Geopolitical tension scared the purchasers of economic-class housing but had no influence on the indexes in other segments of RE market

October 16, 2014. Vilnius. The imbalance between the demand and supply in the housing market has been further growing over the third quarter this year. The amount of new construction apartments unsold (vacant or reserved) in Vilnius was record-breaking by reaching the limit of 4,000. Despite the sharpening competitiveness among the developers and the ceiling reached in the amount of transactions, the prices in the primary market were not decreasing. The increase in residential land plot transactions in the regions of the major cities was impressive: 50 percent in Vilnius and Kaunas regions, and 37 percent in Klaipėda region. The demand has been growing further in the commercial RE market, while vacancies have been decreasing, although the rents have remained stable. This was mainly resulted by newly developing business, trading and logistics centres, which already stimulate the competitiveness among the lessors.

The increase in transactions in the housing market fizzled out and it seems that the ceiling has been reached for some time. There were 7,549 apartment transactions concluded within the third quarter, and i.e. 0.7 percent more than in the corresponding period a year ago. The increase in private house transaction reached 3.2 percent (3,382 transactions). Nevertheless, the developers of real estate are not reducing the pace, therefore a more pronounced imbalance between the demand and supply is formed in the market, especially in the capital city.

“The amount of apartments unsold (vacant or reserved) in Vilnius is reaching almost 4,000 – this is a record-breaking amount of unsold apartments”, – stated Arnoldas Antanavičius, the Head of Consulting and Analysis Department of Inreal. However, according to him, sale statistics shows that currently existing supply could be sold out in the period of 1.37 years, averagely, and this index is quite good. Unfortunately, the trends yet show the decline of this index, thus adequately it means the upcoming challenges and higher competitiveness for RE developers. If this index exceeds 2, more reductions of RE prices may appear. Usually, this index reaches about 1.5, and the prices in the market are stable. In addition, much depends on the developers’ experience. “The apartment sale statistics shows that the old-timers of the market sell their projects twice faster than newcomers, therefore one may assume that it will be difficult to compete for less experienced RE developers”, – stated A. Antanavičius. The competitiveness should mostly prevail in the economic-class segment, where the amount of transactions has decreased rapidly from 719 apartments, sold in the first quarter of 2014, to 210 apartments, sold in the third quarter. Meanwhile, the sale of upper class apartments has remained stable in comparison with the first quarter of 2014, and even went up by 10.1 percent in comparison with the corresponding quarter of 2013. It is likely, that the purchasers of the economic class apartments could return in the event of less geopolitical tension and risks related to it, because many transactions are concluded in this segment through borrowing funds and the purchasers are particularly sensitive to different external factors.

According to the analysts of Inreal, despite the increasing supply of new apartments, the prices in the primary market are not decreasing, because the liquidity rate in the market remains rather high. At the end of the quarter the total average rate of new construction apartment prices in Vilnius reached about 5,460 LTL/sq.m. and has increased by approx. 9 percent over the last year. The total average rate of new construction apartment prices in Kaunas has increased by approx. 4 percent over the last year and reached 3,850 LTL/sq.m. At the end of the quarter the average price of new construction apartments in Klaipėda reached about 4,290 LTL/sq.m., i.e. by 2 percent more than a year ago. The highest increase in asking price of new construction apartments was in Palanga, where the prices have increased by 13 percent and reached about 5,840 LTL/sq.m.

In accordance with the data of the SE Centre of Registers, there were 6,867 land plot purchase-sale transactions registered in Lithuania in the third quarter – i.e. by 25.8 percent less than in the corresponding period last year. The former volumes of land plot purchase-sale transactions, registered in 2013, probably will not be achieved in the near future, because due to complex procedures for purchasing agricultural land, which covers the majority of all land plot transactions, the alternative of long-term lease of land has become more popular. Meanwhile, residential land plot purchase-sale transactions showed an impressive growth: the annual increase of land plot transactions in Vilnius, Kaunas and Klaipėda regions reached 51, 50 and 37 percent, respectively. This shows a growing willingness of people to settle in a private area, located in peripheries of the major cities.

The supply in the commercial property market both in business as well as trade or logistics segments, the demand has been growing and vacancy rates have been decreasing further. Actually, the lease prices have remained stable. It was resulted by new developed projects mostly, which are stimulating competitiveness among the lessors and counterbalance the possible increase in lease prices. As regards the segment of logistics centres, one should additionally mention the trading constraints applied by Russia, which affected this segment the most; however, it seems that it did not result in negative consequences.

As a result of high amount of new projects in both the housing as well as commercial real estate market, the majority of transactions (purchase, lease, etc.) are concluded on the unfinished real estate property by signing different preliminary agreements and postponing the signing of the basic contracts until the object is finished and becomes available for use. Frequently people are rushing, the agreements, particularly by unprofessional developers, purchasers or lessees, are signed offhandedly by evaluating the obligations and expected results. In the event of changes in the market, it may lead many disputes – as a result of termination of preliminary agreements as well as indemnification.

“Not always a preliminary agreement means the same and not always it covers equal assurances for a purchaser or seller, lessor or lessee. It is very important to understand and evaluate the content of a preliminary agreement – to what extent it ensures that the final contract will be concluded, what are the opportunities to terminate such agreement, if required, and what are the possible consequences and obligations to cover losses resulting from such termination”, - noted Simona Oliškevičiūtė-Cicėnienė, the Manager of Real Estate and Infrastructure Practice Group of Raidla Lejins & Norcous.

Preliminary agreements do not ensure the conclusion of the basic contract, the parties of the preliminary agreement cannot require implementing the agreement in-kind and actually implementing the contract under the terms and conditions agreed in the preliminary agreement. The right to require indemnification is also limited. As a result, in order to have an assurance of concluding the final contract and implementing the transaction, it is recommended to sign a conditional final contract, under which the ownership or property transfer and settlement is postponed to a later period in the event of certain conditions (e.g., after construction of the real estate object and proper registration thereof). “For example, as regards lease relationships, the basic contract with postponed enforcement of lease period (and related conditions) usually ensures the lessor and lessee’s interest better. The basic contract, registered in the public register, forms direct obligations for the parties and, on the one hand, protects the lessor from a “null”, i.e. damaging property and, on the other hand, a lessee has assurance that after construction or implementation of other preconditions, property will be transferred to him and the lessor, e.g. in the event of changes in market situation, will not be able to lease such property to a party, which has offered higher price”, - stated Simona Oliškevičiūtė-Cicėnienė, the lawyer at the Law Firm Raidla Lejins & Norcous.

When concluding a preliminary agreement it is very important to understand the expectations of both parties, required assurances on concluding the final contract, to assess the risk of losses as well as ensure they are properly reflected in the document, which is signed between the parties. A preliminary agreement may not always ensure the desired scope of protection, on the other hand, in certain cases, depending on the essential obligations therein, it may be recognized as an enforceable final contract between the parties. Thus not only the title of a document but also its content is important.