REVIEW OF RE MARKET 1st QUARTER OF 2014

In April 2014, household expectation index was higher than in April, 2013, and, practically, at the same level as in 2004, i.e., before Lithuania’s accession to the European Union. Businesses remained moderately optimistic as well: expectations of services and industry stayed virtually unchanged in the first quarter of 2014, while the ones of the construction sector – grew up and became the best ones since the beginning of economic crisis in 2008. Thus, the growing uncertainty about the prospects for Russia’s economy can be stated, at least, not has had a negative impact on expectations of Lithuanian households and businesses yet.

Upon the slowing down growth of Lithuanian exports, domestic sales growth is becoming a key engine of Lithuania’s economic growth. Export volumes ceased to grow in Lithuania in autumn 2013, that, however, was influenced by certain one-time factors. First, the oil exports have rapidly shrunk due to the reduced production capacity of largest Lithuanian exporter “Orlen Lietuva” (after eliminating the impact of the company, the total exports growth remains positive). Second, grain exports are significantly lower than last year due to the decreased purchase prices and poorer crop. Third, the growth of exports to Russia, which had reached approx. 25 percent in 2011 and 2012, has stopped due to the slowdown of Russia’s economy, the decreasing Rouble exchange rate, as well as certain administrative and political barriers to the exports.
Russia is the largest trading partner of Lithuania, where to 19.8 percent of all goods were exported through the year of 2013 (4.9 billion of 24.5 billion Euro). The vast majority of exports (85 percent), actually, consist of re-exports of Western goods (4.2 billion Euro) to the East, i.e., to Russia and other CIS countries. Excluding the re-exports, the direct exports to Russia amount to 2.9 percent of Lithuanian goods only. Thus, the potential trade problems with Russia would not significantly affect Lithuanian manufacturers. However, the transport sector businesses would face the problems much tougher.

Housing market transaction growth rates, consumers’ expectations and actions, rising prices are pointing to the new boom in the real estate segment. During the first quarter of 2014, there were 2,620 apartment purchase and sale transactions concluded in Vilnius – by 51.2 percent more than during the same period in 2013. Developers sold about 1,060 new apartments within the capital during the quarter – as much as by 2.4 times more than during the same period in 2013. If the current transaction rates persist, more than 4,000 new construction apartments can be sold this year – by two-thirds more than in 2013 and much the same as during the previous peak period. Meanwhile, about 3,000 apartments were planned to offer this year – by one-third more than in 2013, yet, would be obviously not enough. The level of newly constructed, but still not sold apartments in Vilnius is rapidly decreasing – during the first three months of this year, it shrank from approx. 1,165 to 635, thus, the supply is dominated by drawing-based apartments. Upon the following intensification of the real estate market, the majority of transactions will be carried out drawing-based, which allows real estate prices to grow. The total rate of new construction apartment prices in Vilnius was approx. 5,373 LTL/sq. m at the end of the quarter and increased by about 8.7 percent during the year. Price growth in the new construction segment stimulates the secondary market sellers' expectations of getting 10-20 percent higher price than 6-12 months ago. If such trends persist, it is realistic to expect that the capital’s real estate prices may rise, on average, by 10-15 percent during 2014, subject to a segment and a year of construction.

An increasing activity of markets has been yet observed in major cities as well as second-home markets – the number of transactions and sellers’ price expectations are growing, while the overall average market price remains stable.

The commercial segment’s sentiment is also improving. The business centre market in Vilnius is going through a renaissance – 6 modern business centres (73,500 sq. m of leased area) are being constructed; construction of several more ones will commence in the near future. After 5-year break, a business centre for lease was started to build in Kaunas. Vacancies in all cities continued to decline; there appear more assumptions to increase a lease price.

At the beginning of 2014, retail trade continued to grow in Lithuania. Growing domestic consumption and persistent minimum vacancies create a favourable investment environment in the supermarket segment – in all the major cities of the country, new real estate projects are being developed or planned to (at least 6 large shopping centres, a total of about 88,200 sq. m).

Performance of Lithuanian industrial sector, that had slowed down at the end of 2013, was also observed at the beginning of 2014, nevertheless, it should be noted that the industrial sector’s representatives are more and more optimistic about the business prospects for the near future. An investment in the development of domestic logistics centres, that had increased in 2013, was still observed in cities – at least 4 modern logistic centres for rent (about 52,000 sq. m) and at least 8 built-to-suit modern warehouses are being constructed or planned to.

Whereas the real estate (RE) market recovers, there grows the number of both residential and commercial premises under construction, thus, transactions on RE under construction between buyers and sellers, who conclude corresponding contracts before the completion of RE construction, are quite a relevant issue recently.

Contrary to the acquisition of completed RE, a buyer has no opportunity to inspect or evaluate a property – the one can see the future outcome in the design documentation only. So, one of the most relevant risks faced by the buyer – whether the RE under construction upon entering into the contract will meet the buyer's expectations and be high-quality after the completion of construction.
In such cases of investment, it is essential to assess the current situation, yet, also, to take into account possible longer-term modifications that may affect both the revenue and cost structure and long-term real estate value and liquidity.

Identification of the property’s legal status and verification of design documentation, entry into the proper content purchase-sale contract and process control are some of the methods to manage the potential risks of investing in unfinished RE.

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