OREANDA-NEWS. March 31, 2008. Latvia’s economy experienced rapid, yet unbalanced development in 2007. The indices for inflation increased and still continue to increase very rapidly. GDP is still high, but is expected to decrease. These and other indices (such as legislation, banking policy, the availability and prices of resources (such as energy resources, human resources etc.), global processes in the world economy) undoubtedly have had a huge impact on Latvia’s real estate market, reported the press-centre of Colliers International.
 
The impact of the Inflation Decrease Plan was particularly severe on the residential sector (e.g., the 10% minimum co-finance share for acquiring a residential property).

The commercial property market is in a comparatively better off position. The market in this sector is developing a clearer structure and improving in quality. Prices will fall for objects which are planned or have been realized without setting the long-term interests of potential lessees and investors as the main priority. However, there is still no reason for a general price decline in the current situation.
 
Mihails Morozovs, Managing Partner in the Baltic States and Belarus says: “The global financial crisis and local government activities regarding real estate market regulations made last year and this year very difficult and challenging for all market players – investors, developers, banks and construction companies. It has created an artificial barrier, which will filter quite a large amount of companies, which lack equity, show higher costs and have made too large investments in real estate assets, which are not generating income and can’t be sold within a reasonable short period of time.

Strong developers, with a clear expansion strategy and professional projects, will be supported by market demand and become even stronger in each particular segment.  We could also expect much higher interest, and several big acquisitions from leading international development companies and construction holdings, especially in the retail and industrial fields. On a positive note I could mention that this situation is creating more opportunities for companies that are looking for average market profits, long term perspectives and horizons”.

OFFICE PREMISES
There were 10 upper class office projects put onto the market in Riga during 2007, with a total leasable area of approx. 52,000 m?. Only one of these buildings was Class A, and it was partially purpose-built and partially speculative office centre Kipsala; developed by RBS Skals and leased by Colliers.

The total speculative stock by the end of 2007 exceeded 200,000 m?. The percentage of total office space completed during 2007 compared to the total office space that was expected to be completed during the year was 66%. A group of offices declared for completion in 2007 are in the final stages of construction, and the anticipated completion is the first quarter of 2008. In total, 87,000 m? of speculative space is currently under construction and is expected to be completed by the end of 2008. Delays in completion are still widespread in the market, with an average delay of 2-3 months if not longer in some cases, depending on the size of the project. Tenants are getting more demanding and are becoming well-informed on market trends and conditions. 

There were 10 upper class office projects put onto the market in Riga during 2007, with a total leasable area of approx. 52,000 m?. Only one of these buildings was Class A, and it was partially purpose-built and partially speculative office centre Kipsala; developed by RBS Skals and leased by Colliers. The total speculative stock by the end of 2007 exceeded 200,000 m?. The percentage of total office space completed during 2007 compared to the total office space that was expected to be completed during the year was 66%.

A group of offices declared for completion in 2007 are in the final stages of construction, and the anticipated completion is the first quarter of 2008. In total, 87,000 m? of speculative space is currently under construction and is expected to be completed by the end of 2008. Delays in completion are still widespread in the market, with an average delay of 2-3 months if not longer in some cases, depending on the size of the project. Tenants are getting more demanding and are becoming well-informed on market trends and conditions. 
 
RETAIL PREMISES
Retail growth in Latvia has been one of the fastest in the EU with a 21.2% increase during most of 2007 in comparison to last year. This rapid growth has been caused by growing salaries and additional incomes, often in the form of loans. The gross value of retail and wholesale trade has shown constant growth, reaching 20.1% of GDP in the third quarter of 2007. Home to more than 32% of the Latvian population, Riga provides the largest contribution to retail growth.

All the larger shopping centres in Riga have declared an increase in turnover for the greater part of 2007, with figures varying from 11% to over 30%. But we forecast these rates will decrease in 2008 due to rising inflation and the decreased purchasing power of the population caused not only by financial, but also by emotional factors. Also the modifications in the Competition law will come into force on October 1, 2008, which limit the rights of retailers to dictate the rules for suppliers.  As a result of all these factors, the shopping centres will have to actively search for possibilities to optimise their supply chains.

The increase in retail space volumes in Riga slowed down in 2007. The market increased by 43,000 m? of new retail space during 2007, approx. three times less than in the previous year, for a total of 520,812 m?. There are no new shopping centres scheduled for delivery in 2008 in Riga, except the expansion of Alfa Shopping Centre. Meanwhile, investor interest in new regional centres outside Riga (in cities such as Jelgava, Valmiera, Kuldiga) will expand in 2008, providing Latvia’s largest cities with modern retail space.

Cube City and Riga Plaza have a planned completion of 2009. Assuming that the above mentioned projects as well as the expansion of Alfa Shopping Centre will be completed on time, supply will still not experience rapid growth over the next two years. A few large-scale projects such as Dominante Retail Park, Akropolis and Linstow Retail Park are planned to enter the market after 2009 and they are expected to create a new retail format to Riga, offering wider entertainment services and attracting well-known brands.
 
INDUSTRIAL PREMISES
The largest part of the Latvian industrial stock consists of outdated, low-standard buildings. Commercial Class A industrial premises were unavailable in Latvia until 2007, when pilot projects with high class specifications emerged. Prior to this, companies needing modern premises with high standards were forced to construct purpose-built warehouses and logistical centres themselves.

As the market evolves, more high-class commercial industrial projects are appearing and the level of industrial stock is increasing. Stable demand for modern warehouses is formed by substitution of outdated stock, rapid development of retail trade, attraction of international companies, and the rise of forwarding and third-party-logistic (3PL) type companies.
 
Colliers International estimates that the stock of modern warehouse space in Riga and Riga suburb, including Jelgava (a city located approx. 40 km from Riga) reached 211,000 m? by the end of 2007, including 105,000 m? of purpose-built projects. The first two quarters of 2007 were marked by the entry of a number of warehouse complexes into both Riga’s central as well as its outlying regions. The largest of them being the first stage of Dominante Park, the first stage of Eirkel Business Park, and the purpose-built Avers Logistics Centre.

During the last two quarters, the largest building completed was the first phase of the first stage in the Dommo Business Park. The total increase of high-class stock in Riga summed 107,450 m? in 2007, effectively doubling the area of modern premises in the region. Approximately 177,000 m? of industrial premises are currently under construction and declared for completion in 2008, which will almost double the stock once again in 2008.

A peak in the supply of warehouse premises is expected in 2009-2010. The projects that are scheduled to be completed during the next few years should significantly increase the total supply. If all the planned projects are realised, the total stock at the end of 2010 could reach 480,000 m.