements exceed at least 10%
of the acquisition value of the construction works or the part thereof before the making of the improvements. Note also, that the seller of an immovable may voluntarily add VAT to the sales price of an immovable (which is exempt from VAT under the general tax exemption rule) upon prior notification of the Tax and Customs Board. If upon the sale of an immovable VAT is added voluntarily, a reverse VAT charge applies under which the buyer (and not the seller) is subject to transferring the VAT amount into the state budget. Real Estate Tax There is no real estate tax in Estonia. Land Tax Land tax is calculated on the assessed value of land at rates between 0.1 and 2.5 depending on the municipality. The tax is paid by the owners of the land or by the users of the land specified by the Land Taxation Act. The tax is paid generally in two instalments by 31 March and 1 October. Starting from 2013 land used for residential purposes and corresponding to certain criteria is exempt from land tax. State-Owned Land Lease Tax There is no state-owned land lease or similar tax in Estonia.
THE FULL SERVICE PROPERTY HOUSE in northern europe
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The Full Service Property House in Northern Europe Newsec – The Full Service Property House in Northern Europe – is by far the largest specialized commercial property firm in Northern Europe.
OULU
TRONDHEIM JYVÄSKYLÄ TAMPERE BERGEN
JOENSUU
HÄMEENLINNA
TURKU OSLO
VÄSTERÅS
ÖREBRO SKÖVDE JÖNKÖPING
VETLANDA
GOTHENBURG HALMSTAD VÄXJÖ KOPENHAGEN
STOCKHOLM ESKILSTUNA NORRKÖPING KALMAR
MALMÖ
With over 600 professionals in 20 offices Newsec covers all parts of the commercial property market. Newsec provides services to most of the leading property owners, investors and corporates in the region.
HELSINKI TALLINN
RIGA
VILNIUS
Today, Newsec employs over 550 professionals in over 20 offices and covers all parts of the commercial property market. Newsec provides services to most of the leading property owners, investors and corporates in the region.
Newsec manages more properties and carry out more transactions, more lettings and more valuations than any other firm. We have the largest research team. Together this gives us depth and breadth of the market. As in many other geographical regions the vast majority of the transactions take place between local players. It is therefore vital to have a strong local presence in every country in order to find the right counterpart. We also have an exclusive collaboration with BNP Paribas Real Estate - one of the leading advisors in Europe.
Newsec is a stable and long-term player. The company was founded in Sweden in 1994. The founding family have been the main owners from the start, with the rest of the company owned by key executives in the Group. Newsec is divided in five Business Areas, and is without question the market leader in each of them. The main thing that differentiates us from other advisors is that we offer all relevant expertise in all seven countries. The Newsec Group is highly researchdriven – for instance we carry out our own macroeconomic analysis – and we produce a unique five-year forecasts for all relevant data for all submarkets of interest in Northern Europe.
THE FULL SERVICE PROPERTY HOUSE in northern europe
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Newsec offers a comprehensive range of services in the business areas of Transactions, Advice, Asset & Property Management, Valuation and Research & Analysis.
TRANSACTIONS
ADVICE
ASSET & PROPERTY MANAGEMENT VALUATION
RESEARCH & ANALYSIS
Newsec Asset & Property Management • Property strategy • Profitability analysis • Investments (in the property) • Financial administration • Accounting service • Lease administration • Leasing • Renegotiation • Tenant relations • Property development technical planning • Property caretaking • Trimming operations • Handlings faults in property Newsec Transactions • Sell side representation: advise, marketing, negotiations • Buy side representation: advise, DD, valuation, negotiations • Corporate Finance • Retail, logistics / industrial, office • Residential • Infrastructure / Wind Power
Newsec Research & Analysis • Situation in the region, Baltic/Nordic market overviews • Tailor made solutions based on the analytical research • Forecasts on RE market development • RE portfolio analysis and recommendations on its optimization • Concept development • Highest and best use scenario consulting • Financial analysis, cash flow and analysis • Business plans
Newsec Advice • Portfolio Allocation • Corporate Real Estate • Strategic advisory and Leasing brokerage • Office • Logistics / Industrial • Retail & Urban Development • Residential • Tenant mix strategy Newsec Valuation • Real estate valuation • Business valuation • Movable property valuation • Due diligence • Construction monitoring
LAWIN
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With over 140 legal professionals, LAWIN is ideally positioned to provide the highest-calibre, specialized legal services both domestically and in a pan-Baltic dimension. The LAWIN Real Estate practice is a team of highly experienced lawyers who provide toptier, innovative advice for clients on a broad range of commercial real estate and construction matters in Estonia, Latvia and Lithuania.
• LAWIN is proud to have advised
• We often act as equal members in the
For nearly two decades, our practices and lawyers in Estonia, Latvia and Lithuania are continuously top-ranked by the most prestigious international legal directories Chambers Global and Europe, Legal 500, and IFLR 1000. LAWIN is the exclusive member in the Baltic States for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in 100+ countries. More: www.lawin.com
project management teams of major development projects, from planning on paper till opening for business and further operation or sale. • LAWIN continues to be the principal legal adviser on real estate matters in all international infrastructural projects. • Long record of LAWIN’s close work with the largest real estate investors in some of the countries has resulted in by far the biggest volume of transactional practice.
the largest institutional real estate investors present in the Lithuanian market. • European Law Excellence Centre (ELEX) Brussels office is an extension of LAWIN practices at the heart of the EU. ELEX is a cross-practice group of highly experienced LAWIN lawyers who provide legal advice for clients on a broad range of EU laws.
To learn about investment opportunities visit us here at MIPIM LITHUANIA Stand: 13.19 CITY OF RIGA Stand: 15.18, 17.13 CITY OF TALLINN Stand: 13.18, 15.17
contact and addresses
Baltic Property Market Report • Baltic States • 2014
NEWSEC LITHUANIA
NEWSEC LATVIA
NEWSEC ESTONIA
Vilnius Gedimino av. 20 LT-01103 Vilnius, Lithuania Tel: +370 5 252 6444 info@newsec.lt
Riga Zala street 1 LV-1010 Riga, Latvia Tel: +371 6750 8400 info@newsec.lv
Tallinn Roseni av. 7 EE-10111 Tallinn, Estonia Tel: +372 664 5090 info@newsec.ee
LAWIN Vilnius office Jogailos 9 Vilnius, LT-01116, Lithuania Tel: +370 52681888 Fax: +370 52125591 vilnius@lawin.lt
LAWIN Riga office Elizabetes 15 Riga, LV-1010, Latvia Tel: +371 67814848 Fax: +371 67814849 riga@lawin.lv
LAWIN TallinN office Niguliste 4 Tallinn, 10130, Estonia Tel: +372 6306460 Fax: +372 6306463 tallinn@lawin.ee
City of Tallinn Tallinn City Enterprise Board Vabaduse väljak 7 15199 Tallinn, Estonia Tel. +372 6404 218 Fax +372 6404 208 invest@tallinnlv.ee business.tallinn.ee www.tallinn.ee
City of Kaunas Head of Investment and strategic planing devision Vygintas Grinis Mob. + 370 699 91942 Tel. + 370 37 42 41 06 vygintas.grinis@kaunas.lt Laisves al. 96 LT-44251 Kaunas www.kaunas.lt
City of Vilnius VILNIUS CITY MUNICIPAL GOVERNMENT Deputy Director of ECONOMIC AND INVESTMENT DEPARTMENT Rasa Cibulskiene Phone +370 5 211 2213 Mobile +370 613 23 954 rasa.cibulskiene@vilnius.lt Konstitucijos ave. 3 LT-09601 Vilnius, Lithuania www.vilnius.lt www.development.lt/2014
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