What 2017 will bring to the Lithuanian real estate market

2017 01 27


The potential of hotel sector is not yet explored/exploited >

Development in trade sector will continue >

Flat sales will decline >

Office market will continue to develop >

Investors show confidence/trust >

Possible breakthrough in the industrial real estate market >


The last year were especially active in the Lithuanian real estate market – new offices arose, forward contracts were concluded on construction of hotels and their activity operations, a long-awaited Lidl also removed the veil of secrecy and opened its doors, and there was a number of large investments into the commercial real estate. All these signs show the increasing trust of large international real estate market players towards Lithuania and gives reasons to expect interest of new investors.

The potential of hotel sector is not yet explored/exploited

According to the data of the international real estate consulting company Newsec, 10 hotels or beds, attributable to accommodation establishments, fall to 1 thousand residents in Lithuania, when in Latvia, this index reaches 13, in Estonia – 25, and the average in the European Union (EU) – 27.


“These numbers show that we are significantly behind from the EU average and we have not exploited the possibilities of the hotel sector. One/we should hope that this situation will change soon – Lithuania became interesting not only to local developers of accommodation services, but also to serious international players. Currently, 7 contracts on hotels’ construction are concluded with managers/heads of such global brands as Hilton Worldwide, Marriott International, Accor Group. It shows that international operators, when providing/granting rights of their brand, trust the stability of Lithuania, and developers – perspectives of the sector and future possibilities to increase value of property”, says/claims Mindaugas Kulbokas, the head of Newsec Research and analytics group in the Baltic region.


According to the representative of Newsec, during the first two-three years, 1,8 thousand rooms should be offered to Vilnius market in newly constructed and expanded hotels. The biggest part of them (1,3 thousand) will be in hotels managed by international network brands. 860 rooms are currently under construction, 960 plans for rooms’ construction are announced. “Up till now developers have focused on construction of apartments, since it guaranteed a rapid financial payoff/return. Now, looking into the future perspectives, volume of housing development will decrease, however, capacities – equipment, construction workers – remain the same, therefore, it is searches where they could be used. It was turned to hotels – a new segment for Vilnius market. Though the period of hotels’ payoff is quite long and reaches 15-20 years, it shows the maturity of market and the wish of developers to diversify investments”, claims M. Kulbokas.


According to the analyst, the influence of tourism on the country’s economy is evident: one euro spent by a tourist in a hotel creates 1,3 euro to the economy of Lithuania – the tourist uses taxi, buys souvenirs, do their shopping in supermarkets, visits bars/restaurants and similar. “In 2015, a share of GDP, generated from tourism, was relatively small – 1,7%, comparing to Latvia (4%), Estonia (3,8%). Lithuania has great potential in seeking to increase the influence of tourism to economy. If we were able to attract more tourist visiting for a longer period of time, obviously, it would also boost the creation of new businesses. Conference tourism is one clearly unexploited niche, but accommodation establishments are not enough, there is a need of a appropriate infrastructure – conference centre”, claims M. Kulbokas.

Development in trade sector will continue

Another, undoubtedly important sign of market maturity that market player of global trade segment views Lithuania and Baltic countries seriously is successful Lidl coming into market. As the interlocutor claims, we were selected from other Baltic countries not by accident – Lithuania has more residents, compared to Estonia and Latvia, we have an even geographical distribution of cities, and it is favourable for scattering of possible consumption decrease risk. According to M. Kulbokas, more frequently eyes in the international real estate map turn to Lithuania, and because of efforts of the country to create sustainable economy, due to investments safety and various disturbances in other countries.


In 2017, Lidl will be also quite active in stores’ sector – it will continue to expand its network and, probably, we will see the comparable results. Two ways are used in the unavoidable competition: one’s own network of store is developed and/or acquisitions of competitors are implemented. This year, the connection of the new RIKI (Rimi and Iki) trade network is expected which will undoubtedly influence re-distribution of market parts. Maxima trade network reconstruction and development is also anticipated.


As M. Kulbokas says, even food products stores will feel the influence of e-shopping more and more strongly – inevitably, a big part of second necessity products will appear in the cyberspace. Due to this reason, areas of large stores will shrink. The analyst predicts that stores, currently occupying approximately 8 000 or 6 000 sq. m., should shrink their area 2-3 times.


Intensive works of supermarkets’ (SMKT) reconstructions, works of concepts’ development and modernization were implemented last year – for example, Kaunas SMKT Molas invested 3 million euros into expansion, in whose renewed premises among 70 tenants, 10 new brands, including H&M, which opened the store in the temporary capital, have settled. When the building was renewed, it trade area increased by 500 sq. m.


In the end of 2016, SMKT Mega opened its door in Kaunas after reconstruction which took more than a year and cost 47 million euros. Having implemented the development project, the trade area designated for Mega increased more than 40%, up to 102 000 sq. m., and the number of tenants increased up to 200.


In 2017, the development of Vilnius territory next to the supermarket Nordika and Latvian Depo, stores’ network of construction materials and household products. “After the leap of flat sales last year, the development of household or construction products’ store networks such as Ermitažas, Senukai is unavoidable. These networks experience gold age, expands into smaller cities, for example, Jonava”, claims M. Kulbokas. According to him, when evaluating local specialties and current niche in the trade segment, it is realistic that outlets will appear next to SMKT Nordika and store Ikea – such practice applies practically in all places, where Ikea is opened.


According to the representative of Newsec, an attitude that visitors will come to supermarkets not for shopping, but to spend their time usefully and purposefully, for entertainment will is gaining more ground. Regarding this, zones of supermarkets are formed. It is evident from statistics that more visitors come to supermarkets for entertainment: for example, 41,9% were spent on entertainment during the first quarter of 2016, and in restaurant – 13,9% more than during the same period in 2015.


It is predicted that lease price in supermarkets should increase this year: the price of 100 sq. m. area premises will reach 25-55 Eur/sq. m., bigger than 500 sq. m. – 14-22 Eur/sq. m.


“Last year a number of supermarket transactions took place in Latvia – owners, managers changed. Vilnius market has already matured for it, therefore, we can anticipate for a turning point next year – at least one SMKT investment transaction”, says M. Kulbokas.

Flat sales will decline

The representative of Newsec predicts that after 2016 the number of housing purchase-sale transactions significantly increases, this year the number could return to the sustainable market development stage and decrease by approximately 10-12%. Sales of houses and cottages should decrease by less, approximately 3-5%, since, according to M. Kulbokas, real estate buyers more frequently find more attractive offers away from the city center, where plenty of projects of real estate developments are being implemented.


“The number of transactions being concluded this year should maintain the pace of 2015. It was smaller than last year due to technical aspects – the comparative base of 2016 was sufficiently high, therefore, comparing to the numbers of 2017, these will look more modest”, claims M. Kulbokas.


M. Kulbokas names buyers’ expectations, positive decisions of the government, cost of construction works, increasing demands of energy effectiveness and buyers for buildings as the main engines of the housing market.


According to the analyst, prices of flats in Vilnius might decrease by 3-5%. An insignificant increase of prices is possible in the primary market of Kaunas (2-4%) and Klaipėda (1-2%) (when concluding transactions on new construction of real estate).


M. Kulbokas predicts that in 2017 it will be finally turned to lease market transparency and even this year it will be possible to switch from expert communication to statistics analysis. Unfortunately, according to the expert, currently the participants of real estate housing market speculates on possibilities of housing as commercial segment too much. It is evident that sustainable housing market is inconceivable without rent. Mandatory registration of responsible borrowing, lease agreements in central register and general real estate fee may become a favourable complex decisions for the development of lease market.

Office market will continue to develop

The last year we exceptional in Vilnius office market – a record number of office area was rented and one of the biggest lease transactions in the history of Lithuanian office market was concluded last year.


“The year was exceptional – the supply increased extensively as it was predicted, however, the demand surprised pleasantly. Reviewing the historical extent of office premises transactions of the last 10 years, the average of office lease in Vilnius market reached about 35 000 sq. m. in a year, and the number of concluded transactions increased twice in 2016. Two thirds of concluded transactions, made with the help of mediators, in the last year happened with mediation of Newsec”, says Mindaugas Kulbokas.


2016 was exceptional in office market, since practice of forward transactions and one of the biggest transactions in the history of Lithuanian office market was concluded last year – Danske Bank global services center rented an office building of 11 600 sq. m. The building is being constructed at Saltoniškių str. 7 by M.M.M. projektai company next to the headquarters of the bank.


Five new business centers Quadrum, City, Highway, 135, Delta increased office supply up to 526 700 sq. m. in 2016. Their total area consists of 84 400 sq. m.


“The average occupation rate of business centers, opened last year, was very high and reached about 70 percent. While at the end of the year, the average level of modern office unleased area reached 4.8 percent. In comparison, a normal rate is considered to be 7-8 percent vacancy in the mature European markets. Therefore, the proportion between office market supply and demand in Lithuania is currently balanced. When analyzing the overall market image and already implemented development, we see that there appears free space to the extent necessary to ensure manoeuvre possibilities of lessees and, therefore, amounts of rent remain sufficiently stable”, notes M. Kulbokas.


The prices of modern offices in Vilnius centre remained 14–16 Eur / sq. m/ within a month, in rare cases, the prices reached 17 Eur. The prices of offices in city parts more distant from Vilnius centre range of 11–14 Eur, and in the outskirts of the city and of older B class offices – 8–11 Eur.


The office market will develop dynamically in 2017 – 2018. It is estimated that having implemented yet only planned projects, the area of modern offices will increase to 140 000 sq. m. in Vilnius. Currently, 12 out of 17 offices, planned to be opened in 2017 – 2018, are under construction.


“The market and its prices will remain sufficiently stable, since, regarding the prospective plans from the side of lessors, stable supply for good offices will remain. It is expected that companies will continue to move from old ineffective office premises to new offices and in this way will increase the effectiveness and their attractiveness as an employer to potential employees. Those Vilnius office buildings who wish to attract new companies coming into the market will face a new challenge and will have to compete with Kaunas, where at least four significant office projects will be implemented in 2017 – 2018. Most likely, the profile of potential clients will increase if public institutions decide to move from ineffective buildings to modern offices”, states Newsec representative Mindaugas Kulbokas.


It is noticed that during the last year the biggest part of commercial real estate was rented by services and informational technologies (IT) centers, which currently conclude almost a quarter of office markets. It is predicted that this indicator will increase further. In 2016 a tendency emerged for lessees to think about new offices 12 – 24 months prior to moving in, and the office premises’ lease contracts are concluded 6 – 18 months prior to moving in.

Investors show confidence/trust

According to Newsec data, the average annual yield of investments into real estate of commercial purpose in Vilnius reaches approximately 7% and significantly exceed average indicators in Western Europe or Scandinavia. Yield in Lithuania is bigger by one third than in the major North European cities, for example, Stockholm, Oslo, Helsinki or Copenhagen, where it sometimes even reaches 4,5%.


It could be noticed that both in Lithuania and in other Baltic countries, the number and volume of real estate transactions is growing. The favourable situation in market should attract investors not only towards traditional real estate segments, but also towards niches, which up till now were considered as unattractive, for example, traditionally held lower class commercial real estate – segment of industrial premises.


According to Newsec data, in 2016, 14 commercial real estate transactions were concluded in Lithuania, generating return to investors from lease flow and exceeding 5 million Eur. Their total value reaches 273 million Eur. Last year, 6,3% less than in 2015 were invested into commercial real estate in Lithuania, however, the activeness of investors were significantly higher, and the main problem is identified – there is not proper quality and volume for property investments.


According to Neringa Rastenytė – Jančiūnienė, the head of Newsec investment transactions group, the biggest and the most significant investment transactions in Lithuania last year was acquisition of Kesko Senukai logistics center by the American W. P. Carey Inc. for 60 million Eur. “This investor – solid and perfectly known in the whole world. The appearance of such new and big investors, as this American company, always is an import event for small markets – it shows that, little by little, trust of global players appears towards us, it also attracts the interest of other large companies. Such transactions are very useful for us and becomes common when economy increases”, ensures N. Rastenytė-Jančiūnienė.


Another outstanding event in the market of Baltic countries, according to the Newsec representative, is the sale of Riga’s supermarkets Domina (74,5 million Eur) and Riga Plaza (93,4 million Eur).


“We notice the increasing appetite of sellers in Lithuania and Baltic countries. Due to these reasons local funds buy real estate slower or they are on a lookout for more expensive objects, since it becomes harder to compete with private investors, who are subject to the general market moods. Therefore, the speed of lower values in investment real estate segment should decrease, but the current situation is very favourable for owners of large real estate projects who wish to sell big objects for a good price. We can predict that this year we will see at least several transactions exceeding 50 million Eur in the market of Baltic countries”, says N. Rastenytė – Jančiūnienė.


According to the Newsec representative, Lithuania and other Baltic countries are acceptable risk markets, which can offer good objects with attractive return. For example, the return of investment in 2016 in the Lithuania’s industrial real estate market reached 8,5% – the same return was recorded in Latvia, and in Estonia – 8,25%.

Possible breakthrough in the industrial real estate market

According to Newsec data, this year new warehousing premises’ area of 30-35 thousand sq. m. (not “built to suit”) in Vilnius region should be offered, and in Kaunas and Klaipėda – area of 40 thousand sq. m. It is predicted that lease prices will remain stable, and level of vacancy will reach 5%.


“Developers will continue trying to connect project development with forward lease agreements. Areas of premises do not increase when building in such a way. However, the traditional warehouse market is increasingly changed by e-commerce market. This kind of trade must receive products as fast as possible and for this reason they need not traditional, but rapid turnover warehouses, which have smaller area and more gates”, says M. Kulbokas.


It is predicted that 2017 may bring the breakthrough of industrial buildings’ development in the industrial property segment. “I would wait for a breakthrough in factory segment, since the government wants to return emigrants, but not all of them work in offices. Therefore, factories are necessary when having a strategic aim to create work places. A good example is the window factory in Marijampolė LEZ, however, there should be more of them. It is the same as in office sector, the first projects were timid, and later there were more stories of success”, says M. Kulbokas.

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