The Property Market
Author Leaonne Hall is an expert on the overseas property market and has written extensively for a number of newsstand titles. She previously produced three editions of the Red Guide to Buying Property in Eastern Europe, and has been writing in detail on the individual markets since 2003.
THE PROPERTY MARKET
People have been buying in the Baltics since the 1990s, but it wasn’t until EU membership removed any obstructions to foreign purchases that the market really began to take off. Since the 90s, prices have risen by an estimated 1,000%, making Latvia, Lithuania and Estonia three of the most popular investment markets in Europe. The focal points for investors are the capital cities of Rīga, Vilnius and Tallinn as these offer the best returns, both in terms of rentals and price appreciation.
Examining the prospects for future returns, A Place in the Sun Magazine concluded that over the next ten years, the Baltic States would offer investors a 356% rise in prices. While this might be an exaggerated claim, there is no doubt that prices will continue to appreciate as the countries head for adoption of the euro, and tourist numbers and the economy remain among the fastest growing in Europe.
Currently, the average property price sits at £46,000 and while prices in the capitals may seem high already, most analysts are confident that within ten years they will have reached Scandinavian levels, meaning a doubling or even tripling of current values. Consequently, a property worth £100,000 today could be worth around £456,000 in ten years.
However, some of these astronomical price hikes are beginning to slow. Growth in 2005 was 66% in Latvia, 21% in Estonia and 14% in Lithuania, while in 2006 appreciation was 39% in Latvia (Rīga), 15.5% in Lithuania and 10.5% in Estonia, meaning people are asking the question, have we missed the boat? When you consider that the Baltic States are only three years into EU membership, analysts are certain that there is still another 10 to 20 years’ growth in the market.
The facts that mortgages are available for up to 85% of a property’s value, taxes are low and affluence is on the increase are all factors that help to explain the explosion in investor interest. Couple this with the fact that the quality of newly-built property is high and the cultural and lifestyle appeal strong, and it is clear why investors are keen to sink their money into Baltic property.
The property market is sustained by both high foreign and local demand. As earnings and the amount of disposable income among the local buyers has increased, the desire for better living standards has added pressure to the market. Consequently it is unsurprising that it has expanded so quickly.
The future for the Baltic property markets looks very good. They continue to offer excellent medium- to long-term growth potential, despite the fact that the most canny investors bought into the market long ago. However, thanks to the press coverage, low-cost airlines and EU accession, overseas buyers are still queuing up to take advantage of the excellent returns, so much so that some developers raise their prices by as much as 30% between one phase of a development and another.
In terms of who’s investing, the Baltic States are a different market from countries such as Bulgaria or Croatia. As tourism is still a new entity, this is not the place you’d choose to buy your second home. Estonia, Latvia and Lithuania are much more of a pure investment and generally speaking you expect to see the more sophisticated buyer with a property portfolio purchasing here.
Vilnius has experienced the highest growth in the Lithuanian market, with apartment prices in the capital’s suburbs rising by 15% to 25% per annum since EU accession, and newly-built properties in the city centre jumping in value by as much as 50%.
With one of the lowest ratios of houses to people, the demand has added to the high rates of price growth, and despite almost 3,000 new homes being built in 2004, 5,500 in 2005 and 6,000 in 2006, the lack of supply doesn’t seem to be abating. With the market driven by buyers rather than sellers, the lack of demand and high turnover of property, evidenced by the fact that Lithuania has the highest level of home ownership in Europe, is good news for investors who intend to buy off-plan and sell on completion.
Over the last year, prices for land plots jumped by between 20% and 50%. 25% of the market comprises pre-1960s properties, 90% of which require renovation, making newly-built properties highly sought after. Interest rates on mortgages are relatively low–attractively so–at 4.2–5.3%. Finally, price changes for 2006 have exceeded appreciation rates of 2005 by roughly 2%, meaning there is a continued growth in property prices in the country.
Knight Frank has reported that Latvia is heading the European property market in terms of price rises, with the third quarter of 2006 seeing increases of 39.2%. While the mortgage market here is still a long way off that of the EU–in Latvia it accounts for 4.6% of GDP, compared to 48% across the EU–this has not slowed the development of the market.
Since 1998 prices have risen by 300%, averaging between 15 and 20% per annum. The most significant increases have been seen in Rīga, followed closely by the coastal resort of Jūrmala. It is to safe to say that Rīga remains undervalued in terms of an EU capital, but if prices continue to rise at the current rate–many areas have witnessed increases of over 30% within the last 12 months–then it won’t be long before they are on a par with their European counterparts.
Mortgages are available up to 85% and are offered to both locals and foreigners in lats, euros and US dollars. Interest rates start at 4.5% and there is no capital gains tax levied on properties that have been privately owned for more than a year.
The same problems of supply and demand evident in Lithuania are also apparent in Latvia and as the country’s property prices are reported as being low, the potential for long-term investors is massive given the projected economic and price growth quoted over the next ten years.
Estonia has so far been the favourite market with investors, being the first of the Baltics to attract the attention of foreign buyers, with prices averaging growth of 15% year-on-year. Prices in the Old Town of Tallinn are the highest of all the Baltic capitals, but not prohibitively so.
Apartment prices in the capital’s suburbs have recently risen by 25% to 45%, while newly-built apartments in the city centre have appreciated by a staggering 70%. Currently, you can expect to buy a decent, newly-built apartment for around £100,000 in Tallinn’s centre. While prices have more than doubled since 2003, the rate of increases has dropped from 21% in 2005 to 10.5% in 2006. However, there is no sign that appreciation rates won’t carry on growing, albeit at a slightly more sedate pace.
Where to buy
While the capitals remain the most popular property hotspots, other towns and cities are proving increasingly popular as developers begin to move in. Areas such as Jūrmala in Latvia are attracting more investment, but it’s likely–with the exception of Lithuania–that property outside the capitals will remain a niche part of the market.
As well as being the geographic capital of Latvia, Rīga is the transport hub and economic and commercial centre. It’s undervalued when compared to other European capitals, and despite price rises of 30% in the last two years, property is still affordable. Surprisingly well developed, Rīga is currently the subject of much regeneration and modernisation. The Rīga government’s development plan is set to run from 2006-2018, with the aim of providing 12 million square metres of living space in order to bring the city in line with western standards. The redevelopment will feature new commercial and residential centres, a bridge to link the north and south sides of the city, and reconstruction of the port area. The development plan will offer considerable opportunities for would-be investors and further encourage the continuation in price growth. The old port area is being opened up as a new residential centre, while just outside of Rīga is Saliena, a satellite town which looks well designed for letting to commuters.
Apartments are the most sought after and widely available property type, although it is possible to find townhouses and old city centre houses. Average prices sit between £60,000 and £130,000, depending on location.
With sandy beaches and traditional wooden architecture, Jūrmala has been described by some agents as the ‘Beverly Hills’ of Latvia. Situated to the west of the capital, this coastal resort consists of the three seaside towns of Majori, Dzintari and Bulduri and is situated on Latvia’s Baltic coastline, only 45 minutes from Rīga.
Traditionally the reserve of the wealthier of Latvia’s inhabitants, its proximity to Rīga has resulted in growing interest from the ranks of foreign buyers. There are a number of new developments being built in the area to cater for the growing demand, and while buyers tend to be predominantly locals, there are also a number of Russians both buying and holidaying in Jūrmala.
Jūrmala sees a massive polarisation in prices, yet property is much more expensive here than in Rīga, with prices averaging €200,000 for a three-bedroomed family home. Despite being coastal, the climate is not akin to that of the Bulgarian Black Sea Coast and so investors should not expect to generate masses of interest from bucket-and-spade tourists. Consequently, rather than looking for a holiday home or rental property, this should be looked at as a longer term investment.
Receiving a staggering 81% of Estonia’s foreign direct investment, the economic hub of the country is also the major property hotspot. This medieval city offers prices which are marginally lower than those of neighbouring Latvia and Lithuania, but this is unlikely to continue as Estonia has the most promise for foreign investors, with long-term appreciation looking the strongest, as the current lack of high quality real estate is replaced by new developments experiencing high levels of demand.
With 15% price rises in Tallinn last year, values in some districts of the capital are somewhat inflated, with one-bedroomed apartments in the old town selling for over €100,000. While prices in the last three years have more than doubled in Tallinn–a property worth £40,000 in 2000/01 would now retail at over £100,000–it is still possible to find a bargain. Even so, by buying in the capital’s centre, you are likely to experience appreciation rates of around 10% per annum.
In terms of appeal, Estonia attracts more foreign direct investment and is seen as a more attractive place to do business than her neighbours. As for tourism, Estonia also comes out on top, generating €600 per tourist. All of these activities–economic, tourist and consumer–are focused on Tallinn. With a strong infrastructure and largely English-speaking business community, investors will find it easy to operate here.
One of Europe’s lesser-known beach resorts, the seaside town of Pärnu is the summer capital of Estonia, thanks to its miles of white sandy beaches. Offering property at prices 30% lower than in Tallinn, yet lying just one hour south of the capital, Pärnu is an up-and-coming hotspot. With two golf courses and several spas, this coastal resort offers property for as little as £20,000.
There are also new developments being constructed, with 18 off-plan riverside apartments being built next to Pärnu River, starting at just £38,000. It’s expected that in the near future, budget airlines will consider running flights directly from the UK to Pärnu.
With property prices appreciating by between 15% and 50% since 2004, and with annual average increases of 30%, Vilnius is experiencing high demand for one and two-bedroomed apartments in the city centre. In the future, as long as demand continues to outstrip supply, you can expect to see a similar trend in price growth.
With a massive demand for Western-style residences in Vilnius, many new developments are under construction and the old housing stock is being renovated. While Vilnius’ old town is incredibly beautiful and the focus for much demand, the suburbs aren’t so attractive and consequently prices fall as you head out of the centre.
Property is selling rapidly, with a number of new developments being built every year. Most property is priced between €150,000 and €200,000, although on the city’s outskirts you are looking at around €50,000.
Kaunas and Klaipeda
These two towns have also begun to attract investors and are currently appreciating exceptionally well, although it’s still early days.
Kaunas is Lithuania’s second city and offers an affordable alternative to Vilnius. Situated 90km to the capital’s northwest and connected directly by motorway, today Ryanair flies into Kaunas from Dublin, Liverpool and London. Flights into Kaunas have increased greatly over the last couple of years, leading to increases in tourists and foreign businesses arriving in the Baltic States’ second largest city. You can pick up a twobedroomed apartment in central Kaunas for £112,000.
The coastal resort of Klaipeda is Lithuania’s third-largest city and also a transport hub for the entire coastline of the country. Located in the middle of the west coast, it has an attractive old town and a lively social scene. Focus tends to be on one- to two-bedroomed apartments, which retail at around €30,000 on a newly-built development.
What to buy
Generally there are two types of property on the market. Newly-built off-plan properties and historic buildings that can be bought refurbished in the old centres of the Baltic capitals. The problem with the latter is that two to three years ago you would have made a killing had you bought one of these art nouveau properties, but today the prices are much higher. That said, for £100,000 you can pick up a newly-built apartment in the centre, while for £50,000 to £60,000, you can buy in the suburbs.
There is a slight risk that the level of development in the capitals may lead to an oversupply of new-build apartments, although at the moment demand is so high that this seems unlikely for the near future. Good-quality townhouses and apartments are the most popular for rentals, making them likely to appreciate well. There is also the option of renovating Soviet-era property, but this is not likely to resell well or rent well as the market is geared towards newly-built or refurbished property in the old town area of the Baltic capitals.
The recommendation for investment is to always buy in the centre, close to offices, shops and restaurants/bars/clubs. The quality of both refurbished properties and new builds is generally very high and the properties are stylish and sophisticated–on a par with anything you can get in the UK and many bathrooms even come with jacuzzis!
Be aware that if buying a newly-built property, you are likely to be looking at purchasing a grey-finish property; this means you are quoted the property price without the interior fitting included. You would be looking at an extra 15% to get the property completed with all fittings.
THE BUYING PROCESS
Despite being fiercely proud and individual nations, the purchasing process is very similar in all three countries. Thanks to accession into the EU, UK buyers will find no restrictions on purchasing here and no residency permit is required in order to buy.
Stage 1: Restrictions on foreigner buyers
In all three countries, foreign investors are treated equally with citizens of the Baltic States and there are no limits on the purchase of apartments and houses. Land is also freely open to foreign purchase. The main restrictions relate to the purchase of agricultural and forestry land. In all three Baltic States, foreigners must have lived in the country permanently for the last three years and have been actively involved in agricultural activities during that time in order to buy agricultural or forestry land. One exception is Estonia, where no restrictions apply to foreigners purchasing agricultural and forest land so long as the amount doesn’t exceed 10 hectares. In Latvia, only a Latvian citizen–or a company with 51% of its shares owned by a Latvian citizen–can purchase such land.
There are also severe restrictions in place when it comes to purchasing a coastal property, so ensure you do all the necessary background research before you buy.
Stage 2: Funding your purchase
Foreigners are able to secure a local mortgage to purchase property in the Baltic States, although the percentage available and interest rates do vary.
In Latvia in order to secure a mortgage, the repayment can’t exceed 40% of your monthly income. Latvian banks will offer a loan of up to 90% of the property price, with interest rates as low as 3.5%. The loan term tends to be up to 40 years.
In Lithuania, loans of up to 85% are available to foreigners purchasing property, with interest rates currently under 5%.
In Estonia, mortgages are incredibly affordable with low rates of interest. Euro mortgages are on offer and generally they have a repayment term of between 15 and 30 years, with Estonian banks providing finance of up to 75-80% at interest rates of under 4%. However you have to prove that you have an annual income in excess of £20,000 in order to qualify for a mortgage.
Stage 3: The contract
The process of buying a property is straightforward, with the general timeline being that of the payment of a deposit (between 10% and 20%) on the signing of the preliminary contract, and the payment of the remainder on the formal notarisation or final signing of the contract. Notaries, rather than solicitors, typically oversee the transfer of ownership, although a lawyer is best employed in order to ensure the contract is correct and to assist the buyer in their negotiations.
In Estonia, the ownership of land can be secured through the setting-up of a company, but you will need to secure permission from the County Governor. If you are buying an off-plan property then a deposit of 10–20% will need to be paid during the signing of the preliminary contract, with the final balance to be paid on completion of the build, which generally takes 12 to 18 months. Generally, the payment for property is done through the notary, with the buyer transferring a lump sum into the notary’s deposit account prior to the conclusion of the property sale, thus safeguarding the buyer’s money until the sale is official. On conclusion of the agreement, or upon registration of the title, the notary than passes the payment over to the seller.
In Latvian legislation, deposits held by a notary are technically safeguarded, although this is rarely the case in practice, with the buyer and seller preferring to use an escrow or bank account for the holding of funds. Until the registration procedure is complete, neither the seller nor the buyer has access to the funds transferred to the escrow account, thus safeguarding the buyer’s interests. As with the Estonian process, the payment of a 10–15% deposit is required on the signing of the preliminary contract, with the remaining balance either paid on completion of the property in the case of a new build, or on the final signing of the contract in the presence of a notary. In both Latvia and Estonia, for new-build properties, there are no stage payments, unlike many other countries.
In Lithuania, the purchase price payment is usually divided into two parts: a partial pre-payment and payment of the remaining purchase price. The latter amount is paid after certain steps have been taken–for example, after the transfer acceptance deed has been signed. The deposit must be paid once the preliminary contract has been signed, with the remainder on completion of the development or the final signing of the contract.
In all three countries, you are entitled to sign a power of attorney, which means you have no need to be present in the country for the final signing–your lawyer can do it for you.
Stage 4: Land registration and completion
Despite having signed the final purchase contract and transferred all the relevant funds, it’s not until you are listed as the owner of the property with the land registry that you are the full-blown owner of your new property. In Estonia, the registering body is known as the Land Register, in Latvia it’s called the Land Book and in Lithuania, the Register of Real Estate. The time taken for registration varies dramatically. In Estonia, it takes between one to four months, but in Latvia and Lithuania it’s much quicker–15 to 30 days in Latvia and 10 working days in Lithuania. Recent legislation introduced in Lithuania in 2007 allows for the signing at the land registry to be done along with the final purchase contract in the notary’s office. Not only does this save time but it also cuts costs significantly.
Baltic States legislation requires all property transactions to be finalised in writing, and so–as with many European countries–the final signing of the contract must be done in the presence of a notary. Latvia is the only country where the process differs, as here all that is required is for the relevant parties to sign their application on the Land Book. The signatures can be notarised following the signing. Be aware that it’s not uncommon to have to wait a month for an appointment with a notary.
Stage 5: Additional payments
As with any property transaction, both the buyer and seller will be required to make certain payments in addition to the purchase price of the property. This is even more so the case in the Baltics as many property prices are quoted in a grey state (see page 85). Expect to put an additional 15% of the property cost on top of the preliminary quote in order to finish the property ready for habitation.
Typical payments include stamp duty and notary fees, as well as VAT for newly-constructed or reconstructed buildings (although this is usually included in the purchase price). The size of these fees varies among the States. In Latvia, the role of notaries in the conveyancing procedure is limited and their fees low–23 lats (£22) for testifying signatures for the application to the Land Book and 15 lats (£14) for signing an agreement in their presence. In contrast, stamp duty is high at 2% of either the real estate purchase price or the cadastral value (the value according to the tax office), whichever is the higher of the two figures.
In Estonia and Lithuania, the notary’s role is more involved and so their fees are higher, at between 0.5% and 1% of the purchase price. In both Lithuania and Estonia there is no stamp duty, although you may have to pay real estate brokerage fees of 3% and bank fees if an escrow account is opened. Other than that, you’ll have the annual payments of property and land tax, plus legal fees which will vary from €150 to €650 depending on the country you buy in.
Typical fees: Latvia
- Transaction costs should come to a total of 4–5%.
- Land registration fees: Maximum €100.
- Stamp duty: 2%.
- Notary fees: €300–€450.
- Property valuation: €100.
- Insurance: Average of €250 (varies depending on property size and type).
- Legal costs: €250–€400.
- Estate agents’ fees: typically 5% (normally paid by both the buyer and seller).
- Property tax: 1.5% of the cadastral value, i.e. the administrative value of the land and buildings on it, as assessed by the council. This is paid annually.
Typical fees: Lithuania
- Transaction costs should come to a total of 3–5%.
- Land Register tax: Measured on a sliding scale but shouldn’t exceed €100.
- Notary fees: 0.5–1% of property price.
- Estate agents fees: 3–7%.
- Legal fees: €500–€650.
- Property tax: 1% value of property.
- Land tax: 1.5%.
Typical fees: Estonia
- Transaction costs are low as there is no transfer tax or stamp duty.
- Land registration fee for new property: 0.5%.
- Notary fees: 0.5–1% of purchase price.
- Estate agents fees: 3–7%.
- Legal fees: €222–€444.
- Translation of contract: €103.
- Land tax: 0.1–2.5%. This is decided by the local authority.
THE LETTINGS MARKET
Thanks to the incredibly low interest rates, mortgages are very affordable in the Baltic States and consequently the majority of the population would rather buy a property than look to rent. As demand is limited, rental yields are not high in the Baltic States, and this is not a short-term market as tourism is still in its infancy.
If you look to let, you have three prospective tenants: firstly, the local market and young couples; secondly, a very small tourist market; and thirdly, the largest and growing market of businessmen and expats.
In Lithuania, while rental returns are healthy, generated income has dropped by about 10% in the last year, although current predictions are for a future 15% growth in the market. Rental returns for studios are predicted to grow by 5–10%–surprisingly more than the two- to three-bedroomed apartments–while suburban housing blocks are recording a 17% increase and prestigious property 8%.
In Latvia, returns for a typical city centre apartment range from £350 to £600, representing a yield of 6–8%. Since Estonia joined the EU in 2004, rental yields have been low for Old Town Tallinn, while suburban areas offer much better returns.
In Estonia, the rental market in Tallinn is growing, while on the coast at Parnu you would be paying rental prices almost on a par with the capital.
RENOVATING A PROPERTY
Due to the fact that the typical properties purchased in the Baltic States are newly-built, off-plan homes, there is very little demand for renovations. Generally speaking, most renovated homes tend to be located in the old town of the country capitals. Be careful though–the renovation costs can come out higher than anticipated unless you look into the process carefully before buying. Renovation or resale properties are generally more expensive, situated as they are in premium locations in the historic areas of cities. You can find homes with a white finish as opposed to grey (see page 85), which generally means that they have been plastered but you’ll need to install all fittings–allow about € 10,000 for this.