52

Investment Guide 2013

Increased
investment activity
for Baltic region
With Latvia adopting the euro next year and Lithuania showing
all the right signs to do the same in 2015, the economic outlook
for the Baltics is increasingly positive. Higher GDP growth and
inflation rates are expected to follow soon afterwards, mainly
because of prices being rounded up and an anticipation of higher
wages, as happened when Estonia made the same move in 2011.
Winston Norman
A
ll three Baltic countries have
achieved good economic and
market recoveries, which has
made them more attractive to inves-
tors. I nternati onal i nvestors who
were previously anxious about rela-
tively small markets because of their
economic situations, lower yields and
lack of prime assets have become more
and more interested in the Baltic real
estate markets, whi ch have proved
well worth their attention, Newsec
pointed out in their latest property
outlook report.
According to Colliers International,
ineach of the three countries the overall
transaction volume during the frst half
of 2013 was over 472 million. Latvia
was the l eader with an investment
volume over 176 million, followed by
Lithuania with 150 million and Estonia
with 146 million.
Several more transactions are expect-
ed to be agreed by the end of the year,
making the fnal fgure around 500 mil-
lion a level close to 2008. Expectations
are even more positive for 2014, which
is expected to be twice as active and to
regain the level of around 1 billion last
seen in 2007.
Colliers put average yields for prime
retail and offce assets around 7.75 to 8
percent, with the most attractive proper-
ties lower by up to 75 basis points and
secondary properties standing between 9
and 9.5 percent. Yields for prime logistic
centres and warehouses vary between
8.25 and 9 percent.
Following a very good frst quarter,
the Baltic investment market continued
to remain active in Q2 as well, driven by
investor demand for portfolios, which
accounted for 30 percent of the total
investment volume. The largest deal of
the half year was the sale of the SMI
Group RE portfolio in Lithuania and
Latvia to the local investment fund
Lords LB Baltic Fund III, including eight
retail assets (shopping centres and one
DIY store) and one logistics centre. The
total rentable area of the assets included
in the portfolio exceeds 118,000 sqm.
In Estonia, EfTEN Capital acquired the
portfolio of fve assets from EPI Baltic I
for 30.5 million in Q2.
Retail continued to dominate the
investment landscape, accounting for
over 40 percent of all investment activity.
Large-scale single transactions for 10
million or more included the purchase
of the Prisma hypermarket properties in
Narva (GLA 13,300 sqm) and Riga (GLA
11,500 sqm) by EfTEN and East Capital
respectively.
Private consumption is driving retail
activity and has begun to play a more
signifcant role in the economic recovery,
and retail trade in the Baltics is continu-
ing to accelerate for the third year in a
row. According to Newsec, pre-crisis hab-
its are starting to reappear and people
are willing to increase their spending on
non-food and luxury products. This has
provided a strong base for international
brands such as H&M to enter the mar-
kets, and the company will have opened
stores in each of the Baltic capitals by
this autumn.
Another important event was the open-
ing of IKEA in Vilnius in mid-August,
which received over 100,000 visitors dur-
ing its frst working week. Being the frst
Guido Wolf -
Director Group
Development,
Zabolis Partners
/ Baltic RED
The i mprov-
i ng economi c
situation in the
Baltcs provides a
signifcant stmu-
lus to the retail
real estate mar-
kets. Investors
have swi tched
from evaluaton
mode to making
purchases; while developers are back on
track delivering smaller, compact hyper-
markets with additional gallery stores.
New international brands are entering
the market, pushing existng retailers and
shopping centres up by adding a compet-
tve edge. Vacancies are shrinking, if they
stll exist at all, with rent prices slowly, but
surely increasing. The region ofers good
opportunites and exitng challenges in
retail real estate to dedicated investors
with a growth strategy.
Bal ti cs Overview
Expectatons are even more positve for 2014, which is expected to be twice as actve
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53

Investment Guide 2013
Bal ti cs
Madis Raidma -
CEO,
East Capital
Real Estate AS
Afer the 2008-
2009 crises, the
real estate mar-
kets in the Baltcs
have relatively
quickly adopted
the new reality
with correctons
in rent levels and
the absorption
of vacanci es .
Improved property fundamentals have
actvated investors in late 2012 and 2013,
so that transacton volumes have jumped
up a notable +75 percent in the frst half of
2013. Larger insttutonal investors are stll
of Scandinavian origin, but local investors
and Russian capital is coming from more
serious players. Actvity in the property
market seems to be acceleratng further in
2014, as investors see the beneft of a low
interest environment and the potental of
rental revenues improving from stll quite
low levels. Strong macro fundamentals
and relatvely responsible public sector
fnancial behaviour are distnguishing the
Baltc market in a positve way, including
low currency risk, as Estonia joined the
euro in 2011 and Latvia joining from
January 1st 2014.
Tarmo Karotam -
Fund Manager,
BPT Baltic
Opportunity Fund
T he i nv e s t -
ment market has
become more
a c t i v e s i n c e
2009 and there
has been sev-
eral transactons
made across the
Baltc States with-
i n H1 of 2013.
There are al so
larger portfolio
deals in the making, which are expected
to be completed by the year-end. The
highest liquidity can be found in proven
locations in the capital cities and that
is the reason why many investors have
narrowed their investment strategies to
include only the capitals. The preferred
asset class is retail, where vacancy is low
and potental is seen in rental growth.
The market can also be characterized by
mature real estate funds trying to exit
from their investments during 2013-2014
allowing investors with sufcient equity
and local market knowledge to negot-
ate very attractive property deals. At
this moment, investors from the Baltcs,
Nordics and Russia dominate the market.
However, interest from global giants look-
ing to pursue diferentatng investment
stories has now also been noted.
IKEA opened in the region, it has already
affected other market players, some of
which have had to make changes in their
strategies. Although the major shopping
centres in Vilnius have remained strong
and continued to strengthen their posi-
tions, the construction of several new,
mostly local, supermarket projects is ex-
pected in the next two years. Low vacan-
cies in the prime shopping centres should
remain at the same level, thus resulting
in rising rents. The situation may change
a little in 2014 and 2015 when several
new shopping centres are due to open in
Riga and Tallinn, but the increased supply
should be absorbed within a few years.
At 144 million, investment in offce
property accounted for the second
largest share of the transaction volume
in the Baltic States in 1HY 2013, mostly
due to the expansion of the Finnish-listed
real estate company Technopolis Plc in
Lithuania and the acquisition of a new
offce campus in Vilnius for 62.6 million.
Employment growth in the three Baltic
capitals has also affected demand in
the offce market. Although relatively
few new international companies have
30%
41%
14%
2%
5%
8%
INVESTMENT VOLUMES BY SECTOR
Ofce
Retail
Industrial
Hotel
Mixed use
Residential
Source: Colliers International
Source: Colliers International
Source: Colliers International
up to EUR 1.0
million
EUR 1-3 million
EUR 3-5 million
EUR 5-10 million
EUR 10-20 million
above EUR 20
million
INVESTMENT TURNOVER BY SIZE
13%
41%
6%
15%
20%
5%
0
200
400
600
800
1000
1200
2005 2006 2007 2008 2009 2010 2011 2012 1HY
1013
E
U
R
m
i
l
i
o
n
INVESTMENT VOLUMES
Estonia Latvia Lithuania
entered the markets during the last
year and a half, those already operating
have continued to expand, while the
continuously growing local companies
have tended to relocate their offces to
bigger and more modern premises. The
demand for prime offices in all three
countries is expected to remain high and
much of the new supply will come with
signed agreements.
In 2009 both Vilnius and Riga suffered
offce-rental decreases twice as high as
Tallinn. As a result, the recovery in these
two cities was much faster during 2010-
2012. However, Tallinn is the only city ex-
pected to reach its pre-crisis level during
the next three years.
Investment activity in the industrial
segment declined in 1HY 2013 compared
with the previous year. Industrial deals,
which accounted for 23 percent of all
the transactions in 1HY 2012 (mostly due
East Capitals acquisition of a 40,000 sqm
VGP warehouse park near Tallinn for 24
million), amounted to only 14 percent in
1HY 2013.
While during the last three years inves-
tors main focus has been on Estonia, in
the frst half of 2013 interest has moved
more towards Latvia and Lithuania, sup-
ported by strong economic recovery in
the region and boosted by the antici-
pated euro adoption in Latvia in 2014.
Additionally, investors are seeking op-
portunities to diversify their portfolios by
investing in other regions and/or sectors.
Investors have capital available and are
constantly looking for good quality cash-
fow properties, while the willingness to
take increased risks can be also observed
among some investors.
Deniss Kairans, Managing Director
and Partner at Colliers International in
Latvia commented: Talking about 2014
we do expect the situation will stay
active on the investment commercial
property market. Investors have capital
available and are constantly looking
for good quality cash fow properties.
To the ti ghteni ng competi ti on for
attractive properties and a shortage of
core investment grade offerings on the
market, the prime yields remain under
pressure and might compress slightly.
Margus Tinno, Partner, Manager, Valu-
ation and Investment Advisory, Colliers
International in Estonia added: In gen-
eral the small Baltic area can produce a
surprisingly active investment market. The
reason is most probably a stable, transpar-
ent and modern environment accompa-
nied with a favourable geographical loca-
tion next to Nordic safe-haven economies
and also the cash-rich Russia.
Overview
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