RE market: new challenges in the context of economic trends

Today, on 1 August, 2012, Inreal Group, together with its partners, JSC bank “Finasta” and legal firm “Raidla Lejins & Norcous”, presented real estate (RE) market’s processes, determined by Lithuania's economic slowdown trends. An overview of Lithuania's economy and real estate market as of the first half of 2012 suggests that signs of stabilisation are observed in almost all sectors of the real estate (RE): in the markets of flats, offices, industry, logistics, and commercial premises. Phenomenally good results have been attributed only to sales of private houses and a land plot market. Meanwhile, dynamics of RE developers in sales of the fading residential property begins to face serious “overheating” of the market. Growing sales’ statistics do not reflect the actual situation.

In the first half of 2012, trends in the economic slowdown, which had been observed at 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; in the 2nd quarter, its rate decreased by 2.1 per cent. Nevertheless, according to the chief economist of the bank “Finasta”, Ruta Medaiskyte, the scale of the economic development is assessed favourably yet. In the 1st half of this year, domestic economy had been growing while increasingly relying on domestic demand – retail trade continued to grow at average rate of 6.2 per cent. The average annual inflation has decreased from 4.1 to 3.7 per cent over the six months; during January-June of this year, a number of new loans granted was much higher than during the same period in 2011. However, the worse assessment of future, subject to grim moods in the Eurozone, may lead to further reluctance of both borrowers and lenders to expand a credit portfolio. A growing presentiment of a new recession in the Eurozone in the second half of this year should restrain a growth of Lithuania’s GDP and job creation. Despite the slowdown, economic growth may remain among the fastest ones in the European Union; while the Lithuanian economy should avoid the European recession.

Similar trends are in the air of the RE market: the year of 2012 has started with a cautious optimism; though, halfway the year, the market took run, and many market segments recorded growth in transactions, some of them – even increase in prices. However, at the end of the half of the year, positive trends began to decline.

According to the head of Consultation and Analysis Department of “Inreal Management”, Arnoldas Antanavicius, at the end of the first half of 2012, the slowdown is observed in almost all RE sectors of Lithuanian cities. In Vilnius, Kaunas, and Klaipeda, the trade centre segment has characterised by increased vacancies and stabilized rental rates. In Vilnius, vacancy increased 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 are observed in the logistics centre segment, which, in the second half of the year, experienced a significant decrease in potential new tenants and increase in vacancies, while rental rates have stopped rising. At the end of the half of the year, a vacancy of modern warehouse premises in Vilnius increased from 4.3 to 5.2 per cent; in Kaunas and Klaipeda, it remained the same. Growth in vacancies is also observed in the business centre segment, with the exception of Kaunas, where the vacancy rate in modern office buildings has declined by 2.2 per cent, compared to the beginning of the year.
Signs of market stabilisation are perceived in the flat segment as well. Basing on the data of the SE 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, analysis of just the 2nd quarter’s data shows that a number of transactions concluded in Lithuania, decreased by 1.8 per cent, compared to the corresponding period of 2011. In the second quarter of this year, a number of flat transactions 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.

Analysts of “Inreal Management” interpret the declining index of demand for flats as well as an increasingly growing demand for private houses. According to the data of the SE Centre of Registers, during the first half of 2012, 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 transactions is even higher in the second quarter.

Traditionally, the land plot market remains intense. During the first half of 2012, growth in transactions was about 10 per cent, compared to the corresponding period of 2011. Agricultural and household plots stay the most popular ones.

During the first half of 2012, RE developers were especially dynamic in a new building (primary) flat market within the analysed period. In the major cities of Lithuania, sales launched in 31 new apartment projects which filled up the market with 1733 more flats. However, only about 800 flats were sold during the same period. During the first half of this year, sales launched in 21 new apartment projects in Vilnius which filled up the market with 1370 more flats. It was almost as much as was offered in the market throughout the whole year of 2011. Meanwhile, the demand remained almost the same – only 624 flats were sold within a half a year – in average, 104 flats a month. Similarly, the level of sales of about 100 flats a month was recorded in 2011. “In truth, in the second quarter, about 120 flats a month were sold, but we think that this is only a temporary phenomenon, since the sales results were improved due to a plenty of newly developed projects prompting residents buy up the most attractive flats,” states A. Antanavicius. He said that a rate of further sales should slope down, while unsold flats should produce a residual supply in the capital even more.

According to the partner and lawyer of “Raidla Lejins & Norcous”, Ausra Mudenaite, in the first half of 2012, an administrative practice in land law and construction law areas had been forming in a positive direction. The National Land Agency developed practices for conclusion and exchange of state land lease contracts, which were amended again in 2011 according to regulations. This holds out hope that upon changes in future state landholders, administrative procedures will be smoother. After having evaluated threatening consequences of a too strict legal control and a formal enforcement of law, the Government decided to open negotiations in order to conclude peace treaties on several items of real estate at the Lithuanian seaside, the construction legitimacy of which was litigated by public prosecution and state authorities. If this initiative succeeds to be implemented, we will have perfect evidence that the public interest can be protected not only by demolishing buildings, but also by altering or eliminating a planning documentation, which no longer meets the public interest and results in a formal illegitimacy of construction.

According to authors of the overview, despite the grim moods in the Eurozone and slowing down GDP, a growth of Lithuania's economy may remain among the fastest ones in the European Union and avoid the European recession. Meanwhile, an emerging economic situation and the overflow of the primary housing market are posing new challenges as well as expertise and insight requirements for the RE developers when meeting expectations of RE customers.

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 JSC Inreal Valdymas (Inreal Management), JSC Inreal, JSC Inreal Pastatų Priežiūra (Inreal Building Maintenance) (related to companies, administering apartment houses), and JSC Inreal GEO. Inreal group companies belong to SC Invalda.

224 employees are currently working in Inreal group, the value of managed assets – about 400 million LTL, mediations  in   lease or sale of 550 thousand sq. m. of commercial premises and 1150 apartments, the value of asset, evaluated per year, is reaching 2 milliard Litas, and the area, administered by companies of building maintenance sector  - 1 million sq. m. Company offices or representations are operating in Vilnius, Kaunas, Klaipėda, Šiauliai, Mažeikiai, Alytus, and Plungė.

Investment bank Finasta, under the management of SC Finasta Holding, which was established in 2008, is the largest private banking bank in the Baltic countries, in accordance with the managed property and the amount of customers.

Specialization of the bank – services of investments and private banking. The bank provides complex investment management and company finance services to private and business customers, and offers nonstandard business crediting solutions.

Law offices Raidla Lejins & Norcous in Estonia, Latvia, and Lithuania are the leaders of legal services in the Baltic countries, where more than 100 lawyers work. Offices provide complex services to national, regional and international companies, among them – large corporations, international banks and financial institutions.

On the 8 of December 2011 Financial Times and Mergermarket recognized the law office Raidla Lejins & Norcous being the best legal adviser in the Baltic countries.

Raidla Lejins & Norcous Real estate and construction practice group is one of the strongest groups in Lithuania, uniting the lawyers of different profiles. One of the largest specialized real estate groups of lawyers is being managed by Aušra Mudėnaitė, the partner-lawyer.

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