Real estate developers absorbed the rise of housing prices

July 30, 2014. Vilnius. The improving economic situation of the country in 2014 preconditions the increase in real estate (RE) transactions, however the stimulus for housing prices to grow is less than expected. The activity of RE developers increased over first half of 2014 is creating an excess in the RE market, which will impede the rise in prices. The record-breaking number of private house sale-purchase transactions testifies the fact that more and more people are not only willing but also able already to purchase a higher-class housing. In the first half of this year the number of transactions in the land plot market decreased by 19.2 percent, meanwhile positive trends have remained in the commercial segment.

In the beginning of the year the economic growth in Lithuania was one of the most fast-growing economies in the European Union, and the future prospects of the country also remain optimistic. Wage and unemployment rates are improving, low inflation promotes domestic consumption in the country along with reducing the economic dependence of the country on adverse changes in the export markets. According to the data of the Department of Statistics, the volumes of exports and imports in Lithuania, which have shrunk in early 2014, became stable in May. The first improving rates of 2014 have been achieved – respectively 7.1 and 11.5 percent in comparison with May of the previous year. According to Arnoldas Antanavičius, the Head of Consulting and Analysis Department of Inreal, the adoption of the euro in Lithuania from 2015, which will also improve conditions of borrowing, should contribute to the growing exports in the future as well.

The improving economic situation of the country preconditions the increase in real estate transactions, however the stimulus for housing prices to grow is less than expected. Low interest rates, high expectations, improving household financial situation and permit for Lithuania to joint the euro zone may act as motivating factors allowing some citizens to forget the former crisis and put their savings in purchasing own housing. As a result it is probable that in the nearest future the activity of housing trade will remain high in the market, which will also be followed by increasing supply of housing. According to the analysts of Inreal, high activity of new project developers should bring the balance to the real estate market and function as a factor inhibiting increase in prices.

The growth of the real estate market in Lithuania has continued in the first half of 2014. Transactions in the apartment segment have been reaching fast, and in the private house market – even overtook, the pre-crisis volumes of transactions. “In the beginning of the year, the significantly-increased demand in Vilnius preconditioned the increase in RE prices, however the developers, who have immediately responded to the situation, have augmented the supply within the second quarter of this year and halved the increase in prices”, - stated A. Antanavičius. In early 2014, the prices in new construction projects in Vilnius had increased by 2-5 percent averagely (depending on a segment) over the first quarter, however late half-year the increase in prices have reached just 1-2,5 percent averagely. Meanwhile, according to the analysts of Inreal, developers have not been so active in Kaunas, Klaipėda and seaside second-home segment, thus purchasers’ positive attitudes and growing sales of new construction apartments have led to trends different to those in the capital city – prices of new construction apartments continued to grow in almost all segments. Kaunas market was the most exclusive one, where prices of apartments in new construction projects in economic and middle-class segments have increased by 14.7 and 9.1 percent, respectively, within the half-year.

The record-breaking number of private house purchase-sale transactions testifies the fact that more and more people are not only willing but also able already to purchase a higher-class housing. There were 6,087 private house purchase-sale transactions made within the half-year – by 21.2 percent more than in the corresponding period in 2013, and this rate is the highest, which had ever been in the first half-year. “Although the private house segment is about 2.5 times smaller than that of apartments, however, unlike the apartment segment, where the increase of transactions is fizzling out, further increase may be forecasted for  the private house segment due to improving economic situation of the country and citizens’ opportunities to purchase a higher-class housing”, – stated A. Antanavičius.

Simona Oliškevičiūtė-Cicėnienė,the Manager of Real Estate and Infrastructure Practice Group of Raidla Lejins & Norcous, noted that growing residential RE market promotes the expansion of rental relationships. More and more housing is purchased for rent as an investment. The increasing number of rental transactions develops rental relationships – lessors and lessees move into formalization of interrelation subject to regulations and refuse the obsolescent practice of oral rental agreement.

In the first half of this year the number of transactions in the land plot market decreased by 19.2 percent. The reduction of this rate was resulted by new restrictions for purchasing agricultural land, which entered into force on 1 May 2014. Still, according to the analysts of Inreal, the statistics does not reflect the real situation and the decrease in transactions does not mean lower demand of agricultural land plots in the market. There are interested purchasers, but long-term rental form is frequently chosen instead of purchase-sale transactions.

Positive trends in the commercial segment. Vacancy rates continued to decrease in modern business centres located in Vilnius and Kaunas. “In order to meet high demand, new business centres, absorbing the possible growth in lease prices by the new supply, have been built actively”, – stated A. Antanavičius. Meanwhile, the business centre segment in Klaipėda incurs stagnation due to relatively high lease prices and high vacancy rates. Increasing consumption in the shopping centre segment and particularly low vacancy rates have led to continuous active expansion of the major shopping centres and supermarkets in the major cities of Lithuania. It is intended to offer about 78,000 sq.m. of additional trading area in the major cities by the end of 2015. Ambivalent moods are observed in the logistics segment – the re-export sector to Russia has been affected seriously by the political crisis in Ukraine, therefore new logistics projects are being planned carefully. On the other hand, the trends in Kaunas and Klaipėda, where logistics companies are mostly run business with Western and Scandinavian markets, are positive – vacancy rates are decreasing, new logistics centres are being expanded in order to meet the increasing demand.

According to S. Oliškevičiūtė-Cicėnienė, professionally, both in legal and commercial aspect, a well-structured rental agreement remains the essential factor in the commercial real estate segment to ensure a stable flow of rental income and return on investment. The increasing demand for commercial premises have led increasing the lease prices of offices and trade premises. This factor and new business and shopping centres, which are being built, promote lessees’ migration among different objects. Seeking for more favourable lease conditions, expanding activities or looking for new, higher-quality premises, lessees terminate the existing and form new rental relationships. Newly built business centres will increase the number of vacant office premises, thus further promoting lessees to prospect. Therefore, it is particularly important to establish properly the essential lease conditions and sufficiently focus on the professional property management.