The property market was the first sector in Latvia to be hit by the global economic crisis, but it was also the first to show signs of recovery. In addition, the real estate market is clearly understandable for European investors due to its relatively high predictability.
Analysts estimate that property prices in Latvia hit bottom last year and started to climb slowly in early 2010. Therefore, investors must try not to miss this unique opportunity, as the highest profits are made when a market is at its weakest.
But time is not on the potential investor’s side and market analysts are looking to the future much more optimistically than they were last autumn. The expected surge will soon benefit high-end real estate owners, although such properties are most often sought after by small and medium-size investors. Larger players tend to focus on commercial properties – a market segment that has high growth potential in Latvia.
On the subject of the benefits of purchasing residential property in Latvia today, the country is now closer to what is considered a buyer’s market than in the first few years of its independence, when it was described as a seller’s market. The current market situation demands a higher quality property offering as there are more sellers than buyers. In the past, newly developed properties enjoyed the greatest demand and this high demand provoked an excessive supply of properties for sale, which led to the construction of too much new housing and saturated the real estate market.
The supply and demand ratio later stabilised due to a new government policy; the majority of the intermediaries were removed from real estate transactions and buyers now usually purchase property directly. The demand has gradually shifted from newly developed properties towards older housing and as of now, both kinds of property are equally popular. Recent developments include projects involving major renovation of buildings in the historic centre of Riga, the Latvian capital, as well.
Incidentally, new residential projects are now enjoying a second wave of consumer interest. This is partly attributed to a policy adopted by creditor banks that is forcing developers to cut prices in order to boost sales. Last autumn, newly developed apartments cost an average of €900 per sq m, while in January the price rose to above €1,000 (the figures cited in this article relate to high-end housing, which is more attractive to potential investors).
In Latvia, the asking price for residential property usually includes interior finishing, which is not the case in Russia, for example. Also, by buying a flat in an apartment block, one automatically becomes co-owner of shared areas such as staircases, elevators, hallways, entrances, and even the land the building stands on. Latvian construction regulations require that residential developments include at least one car parking space per flat.
Riga’s upscale residential properties in downtown locations were not affected by the global meltdown. Luxury flats located in the centre of the European capital, which were built during the heyday of the Jugendstil (Latvian Art Nouveau style), will always be in demand, regardless of any economic cataclysms that may befall the country in the future.
Flats in a renovated old building at the elegant Embassy District location are listed at €3,000–€4,000 per sq m. It’s hard to find a cheaper price than that, as this category of property usually sells well.
Properties in less expensive neighbourhoods sold for around €2,000 per sq m. in December, 2009. However, last autumn one could find flats for sale at €800–€1,000 per sq m. in central Riga, and even at €700–€750 per sq. m if one was really lucky. Admittedly, flats at those prices usually sold within 24 hours.
Riga’s residential property market is showing signs of a trend which can be directly linked to the recession — many apartments bought on mortgage are now for sale, as owners cannot pay off their loans. These opportunities can be particularly interesting for investors – one can buy a flat or house significantly below market value at auction, with a margin of up to 70%. Banks controlling the properties seized to repay overdue loans have suddenly become major players on the housing market.
As of now, banks are busy establishing funds for the management of repossessed properties in order to keep them off the market for a while and prevent a further fall in property prices.
Latvia’s famous seaside resort, Jurmala, remains the most attractive location in which to buy a villa or a country house. One of the advantages of Jurmala is that Latvian law only allows large plots of land (1,500 to 5,000 sq m) to be sold there. This decision was taken by the local authorities and is aimed at preventing excessively dense real estate planning.
The average price of seaside property in Latvia has dropped by 30%-45% and plots of land or houses located directly on the coast are up for sale. It’s hard to estimate the average price for this kind of real estate because it largely depends on the property’s individual characteristics, such as the quality or date of construction and current state of repair.
Early 2010 saw very few residential property transactions, which is probably due to the introduction of a new housing tax on January 1, 2010. Apart from additional costs, the new tax conditions also extend the mandatory period for preparing and closing on property transactions. This includes the time required for a buyer’s name to be entered into the central land register, known as the Land Book. Furthermore, the supply of residential real estate has dwindled as owners have chosen to rent their properties out rather than sell them, awaiting a rise in real estate prices.
The retail property segment is showing a distinct upward trend, led by mediumsized stores and large shopping centres. Commercial activity has traditionally been concentrated in the Latvian capital’s city centre, and vacant premises are increasingly harder to find in Riga’s more popular shopping areas. Elegant shops and cafes have sprung up where there were gaping, empty windows just a few months ago.
The economic downturn has forced shop owners to lower rents, which currently stand at €8–€25 per sq m a month in Riga’s prime retail locations. In 2008, tenants paid a minimum of €20 per sq m. a month and the highest rents in Old Riga (Vecriga) reached €100 per sq m.
Admittedly, property owners are careful not to sign long-term contracts at such low rates. This tendency leads to frequent tenant turnover and forces companies to change locations far too often, especially those that don’t invest much when settling into a new retail space. This autumn, when most of the one-year lease contracts in Riga expire, many of these companies will be moving again.
However, prices for office space have definitely hit bottom and are ready to start rising again. The current lease price for Class A and B offices in central Riga ranges from €5 to €12 per sq m. whereas in 2007 – the year preceding the financial crisis – rents fluctuated between €10 and €25 per sq m. In the first few months of 2010, 25%–30% of Riga’s office spaces remained vacant, whereas demand exceeded supply in this market segment before the recession.
Getting back to the benefits of buying property in Latvia today, it must be noted that this Baltic country is known for its liberal legislation. There are no restrictions for foreigners buying local real estate or land for development projects. Property rights are protected by law, which is applied equally to Latvian nationals, non-citizens who establish residency in Latvia and foreign nationals. Real estate that has been properly registered can only be repossessed under extraordinary circumstances and exclusively by parliamentary decision. All real estate ownership data is entered into a special state registry, known as the Land Book. It is an open-access resource which supplies buyers with reliable information on property owners and guarantees the transparency of property transactions.
Potential investors will be particularly attracted by Latvian bank mortgage policies regarding foreigners. If a non-resident has an official source of income in Latvia, that investor can borrow at the same interest rate as Latvian residents and property acquisition will be financed at 90% of its estimated value. If a non-resident can produce confirmation of income in their own country, he/she will be granted a loan of up to 60% of a property’s value under the same conditions as a Latvian resident. If non-residents are so inclined, it is possible to borrow up to 80% of the value of property at time of sale by using a local guarantor with a set income to secure the transaction. The average bank interest rate for non-residents is 5.5%.
The federal and local governments have yet to set any restrictions for investors interested in purchasing Latvian property. A foreign national who wishes to buy a house, flat or land need only apply to the relevant municipal authority; a response (usually a clearance to buy) is forthcoming within 14 days. It is also important to note that non-residents can acquire any type of property, with the exception of areas on national borders, nature reserves, farmlands and woods.
Potential investors should consider yet another positive aspect of purchasing real estate in Latvia, a factor which is particularly appreciated by Russian nationals. The nation acceded to the Schengen Agreement in 2007, meaning that a visa issued by a Latvian consular authority is valid for travel to any country in the Schengen Area. Furthermore, Latvia is planning to adopt a law giving resident status to any foreign national who owns property in Latvia and has created at least two jobs locally. It is worth mentioning here that residence permits issued by a European Union country give bearers the right to live in any EU member state.
Acknowledgements: the author would like to thank lawyer Egils Rubenis and Ilze Mazurenko, a board member at Baltic Sotheby's International Realty, for their assistance in writing this article.
