The Latvian Property Market

“Due to a pandemicrelated boom in housing demand, residential prices in Riga and Latvia have continued to rise” The Latvian property market

Another active period for investors

The Latvian economy continues showing resilience to the fallout from Russia’s invasion of Ukraine, but development is already slowing. Energy costs are rising to new records and pushing inflation higher. GDP in Q2 2022 grew by a preliminary 2.6%, with the overall price level up 19% from a year ago. Unemployment, however, stood at 6.4% at the end of Q2 and was down 1.4 percentage points compared to the end of Q1.

Still, under the latest Bank of Latvia forecasts, GDP is set to grow 2.9% in 2022, 2.4% in 2023 and 4.2% in 2024. Overall inflation is forecast at 14.8% in 2022, 7.0% in 2023 and 2.4% in 2024. In H1 2022, total real estate investments exceeded EUR 120 million. Despite increased uncertainty, investment volume was only 15% lower than in the same period last year. The drop was due to a smaller average transaction size, though Q2 2022 was more active than Q1. Retail remained the dominant market segment in H1 2022 as it was in 2021.

Real estate investors and property developers naturally have been more cautious and concerned in 2022 given the region’s geographic proximity to Russia. Some investors have tested their ability to dispose of real estate and some developers have considered selling half-built projects or sites previously acquired for development. Still, the development of new real estate objects is continuing, even if more slowly than initially planned. Due to a pandemic-related boom in housing demand, residential prices in Riga and Latvia have continued to rise. In H1 2022, the increase in prices for new apartments was more pronounced than last year, mainly due the higher demand and construction costs. Construction costs in Q2 2022 were up an average 42% compared to 2015 and increased by 22% over a year.

Contact:

Inita Nitiša i.nitisa@newsec.lv Kristina Živatkauskaitė k.zivatkauskaite@newsec.lt

Interesting trends on the Latvian property market in H1 2022 and beyond

Like last year, most investments were in retail

In H1 2022, the majority of investment deals were in the retail segment, which accounted for more than 75% of total investment volume.

The largest deals were the acquisition of Damme shopping centre by Summus Capital, the acquisition of the Grostonas 1 shopping centre by Eika Asset Management, and the purchase of a shopping centre on Stirnu Street by Hili Properties. At the Damme and Stirnu Street shopping centres, the anchor tenant is a Rimi hypermarket, while at Grostonas 1 it is a Maxima XXX hypermarket. Latvian market continues to attract new investors

As previously, in H1 2022, too, the Latvian market proved most attractive to neighbouring investors: most properties were bought by entities from Estonia or Lithuania.

Last year a new Finnish investor, the Titanium Baltic Real Estate Fund, entered the Latvian investment market. This year the fund acquired another property. The seller of both properties was KS Holding. This year four new investors acquired properties in Latvia: three funds and a pharmaceutical company. The newly established Estonian fund manager Green Formula Capital acquired a medium-size retail centre on Kurzemes Prospekts in Riga, while Eika Asset Management of Lithuania acquired a shopping centre at Grostonas 1 with Maxima as the anchor tenant. Meanwhile, ICG Farma purchased another retail building at Krasta 52 with a Jump Space entertainment centre and Dino Zoo pet store as anchor tenants. And an LHV Bank pension fund acquired five residential properties in one transaction – three new and two renovated residential buildings in Riga. The total area of the buildings is about 4,000 sqm across 109 apartments, of which almost all were already rented out.

The office market in Riga is still the most active submarket

Developers continue work on their office projects even though the timelines of some projects have been pushed back. Key factors in the delays are surging construction costs and supply disruptions. In August 2022 the first stage of the Verde office project was delivered, supplying the market with 15,000 sqm of highquality net leasable area of which more than 70% is leased out already. Meanwhile construction on the second stage of the Verde continues. Five other significant office projects are in the construction stage as well. They are mostly class A and will supply about 110,000 sqm of new office space. Delivery of these projects is currently scheduled for H1 2023 but, given the current market situation, likely will be pushed back. Utility bills play a significant role

As energy and overall prices rise, utility costs are growing too. It is uncertain how long energy prices will continue increasing and how heavily that will ultimately affect utility prices. Thus this year tenants and developers are paying extra attention to utility bills and other expenses on top of rent. Some property owners are willing to offer rent discounts while others are raising management fees citing the overall rate of inflation.

EUR 610 million

Total investment volume in 2021

EUR 300 million

Total investment volume expected in 2022 as a whole

+2.9%

GDP growth expected in 2022