2012 — 08 — 02
Real Estate market: new challenges in the context of economic trends

On 1 August 2012, law offices COBALT, together with partners Inreal Group and the bank Finasta, presented an overview of processes in the real estate (RE) market, determined by Lithuania's economic slowdown trends. An overview of Lithuania’s economy and real estate market in the first half of 2012 suggests that almost all real estate (RE) segments – the markets for flats, offices, industry and logistics facilities, and commercial premises show signs of stabilisation. Only private home sales were strong and the land plot market performed excellently. Meanwhile, activity of RE developers in the face of dropping sales of residential property poses the risk of serious market overheating. A rise in sales figures does not reflect the actual situation.

In the first half of 2012, the trends of economic slowdown, which had been observed as early as the end of 2011, continued to intensify in Lithuania. In the 1st quarter of 2012, the country’s GDP grew by 3.9 per cent, while in the 2nd quarter it decreased by 2.1 per cent. Nevertheless, according to Ruta Medaiskyte, Chief Economist at the bank Finasta, the scale of economic development can be considered adequate. In the 1st half of this year, the growth of domestic economy was increasingly dependent on domestic demand – retail trade continued to grow at an average rate of 6.2 per cent. The average annual inflation fell from 4.1 to 3.7 per cent over the six months; during January–June this year, the number of new loans granted was higher than during the same period in 2011. However, pessimism about future due to gloomy moods across the Eurozone can lead to reluctance of both borrowers and lenders to increase the size of the loan portfolio. A growing perception of a new recession in the Eurozone in the second half of current year is likely to impede further growth of Lithuania’s GDP and job creation. Despite the slowdown, Lithuania can remain one of the fastest growing economies in the European Union and should avoid the recession in case the latter hits Europe.

Similar trends are in the air in the RE market: 2012 started with a cautious optimism; however, halfway the year, the market gained momentum, and many segments recorded a growth in the number of deals. Some even recorded an increase in prices. However, at the end of the half-year, positive trends began to decline.

According to Mr Arnoldas Antanavicius, Head of Consultation and Analysis Department of Inreal Management, at the end of the first half of 2012, a slowdown was observed in almost all RE sectors in Lithuania’s largest cities. The shopping centre segment in Vilnius, Kaunas, and Klaipeda was characterised by increased vacancies and stabilised rental rates. In Vilnius, the vacancy rate rose from 3.5 to 4.4 per cent; in Kaunas – from 0.8 to 1.1 per cent; and in Klaipeda – from 1.4 to 1.5 per cent. Similar trends were observed in the logistic facilities segment having experienced a significant decrease in potential new tenants and an increase in vacancies in the second half of the year, while rental rates stopped rising. At the end of the half-year, vacancy rates for modern warehouse facilities in Vilnius increased from 4.3 to 5.2 per cent; in Kaunas and Klaipeda they remained unchanged. A growth in vacancy rates was also observed in the business centre segment, with the exception of Kaunas, where the vacancy rate for modern office buildings declined by 2.2 per cent, compared to the beginning of the year.

Signs of market stabilisation can be seen in the flat segment as well. Based on the data from the Centre of Registers, during the first quarter of 2012, just 2.3 per cent more flat sale and purchase agreements were concluded in Lithuania than during the same period of 2011. Meanwhile, the analysis of just the 2nd quarter’s data shows that the number of deals concluded in Lithuania went down by 1.8 per cent, compared to the corresponding period of 2011. In the second quarter of this year, the number of flat deals declined in all major cities: in Vilnius – by 3 per cent; in Kaunas – by 0.4 per cent; and in Klaipeda – by 6.1 per cent.

Inreal Management analysts consider that the declining index of demand for flats was due to an increasingly growing demand for private houses. According to the data from the Centre of Registers, during the first half of 2012, even 23.3 per cent more private house sale and purchase agreements were concluded in Lithuania than during the same period of 2011. Unlike the flat segment, a growth in private house deals was even higher in the second quarter.

Traditionally, the land plot market remains active. During the first half of 2012, there was a nearly 10 per cent growth in the number of deals compared to the corresponding period of 2011. Agricultural and private land plots stay the most popular.

During the first half of 2012, RE developers were especially active in the new-build flat (primary) market. In Lithuania’s major cities sales were launched in as many as 31 new apartment projects having added 1733 more flats to the market. However, only about 800 flats were sold during the same period. During the first half of this year, sales were launched in 21 new apartment projects in Vilnius having added 1370 more flats to the market. Almost as many apartments were offered in the market throughout 2011. Meanwhile, the demand remained nearly the same – only 624 flats were sold within the half-year, i.e. 104 flats a month on the average. Similarly, sales of about 100 flats a month were recorded in 2011. “In truth, in the second quarter about 120 flats a month were sold, but we think that this level is only temporary, since sales results improved due to a plenty of newly developed projects encouraging people to buy the most attractive flats,” states Mr. Antanavicius. He said that the rate of future sales should slope down, while unsold flats should even further increase the residual supply in the capital city.

According to Ms Ausra Mudenaite, a partner at COBALT, in the first half of 2012, administrative practice in land law and construction law areas developed in a positive direction. The National Land Agency has been consistently developing the practice for concluding and amending state-owned land lease contracts according to the rules which were changed as early as in 2011. This holds out hope for smooth administrative procedures when tenants of state-owned land change in future. After having evaluated the likely consequences of overly stringent legal regulation and formal application of law, the Government decided to open negotiations in order to conclude settlement agreements in respect of a number of real estate properties at the Lithuanian seaside, the construction legitimacy of which properties was challenged by public prosecution and state authorities. If such initiative is successfully implemented, we will have perfect evidence that the public interest can be protected not only by demolishing buildings, but also by altering or eliminating planning documentation which no longer meets the public interest and results in formal unauthorised construction.

According to the authors of the overview, despite gloomy moods across the Eurozone and a slowdown in the growth of GDP, Lithuania can remain one of the fastest growing economies in the European Union and, furthermore, avoid recession, in case the latter hits Europe. Meanwhile, the emerging economic situation and excessive supply on the primary housing market pose new challenges for RE developers, so they need to have the expertise and insight required to meet the expectations of their customers.

Overview you may find here >>.

ABOUT COMPANIES

Inreal group provides probably the widest spectrum of services in Lithuania, related to real estate and building maintenance services. The group consists of UAB Inreal Management, UAB Inreal, UAB Inreal Building Maintenance (related to companies administering apartment houses), and UAB Inreal GEO. Inreal group companies belong to AB Invalda. 

Inreal group currently employs 224 people. The value of assets managed by the group is about EUR 115.9 million; it mediates in the lease or sale of 550 000 sq. m of commercial premises and 1150 apartments; the value of assets, evaluated on a yearly basis, is EUR 580 million, and the area administered by the companies operating in the building maintenance sector is 1 million sq. m. The company operates offices or representations in Vilnius, Kaunas, Klaipėda, Šiauliai, Mažeikiai, Alytus, and Plungė.

Investment bank Finasta, controlled by AB Finasta Holding, was established in 2008 and is the largest private banking establishment in the Baltic countries by volume of controlled property and the number of customers. 

The area of specialisation of the bank is investment and private banking services. The bank provides complex investment management and company finance services to private and business customers and offers nonstandard business crediting solutions.

COBALT firms in Estonia, Latvia, and Lithuania are the leading providers of legal services in the Baltic countries with over 130 lawyers. The firms provide full-scope services to local, regional and international companies, including multinational corporations, international banks and financial institutions.
On 8 December 2011 The Financial Times and Mergermarket recognised the law offices COBALT the legal adviser of the year in the Baltics.

COBALT Real Estate and Construction Practice Group, which unites lawyers with different areas of expertise and is one of the most reputed practices of its kind in Lithuania, is headed by the firm’s partner Aušra Mudėnaitė.