29 August 2022, Vilnius, Kaunas, Klaipėda. The country's economy grew by 7.2% in 2022 H1, however it started to slow down in the second quarter, with a market contraction likely to occur in Q3. The slowdown in the housing market in the first half of 2022 resulted from the increased costs of real estate (RE) development, infrastructure costs, energy efficiency class requirements, compensation for development on state land, rising housing prices, and decreasing affordability. Positive demographic changes remained the most important driving force of the housing market. The commercial RE sector withstood the challenges of H1 much better with decreasing vacancy rates and moderately rising prices. The most relevant legal news is changes in legal standards in the field of green energy.
LITHUANIAN ECONOMIC AND REAL ESTATE MARKET REPORT 2022 H1
"The Lithuanian economy demonstrates resilience to the geopolitical tension that caused the energy crisis and other hardships. Having grown by 4.4% in Q1 of this year, the country's GDP added another 2.8% during the second quarter. Of course, the latest trends are not encouraging – economic development in Q2 was 0.4% slower than in Q1, the growth of export and industrial production has been slowing down for 3 months in a row, and retail trade has shrunk in June. Consumer moods were dampened by increased uncertainty and the highest inflation rates over the past quarter of a century. In June, prices in Lithuania grew by as much as 20%, almost twice as fast as in other EU countries. Wages in the country continue to grow rather rapidly, however the purchasing power of the population is decreasing, since actual wage growth has become negative for the first time in the last 10 years in Lithuania, meaning that inflation grew faster than wages. Accordingly, there is tension in the labour market, employment involves many challenges, and business competitiveness in export markets is decreasing. Central banks are rapidly increasing their base interest rates to curb inflation. Such trends increase the risk of a recession in the country's economy in the coming quarters. The growth of the Lithuanian economy should slow down significantly in the second half of this year, and a GDP contraction cannot be ruled out in Q3," says Tomas Kipišas, Head of Saving and Investment Products at Šiaulių Bankas.
As market activity decreased, the supply of new apartments in Vilnius remained stable, reaching 3,462 housing units in mid-2022. 1,594 new housing units in the city of Vilnius were included in the observations of Inreal in 2022 H1, which is twice less than in the same period last year (3,251). "There are two main reasons for the downward trend in new supply. First one is that developers are beginning to sell housing in their projects in the later stages of construction. This helps to avoid excessive pricing changes as construction costs rise and to manage the resulting risk of potential conflicts with early buyers. The second reason is that the regulation of RE development that has changed over the last couple of years has complicated the development of new projects, which makes it very difficult to ensure sufficient supply," says Tomas Sovijus Kvainickas, Chief Investment and Analytics Officer at Inreal Group.
1,611 housing sales agreements were concluded in the primary market of Vilnius in 2022 H1, which is almost three times less than a year ago (4,432). Such modest sales can be compared to those in 2020 H1 (1,711) after the onset of the COVID-19 pandemic, when all commercial activity was essentially banned in the second quarter. As buyers buy fewer new homes, the market balance indicator is showing a balanced market in Vilnius for the first time since the start of the pandemic (mid-year value – 0.99, balanced market – 1.00). The achieved market balance is almost certainly not sustainable, since buyer activity is about one and a half times lower than in 2019. The area of affordable housing in Vilnius has decreased to 45 sq. m. Increased development costs and the imbalance between supply and demand erased the progress of five years – in 2020, the affordability indicator reached 60 sq. m. In half a year, the prices of economy-class housing in Vilnius increased by 17% – from 2,113 to 2,477 EUR/sq. m. Middle-class housing became more expensive by about 20% – from 2,742 to 3,286 EUR/sq. m. Price changes in the prestigious-class segment were insignificant – about 3%, from 4,223 to 4,346 EUR/sq. m, although the actual (given the unannounced prices in new projects) price level in this segment is likely to be higher. Loft prices jumped by 17% – from 1,659 to 1,935. This was influenced by the development of loft projects in areas closer to the centre of the capital. The prices of townhouses have increased by about 14% – from 1,492 to 1,694 EUR/sq. m.
There was also a slowdown in the housing market in Kaunas, although not as pronounced as in the capital. In 2022 H1, developers agreed on 480 new housing units, which is 3% less than in the same period last year (495). Inreal added 485 new offers to its observations – 20% less than a year ago (625). Supply reached about 1,300 properties in mid-2022, which is about 1.5 times more than a year ago. "As sales decline, a larger supply could become a problem for RE developers, especially if their sales volume expectations are close to the results of Q4 of 2020 or 2021. Larger supply limits the possibility to raise prices due to an imbalance between supply and demand. Given the fact that the population of Kaunas is gradually growing and thus forming a demand for housing, the market slowdown in Kaunas may be less painful than in the capital," says T.S. Kvainickas. Housing affordability in Kaunas also remained better than in Vilnius, with the prices of new housing changing unevenly. Economy-class housing became more expensive by about 21% – from 1,426 to 1,722 EUR/sq. m. A 2% price decrease was recorded in the middle-class segment – from 2,566 to 2,521 EUR/sq. m. This price dynamics is also associated with structural changes. The publicly announced prices of the most attractive prestige-class projects reached about 3,423 EUR/sq. m. There was an approximate 10% rise in loft prices – from 1,877 to 2,060 EUR/sq. m, while the prices of townhouses have increased by 13% – from 1,463 to 1,660 EUR/sq. m.
In the first half of 2022, developers agreed on the sale of 114 new homes in Klaipėda, which is twice less than a year ago (259). Inreal added 153 new objects to its observations – a third less than a year ago (223). In mid-2022, buyers could choose from 360 new homes in Klaipėda, which is similar to the number recorded a year ago. "The relative price level in Klaipėda is not high, and housing in this city is more affordable than in the capital. It is more likely that buyers are not finding properties that suit their needs, and demographic changes is an insufficient factor to encourage the development of new housing," says T.S. Kvainickas. Unlike in Vilnius or Kaunas, where there are rather sharp price differences between housing classes, a square meter cost about 1,700 euros in the first half of 2022 in both economic and middle-class projects in Klaipėda with publicly announced prices. Housing prices in higher class projects reach 2,500 EUR/sq. m or more. The overall price change in the port city during Q2 of 2022 was insignificant, reaching just 2%.
According to the data of Inreal, buyers have purchased 192 new homes in Palanga and its surrounding resorts by mid-2022, which is 29% less than in 2021 H1 (269). The attractiveness of Palanga has decreased over the past year, but still remains higher than before the pandemic, when an average of around 130 homes were bought in the primary market within a period of six months since the introduction of the euro. Housing supply in Palanga has decreased from 643 to 554 units over a period of six months. Such supply both at the beginning and in the middle of the year is lower than before the pandemic (housing supply reached 746 units at the end of 2019). Prices have not changed significantly, varying from 1,500 to 4,500 EUR/sq. m.
Objects in Neringa sold and tracked on new housing project websites have almost disappeared, with only a few apartments remaining in the statistics. According to T.S. Kvainickas, this happened due to the relatively high demand for housing and its very limited supply. "The information deficit is also reflected in the price statistics, based on which one may get the false impression that Neringa has suddenly become a relatively easily affordable region. Meanwhile, the surge in prices published in ad portals raised them to 6,000-7,000 EUR/sq. m," says the Inreal analyst.
Sales in the land plot segment have decreased by 14% in 2022 H1, compared to the same period a year ago. On the other hand, this number still exceeds the pre-pandemic figures both in the regions of large cities and in Lithuania as a whole. The market also slowed down in residential house segment with 6,700 sold residential homes – 11% less than during the same period last year (7,553).
In 2022 H1, the supply of business centres in Vilnius should increase to a little over 100,000 sq. m of leased space. The same amount is currently under construction and will enter the market in 2023 or early 2024. And twice as many more sq. m are still in the early stages of development. "The vacancy rates of the capital's business centres shrank to single digits or 3-6% in the middle of the year, which forms an attractive environment for the development of new business centres," says T.S. Kvainickas. According to him, the development of new commercial RE facilities is limited by increased construction costs which will ultimately be passed on to tenants, as well as the threat of recession which can curtail the formation of new demand. On the other hand, the condition of old construction buildings as well as their insufficient energy efficiency in the context of increasing resource prices further highlight the gap between new construction facilities and those built decades ago. Office rental prices in Vilnius range from 8 to 18 EUR/sq. m. Development was slow in the Kaunas offices sector. Larger projects are planned only in 2022 H2 – 2023. Over 35,000 sq. m of office spaces will be built, which will also be developed in newly formed apartment blocks. The vacancy rate of Kaunas business centres is 4-6%, depending on the class, with prices ranging from 7 to 14.5 EUR/sq. m. One business centre was opened in Klaipėda in the first half of 2022, with more intensive development still planned in the future. The largest vacancy rate of 25% was recorded in Class A business centres of the port city. The vacancy rate of Class B1 and B2 has decreased to 3–4%. The office rental price ranged from 5 to 12 EUR/sq. m. The logistics sector has experienced the least negative impact since the start of the pandemic. The vacancy rate in Vilnius and Kaunas regions has decreased to 1%, while in Klaipėda it balances at 5%. Logistics centre and warehousing facility rental prices range from 2.5 to 5.5 EUR/sq. m in the Vilnius region, and 1.5 to 5.0 EUR/sq. m in Kaunas and Klaipėda. On the other hand, logistics centres are also sensitive to increasing development costs.
Fewer new residential and commercial projects than usual were launched in the first half of 2022, both due to uncertainties in the geopolitical situation and due to unpredictable construction costs. "Buyers looking for residential housing preferred to choose properties in projects closer to the end of their construction. Despite the very limited supply, this reduces the risk of unplanned expenses resulting from rapidly changing construction costs. "Up until now, developers tended to launch their sales still at the "drawing" stage of construction, and buyers were not afraid to take the risk of agreeing on housing at an earlier stage of construction due to the possibility to choose from a wider supply and make any preferred changes which may no longer be possible at the end of construction," says Vilius Visockas, Developer and Manager of the RE platform CityNow.
"The Ukraine war is undoubtedly the key factor affecting the real estate market in the first half of 2022. This tragedy has triggered turbulence in the building materials market. The anxiety and uncertainty caused by the war has resulted in a shift in interest from the domestic market to the warm countries’ markets in the residential housing sector. Changes of one kind or another are also felt in other real estate sectors.
Nevertheless, with certain exceptions related to changes in the legal provisions governing the building materials market, the real estate legislative process has followed a steady and planned path towards improving investment climate in the areas of territorial planning and land use.
No doubt, climate change and fighting climate change is a top priority. Therefore, in our view, the most relevant piece of news in the first half of the year is changes in the legal provisions on the so-called green energy. The adoption of the so-called Breakthrough Package is likely to significantly impact on the green energy market in the near term. Businesses operating in this field are already getting their heads around how to apply one or another legal provision in practice and are readying for the changes. Time will tell whether the proposed changes will really act as a catalyst stimulating the development of green energy. At any rate, such initiative is welcome, and we hope that this will facilitate a more efficient and smoother implementation of such projects.
The second half of 2022, the autumn, is going to be unquiet and challenging, according to numerous forecasts. The purpose of a quality legal provision is to help businesses and the state to deal with such challenges. Accordingly, we who deal with day-to-day challenges of applying legal provisions and who apply such provisions, also hope that the new developments introduced in the first half of this year will prove to be useful and efficient in practice," says Artūras Kojala, COBALT Partner.
About INREAL group
INREAL is a brand of an idea, which gives spark to unique projects, basis for professional services, and added value to businesses, clients, and partners. INREAL positions creativity as a core value in the dynamic business world. INREAL Group, which consists of UAB "Inreal", UAB "Inreal GEO" , UAB "Inreal valdymas" and its managed companies, develops unique real estate (RE) projects and provides probably the widest range of real estate services in 11 cities in Lithuania. The company has engaged in business operations for more than 25 years and implemented more than 70 real estate projects of various purposes, which received recognition and awards at contests not only in Lithuania but on an international scale as well.
Rūta Merčaitienė Head of Marketing and Communication at INREAL group +370 611 29 779 firstname.lastname@example.org
 When an economy-class home is purchased with a loan by one person earning the average salary of the municipality