OREANDA-NEWS. February 06, 2009. After GDP growth of 10% in 2007 and 12% in 2006, Latvia plunged into recession in 2008 with GDP falling 4%, due to the choking off of foreign credits which led to declining investment, real estate purchases, and private consumption.

Meanwhile inflation began 2009 at 11.5% annually, after reaching a peak of 18% by mid-2008. The crisis led to the nationalisation of Latvia's largest domestically owned bank, Parex Bank, and to intervention by the International Monetary Fund (IMF) which spearheaded a 7.5 bln euro bailout of Latvia that included funding by the IMF, the European Union and the World Bank.

The bailout will allow Latvia to maintain its currency's peg to the euro at the rate of 0.7028 Latvian lats (LVL) to one euro (1 LVL = 1.4229 EUR), but Latvia has agreed to raise taxes and slash spending to reduce the budget deficit to 3% of GDP by 2011. In the short term, these moves will further dampen demand and exacerbate the recession.

Office
Office construction boomed in 2008, with 189,000 sqm of modern office stock added to Riga last year, boosting the total an enormous 40% to 671,000 sqm, according to Ober-Haus Real Estate Advisors. The timing was not the most fortunate, given the economic train wreck at the end of 2008.

New projects in 2008 included the SWH Business centre (20,000 sqm), Muitas Business centre (7,000 sqm), and Riga Industrial Park (8,600 sqm). Another 69,000 sqm will be brought to market in 2009 if all the projects will be finished.

Office vacancy rates are from 7-9% by the end of 2008. Ober-Haus sees office vacancy rates hitting 10-13% by the end of 2009. Free spaces mostly will have  large projects which will come in market in 2009 and projects with bad location and infrastructure.

Rents for class A offices in Riga fell 15-25% in 2008, to EUR15 - EUR 20 per sqm. Typical service charges in class A buildings are EUR 2.50 - EUR 3.50 per sqm per month. Rents for B class offices dropped 20-30% to EUR 8 - 14 per sqm.

Retail
Developers brought 40,000 sqm of new retail space to Riga in 2008 mostly of them make two projects Alfa IV phase and Panorama Plaza, all of which was successfully leased. It remains questionable, however, if the same success will be had of the 267,000 sqm of new retail space coming in the next three years, including Riga Plaza, (67,000 sqm), Galleria Patollo (50,000 sqm) and Akropole (150,000 sqm).

Demand has fallen significantly, and while the 1% vacancy rate has nit yet increased in existing retail centres, tenants are falling behind on rents and Ober-Haus projects retail vacancy rates to reach 3-5 by the end of 2009. City centre high street vacancies are at 5% today, with a vacant shop visible on almost every city block.

Rents were flat in 2008 due to weakening demand, and we expect declines in 2009. City centre high street rents have declined 40% from their highs to EUR 30 - 40 per sqm. In shopping centres rents have softened to EUR 13 per sqm for large units (1000 sqm), while recent lettings of medium units (150 - 300 sqm) have declined from EUR 30 per sqm to EUR 25 - EUR 29 per sqm. Anchor tenants, such as supermarkets, typically pay EUR 8 to 12 per sqm. The service charges vary between EUR 3 – 5 per sqm. In suburbs rents are EUR 10 - 20 per sqm.

Logistics
Riga's central location in the three Baltic States has made it an attractive distribution centre, with 150,000 sqm of new warehouse space built in 2008. Modern warehouse space is offered at rents from EUR 4.5 - EUR 6.5 per sqm.

Residential
The withdrawal of virtually all mortgage lending in the Latvian market drove residential prices down 36% in 2008 to an average EUR 1500 - EUR 4000 per sqm in the city centre, and EUR 945 per sqm in Soviet-era suburbs.

Less than 3000 new apartments were delivered to market in Riga in 2008, less than half the 6780 delivered in 2007. Almost 65% of the new flats built in 2008 remain unsold. There are at least 2,200 unsold new apartments on the market, in addition to the estimated 2,500 which will be delivered in 2009.

Prices for newly developed apartments in Riga range from EUR 900 - EUR 1,500 per sqm in the suburbs and EUR 1,700 - EUR 2,500 per sqm in the city centre. Rents for new apartments in the city centre range from EUR 7 - EUR 9 per sqm, while rents for apartments in the suburbs range from EUR 5 - EUR 7 per sqm, a drop of nearly 30% since the beginning of last year.

Complete 2009 Real Estate Market Report
Ober-Haus Real Estate Advisors will publish a complete 2009 Real Estate Market Report for Estonia, Latvia, Lithuania and Poland in March 2009.