Commercial Real Estate Market Review Latvia Lithuania Estonia LATVIA Contents

Commercial Real Estate Market Review 2006 Latvia Lithuania Estonia LATVIA Contents 4-5 6-9 10-13 14-15 16-17 18-19 20 ECONOMIC OVERVIEW OFFICE PREMISES RETAIL MARKET INDUSTRIAL FACILITIES HOTEL SECTOR RESIDENTIAL MARKET INVESTMENT OVERVIEW OF THE BALTIC STATES  ECONOMIC OVERVIEW free movement of goods and services, free capital and labour flows, access to EU funds, which helps to reduce social and economic inequality between Union member states. Economic indicators in 2005 demonstrate the result of successful cooperation with the Union. The growth rate of GDP is among the highest in Eastern and Central European countries. For the last five years the average GDP growth has been about 7.8% per year. The rate of growth tempo has not slowed down. At the end of 2005 it is expected to achieve its maximal value - about 9-9.5%. As in the previous years there were two reasons for growth: the first was increasing domestic demand and increasing value of exports, the second-one - low interest rates and loans encouraging investments. Among dominant economic sectors: Trade (including hotels and restaurants) is 19.6 % of GDP Transport and communications sectors is 16.1% of GDP Construction sector is 6 % of GDP Manufacturing is 1.1% of GDP It is very important that economic growth is achieved in a stable macroeconomic environment. The fiscal deficit is low and does not exceed the reference level set by the Maastricht criteria. The level of inflation has been relatively high over the last two years, it is 2.6 times more than in 2001. The increase in 2004 was partly expected – prices must be balanced in the EU member countries, but also it was caused by several single factors – an increase in administratively regulated prices, he government of Latvia as a long-term goal of the economic policy has defined sustainable and balanced economic and social development, the transition from a labour-intensive to a knowledge-based economy. The European Union average GDP per capita level has to be reached within the next 20-0 years. Before joining the European Union, the legislation had been aligned and the business environment had been improved. At this moment the corporate income tax rate is 15% and it is one of the lowest in the EU. Latvia’s accession to the EU took place in 2004; this convergence provided for the T Source: CSBL 4 Cumulative FDI graph shows, that the trend has a rising tendency. In the first half of 2005 the largest investments were made in the commercial services sector - 2%, finances sector - 2%, trade sector - 16%. The main source of investment is equity capital as well as reinvested earnings. Foreign Direct Investment Stock By Industry (end of June, 2005) Foreign Direct Investment The potential for economic growth can be described by the investment growth. Foreign direct investment this year slowed down. In 2004 high comparing base was insured by large-scale projects. Investment from developed countries dominates in the structure of the FDI stock. According to data from the Bank of Latvia the largest amount of investment in 2004 was received from the EU member states - totally 71%; among them Germany -17%, Sweden -12%, Denmark - 9%. Only a few of the so called ‘green field’ projects have been implemented in Latvia, mainly presenting the introduction of new and modern technologies. However, relatively low labour qualification repairs adequate implementation of this sort of projects. To ensure long-term development of the economy of Latvia, it is necessary to continue development of infrastructure, investment into education and creation of the beneficial preconditions for foreign investors in knowledge-intensive and high technology sectors. Economic Overview 5 harmonisation of indirect tax rates and high oil prices in the world market. At the end of 2005 the inflation rate is expected to be 6.7%, mainly due to the rise in fuel prices and the second phase of inflation (inflation spiral). Such a result makes adoption of the euro in 2008 almost impossible. In addition to this a large part of society does not encourage the idea of joining the euro zone. Such a critical attitude may be explained as a disinclination to lose national identity. The intention to adopt the euro forces the government to make unpopular decisions, which might not be possible before Parliamentary elections in October 2006. Also, good macroeconomic indicators have been reached in the labour market. The unemployment indicator has reached its lowest level during the last 5 years, i.e.,7.5%. This is the result not only of fast economic development, but also of migration abroad. At present about 10% of the population of working age have a job outside Latvia, mainly in Great Britain and Ireland. Although the number of people of working age is decreasing, the number of economically active people and the employment rate is rising. Lack of specialists and workers is the reason why the rise in wages and salaries is taking place in the labour market. Average gross salary in September 2005 was equal to 40 EUR. In the coming years the wage level in Latvia is expected to grow by 10-15% per annum, until it reaches the average level in such countries as Greece, Portugal and Slovenia. OFFICE PREMISES s the capital city of Latvia, Riga accounts for about 0% of Latvia’s population and 60% of economic activities in terms of gross domestic product; it is the major business centre for the Republic of Latvia and also the Baltic States. The concentration of economic activities in Riga and in the capital city region determines the most significant demand and supply impact for office premises just in this area. A Demand A typical mark of the office market in Riga (data as of Summer 2005) is that almost half of office premises occupied by tenants are small ones, less than 100 sqm. Figure No.1 demonstrates the distribution of office premises by size. At the same time the proportion of office space over 500 sqm is comparatively large, i.e. 16%. In 2005 the new tendency delineated the market field – strong brand international companies were looking for premises over 500 sqm and in several cases for more than one thousand square meters. The dynamically growing international companies with a stable growth trend and significant market potential are a substantial part of the enterprises looking for new office premises. On average, this segment had sales growth ratio of 70% over the last three years. The demand for modern, convenient and appropriate office premises is constantly strengthening and still exceeds the existing supply of them. Supply/Total Stock In the first half of 2005, Riga’s A and B class office market stock reached 85,920 sqm, but at the end of year the stock increased just by 4,500 sqm and reached the total of 90,420 sqm. In the first quarter of 2006 three new B1 class office centres “Astras biroji” (6,670 sqm),“Baltais Vējš” (2,700 sqm) and “Unimarine” (6,800 sqm) will add 16,170 sqm of gross rentable area. However, the premises are already pre-leased. The supply of office premises is estimated to reach 12,590 sqm at the end of 2006. Distribution of Occupied Office Premises by Size Vacancies The overall office vacancy rate now stands at 10%. The average vacancy rate in A class buildings has decreased after putting into operation the Headquarters of Hansabanka, one of the leading commercial banks in Latvia (the Hansabank Group is the largest financial institution in the Baltic States), since there used to be only one A class office centre 6 Dynamics of Rent Rates (Weighted Average of Available Premises), EUR/sqm per Month Office Premises 7 in Riga before – Valdemara centre having Vacancy Rate had a relatively high vacancy rate. Now, increased demand has contributed to a better occupation of Valdemara centre too, e.g., Procter & Gamble moved to this centre taking about 700 sqm. In 2005 the property, which is located in the very centre of Riga was acquired by Baltic Property Trust, a Danish investment company. Hansabanka building is a built-to-suit project, located on the left bank of the river Daugava, where just two floors out of 24 are rented to external tenants. Besides that, Hansabanka has strict requirements for tenants and it can be characterized as market inflexible. A wide vacancy rate in particular properties is evidence The vacancy rate in reconstructed B1 class premises is 12%, and, at the same time, in the newly built of how important it is to pay attention to concept development for a building, space planning, quality of building B1 class premises it reaches hardly 2%. The vacancy rate in B2 class has decreased from 16% in management, parking capacity and marketing strategy. summer 2004 to 1% in November, 2005 due to new tenants moving to B2 class offices. However, an upward pressure on Rents The weighted average rent rates are EUR 16.5 for vacancy rate derives from the new office building Domina Office Centre, which was put into commission in spring A class premises, EUR 14.2 – for В1 class premises 2005. At the same time this office centre confronts a rela- (the range between EUR 9 to EUR 20) and EUR tively high vacancy rate because of its poor infrastructure 10.6 - for В2 class office premises (the range between EUR 10 to EUR 15). and very close location to the Domina Shopping Centre. Office Premises Sometimes the rent rate level in B2 class office buildings is higher than in B1 class properties due to the fact that many B2 class office buildings are located in good areas in the city centre and their target tenants are small companies. It has also increased due to the new Domina Office Centre being put into commission. In B1 offices the rent rate increase was stimulated by Felix Holdings Centre keeping it at 20 EUR/sqm level, at the same time adding to the vacancies. Since demand is strong and good quality stock supply is still limited, some higher class structures overestimate the rates. Thus the A class office rent rates are even higher than in some European capital cities such as Bucharest, Oslo, Prague, Sofia or Budapest. * Approximately 15 800 sqm are occupied by the owner – Hansabanka Trends The outlook for 2006 is optimistic as significant demand is coming from international companies for A and B1 class office premises. So far, the increase in stock has been slower than anticipated. Due to relatively small stock even an insignificant market change in supply gives a noticeable effect. The market attractiveness for investors and developers, shortage of modern and good quality premises, land plot availability outside the city centre - these all are conditions for a supply increase to be expected during 2007 to 2009. Then we expect the competition to become more severe and the market development cycle will gradually approach the point of saturation. Decentralization of office building locations is another trend we expect along with the business activities moving towards the periphery of the capital and to the regions. Companies move to new premises outside the city centre, because of the shortage of space for expanded activities. A sufficient number of parking lots become a more important factor than the office’s location in the centre or close to it. The start-up point for office space now starts from 500 sqm and up. Also, we can see the sale and lease-back transactions coming on to the market, as for example, the transactions with the Headquarters of Hansabanka and the construction company Re& Re office buildings. 8 LATVIA OFFICE CASE STUDY CLIENT: CITY: SERVICE PROVIDED: Rietumu Bank Riga • Concept Development • Feasibility Study • Exclusive Brokerage • Marketing  000 sqm Colliers International is the exclusive consultant on the Rietumu Capital Centre – the new headquarters of Rietumu Bank. Rietumu Bank is one of the largest financial groups in the Baltics. Rietumu Capital Centre is located close to the main streets of Riga, which are of high intensity and importance to the city, and is currently under construction, scheduled for completion in September, 2007. SPACE TO BE LEASED: RESULTS: 9 RETAIL PREMISES Current and Planned Total Stock of Major Shopping Centres in Riga The shopping centres’ anchor tenants remained the same. The anchor tenants represent the food stores occupying large areas over  000 sqm, such as Rimi (the leading anchor) or Maxima. The rent rates during the second half of a year remained stable. The end of 2005 was marked by the expansion of Spice Shopping Centre (located in Lielirbes str. 29). Currently, it has a total area of 50 000 sqm and Gross Leasable Area (GLA) of 40 000 sqm (before the expansion: 24 800 sqm and 18 500 sqm, respectively). Particular features engrained are various shops for children and an increased number of catering facilities. Leasing the premises of ca 2000 sqm to the largest Latvian public catering company Lido can be considered as a „sensation” since it is the first Lido restaurant located in, side the shopping centre and the second-one by size among other restaurants of this brand situated in Riga. The further expansion of Spice is scheduled to be completed in 2006. Olympia Shopping Centre (located in Azenes str. 5) has a new owner - Baltic Property Trust (Denmark). The future plans of this centre are to improve the marketing strategy and to configure a new tenant-mix. In December 2005 Centrs Shopping Centre (located at Audeju str. 16) closed its doors for entire renovation and expansion. The premises of former Krasta Centre (Gross Building Area (GBA) of 25 000 sqm, located in Krasta str.) abandoned for several years, found a new owner. In December the local company Elkor opened the new Elkor Centre here. At the moment Elkor operates the largest chain in Latvia (more than 0 stores) specialising in selling household appliances, electronic goods, fashion and sports goods. Two K-Rauta trade centres were opened in June 2005 in Riga (15 000 sqm at Priedaines str. 7 and 14 000 sqm at Lucavsala ). These properties belong to the Finnish developer Rautakesko. The main specialisation is trading of building materials, articles for the home and garden. Depo DIY (Iceland) opened two DEPO stores in Riga, at K.Ulmana ave. 96 and Krasta str. 52. The range of goods is similar to K-Rauta (building materials, articles for the home etc.). he sales growth of retail companies reached 21.1% from January to November 2005 with regards the same period of 2004. At the same time the insufficient purchasing power of the population is still the major limiting factor impeding more active development of retail trade in Latvia. The average monthly gross income amounts ca EUR 40 per capita in 2005. This indicator has a tendency to grow slightly, especially taking into account the requirements of the European Union for structural improvements. There is still an evident lack of shopping centres offering qualitative entertainment and leisure facilities. Some of the existing large-scale shopping centres cannot fully satisfy the growing demand for a more diverse range of goods and services, comfortable transportation and pedestrian accessibility. In 2005 we saw shopping centres in Riga following the strategy of internal expansion and improvement of concept. T Shopping Centres The total supply of new retail space in Riga shopping centres increased by just ca 25 000 sqm and reached almost 459 000 sqm in 2005. Compared to the previous year the increase in stock was not significant. No large-scale shopping centre opened in Riga during 2005. 10 The Projected New Shopping Centres Galerija Azur: total area 25 000 sqm, located close to the city’s centre and future Southern Bridge. It will include ca 70 stores and -4 anchor tenants. Sample Rent Rates for Large-Scale Shopping Centres Major Large-Scale Retail Developments in Riga in Short-Term Outlook Retail Premises 11 The local company «Elektrosistemas» opened its first Profs hypermarket at K.Ulmana ave. 140, Riga. Its total area is 8 500 sqm. Profs can be considered a competitor to K-Rauta and Depo since it too specialises in building materials. In 2005 IKI, the third largest retail chain in the Baltic States, opened its IKI supermarkets in Latvia. Up to now the Lithuanian retail chain IKI has operated four low price stores; Leader Price in Latvia and two IKI supermarkets in Riga (at Chakstes str.70 and Dzelzavas str. 74). Another strong brand Lithuanian developer VP Market continues its active expansion in the Latvian market and plans to open new super- and hyper-markets all over the country. The opening of the furniture outlet Natuzzi (the first in the Baltic States) took place in Riga. It is located at K. Ulmana ave. 114/4. Natuzzi is a famous Italian brand and is represented in more than 0 cities worldwide having more than 140 stores in Italy. In 2006 the increase in supply of retail premises in multi-tenant shopping centres will surpass that of 2005. However, the more significant rise in stock will take place starting from the year 2007. Over the next 2- years competition among the shopping centres in Riga will become fierce. There are a number of large-scale project developments scheduled for market entrance in the short term. Also, there are several projects on the horizon scheduled to come on to the market by 2006-2008. Vacancy Rates in Percents in Large-Scale Shopping Centres of Riga (as in July 2005) Riga Plaza: total area of 50 000 sqm, located outside the city centre, close to Salu Bridge (crossing the river Daugava to the South from the centre). The planned number of shops is 150. Strong specialisation in entertainment and leisure. Galleria: total area of 5 000 sqm, located in the central part of Riga in a commercially active area. The planned number of shops is 220. The tenants are divided by profiles and floors. The number of floors is 7. Subterranean parking for ca 200 cars. Expansion and reconstruction of Centrs Shopping Centre (in future – Galerija Centrs): total area of 25 000 sqm, located in the Old Town – the historical centre of Riga. The target market is pedestrians and tourists because of entrance limitations to the Old Town by cars and parking difficulties around. Akropole: total area of 150 000 sqm, located outside the city centre, not far from Vansu Bridge over the river Daugava. According to the developer’s plans, it should be the largest multi-tenant shopping centre in Riga. The concept is similar to Akropolis Shopping Centre in Vilnius, Lithuania. High Street Retail The most desirable retail location in the central part of Riga is the area between Elizabetes, Lachplesha, Brivibas and K.Barona streets. These locations are characterised by an intense pedestrian flow. Many small and specialised stores targeting nondrivers are interested in renting retail premises in this area, but it is quite hard to find 20-50 sqm premises for rent here. Often constraints of inefficient planning, the presence of particular construction-related burdens, narrow facades, a surplus requirement to rent the basement, as well as high rent rates are particular features of high street retail premises in Riga. The premises in the places most in demand are leased out at the rate of 0-55 EUR/sqm/month. Many internationally-known fashion brands are interested in opening their outlets in this area. Armani, Gianfranco Ferre, Zara, Motivi, Mango, Benetton and others are present here. In 2005 the new store MOSKITO (located in the newly-built Terbatas Business Centre at Lachplesha str. 20) became available to Riga shoppers. It belongs to Apranga company (Lithuania) and offers a number of fashion labels such as Jack and Jones, Miss Sixty, Ichi, and B young in the area of 1 000 sqm. The famous Italian women’s fashion boutique LUISA SPAGNOLI opened its doors in Brivibas str. 70 in November 2005. Another retail outlet CASTRO selling fashion clothes was opened in Brivibas str. This is an Israeli fashion chain, comprising 86 branches worldwide. The store is oriented to a young audience. A new children’s fashion shop RITONI KIDS started its work in Riga Old Town (Kungu str.), as well as in Terbatas str In addition, there are the following streets as Kalku (located in the historical part of Riga, in the pedestrian area), as well as Krasta and K.Ulmana avenue, (located outside the city centre, in car-dominated settings) which are considered attractive retail locations. Many car show rooms, do-it-yourself stores, furniture outlets, trade centres and hypermarkets are situated on Krasta street and K.Ulmana avenue. These locations are not designed for pedestrians and the target audience is drivers. Retail Premises Other News The petrol retailer Neste Latvija signed a contract with the Finnish fast food chain Hesburger planning to open its restaurants at the petrol stations Neste A24 in Riga and in other Latvian cities. At the moment four restaurants are operating in Riga. Hesburger’s target is to open 20-0 restaurants in Latvia. The company “Čilija Pizza” - the owner of “Čili Pica” (one of the most popular pizzerias in Latvia) acquired two pizzerias of former “Pizza Jazz” in Riga (located at Brivibas street 76 and Raina boulevard 15). After this deal “Čili Pica” became the leading pizzeria chain in Latvia. The coffee shop chain Double Coffee opened five new express coffee shops in Riga. Next year the company plans to open a bakery for Double Coffee café. In addition, it plans to open barista chain - Double Coffee Express. The owners of Double Coffee have ambitious plans not only regarding the coffee shop concept, but they are going to expand its fast food restaurant Chicko Chicken concept as well. The company is intending to take all the best locations in Riga centre and major shopping centres. In December the biggest phone operator Lattelekom opened its first IT and electrical appliances shop, Apollo. The company’s future plans include the expansion of the shop chain in Riga and other Latvian cities. The new shop offers its customers a full range of services – from consulting up to phone and internet porting. The biggest mobile phone operator LMT purchased the mobile phone shop chain “DT Mobile”. At the moment DT Mobile has Dual, Trodeks and Trodeks IT shops, all together 75 retail outlets in Latvia. Probably, the largest Russian mobile phone network “Euronetwork” (Evrosetj) plans to enter the Baltic States’ market next year and to open 100-120 shops in the region. Regarding the new fashion brands planning to enter the Latvian retail market in 2006 are Semax and Tatuum (Poland), Pietro Filippi, Tally Weijl (UK), S.Oliver (Germany) etc. According to our information, all of them are looking for a local franchisee. 12 Demand Tendencies The companies entering the retail market tend to distinguish types of customers they plan to target and correspondingly make the choice where to open an outlet in street retail or in shopping centres. More exclusive and individual type shops tend to focus on customers in the street retail area while volume based shops lease premises in shop- ping centres. Fashion retailers need mostly small premises with an area of 100-200 sqm. Franchisers usually seek larger premises over 500 sqm. The demand for street retail is high on the top street locations. The street retail market can be characterised as quite dynamic with high rotation. Tenants who cannot adjust to high rent rates, leave and within a short time free, spaces are rented out to new tenants. At the same time the rent rate is crucial in decision making. Rents over market level stay vacant for longer periods. Moreover, there are available premises in the high street retail area having certain burdens and limitations, such as small windows, two storied, with cellars and large auxiliary premises. Retailers are concerned about parking lots, first floor design, large facades; they expect at least “grey” finishing with all the installations provided and absence of any temporary fee. Besides, the retailers have an interest not only in good locations in the capital city, but in other cities as well, among them Liepaja, Venstpils, Daugavpils and Rezekne. Therefore, the fashion brand Takko (Germany) is planning to open its first shop in the trade centre Ditton Nams located in Daugavpils. The second shop, presumably, will be opened in Galerija Azur Shopping Centre in Riga. LATVIA RETAIL CASE STUDY CLIENT: CITY: SERVICE PROVIDED: RESULTS: TK Development Riga Co-exclusive brokerage Colliers International assists one of the largest commercial property developers - TK Development - in leasing 20 500 sqm of retail space in Galerija Azur, a shopping centre under construction, scheduled for completion in May, 2006. The total area of the development is 25 000 sqm; there will be -4 big anchor stores and approximately 70 smaller boutiques. 1 Retail Premises INDUSTRIAL FACILITIES ket, and requiring much more spacious industrial and warehouse premises (10 000-15 000 sqm and above) with a developed infrastructure that meets international standards. International companies or their representatives form the biggest share of tenants in the existing business-hosting parks. In terms of business activities, most of tenants are industrial, service (mostly logistics) and trading companies. The basic requirements of potential tenants are good location and vicinity to the centres of business activity, certain building characteristics that could satisfy the tenants’ needs, the availability of a work force, good access and well-developed infrastructure (roads, traffic control, communication systems), etc. Supply Currently, there are no Class A industrial and warehouse premises offered for lease in the local market. The existing industrial and warehouse premises in Latvia characterize the fact that most of such facilities do not possess a developed infrastructure (all the necessary engineering communications and technical equipment that could fully correspond to international standards and meet today’s demand for high quality premises and facilities). Many of the existing premises represent physically and morally obsolete buildings of Soviet times and are located in the territories of bankrupted industrial zones and complexes. Due to the lack of qualitative facilities available for lease, several years ago the premises of “build-to-suit” category started to appear in the market and their number is still growing. Their owners and operators are mainly manufacturers, distributors and logistics companies. In Latvia the first business-hosting parks started to appear in the second half of the 1990’s. The majority of these parks were created in the territories of former industrial zones. They refer to the “brown field” category and offer renovated premises for different types of tenants. New owners of these objects have bought ex-factories, have fully or partly renovated buildings and started to attract potential tenants (mainly foreign companies) to start their operations in Latvia. Among such parks are Nordic Industrial Park in Olaine, Nordic Technology Park and NP Business Centre in Riga, NP Jelgavas Business Centre in Jelgava. All of them were developed by the company NP Properties. Norwegian Industrial Development Corporation SIVA is another developer operating in the market. It owns SIVA Business Park in Ogre. Another market player is Riga Industrial Park. It offers modern tailor-made premises of industrial, warehousing and office use for potential tenants. It represents a greenfield and uses the “build-to-suit” development strategy. Some of the existing industrial parks position themselves as high class, although they do not fully meet all require- he industrial and warehouse facilities market is still the least developed among the other commercial real estate market segments in Latvia. The substantial growth of the state economy and commercial real estate market should result in active development of the industrial market segment as well. Besides FDI growth, it is worth mentioning the tendency of West European companies to place industrial production in the countries of Central and Eastern Europe due to lower production costs, cheaper labour, more favourable taxation regimes and lower social loading which refer to the Latvian market as well. At the moment the warehouse facilities market is characterized by low supply and growing demand for high-quality premises. T Demand For many years the tenants did not have a big choice: they were offered the facilities to rent in the obsolete premises of Soviet times or invited to build their own facilities. As a result, the demand and its structure were not clear for a long period of time. It was known that the market does not offer any modern premises of highquality and the companies did not actively search for them, but tried to solve their problems on their own initiative. The demand was implicit for several years. The raise in the retail trade, manufacturing, transportation and logistics services, as well as the development of local small and medium enterprises (SMEs), resulted in a growth in demand for modern industrial and warehouse facilities. The most required area of warehouse premises on the part of local SMEs in general varies from 00 sqm up to 1 000 sqm and can overpass 5 000 sqm. In addition, there is a strong trend of large international companies entering the Latvian and Baltic mar- 14 Riga Industrial Park ments of high-class objects. The quality of supply in them does not always meet the expectations of the potential tenants. Low ceiling height (in some existing parks it is only 6m), the high number of storeys (in some parks up to 4 floors), inefficient column grid, insufficient floor load, non-observance of fire prevention requirements, insufficient number of loading/unloading gates, too large coverage area of the land, is often an obstacle for the improvement of the utilization rate of such buildings. It is quite difficult to analyze the supply tendency in the market today, due to the lack of reliable information on new and planned projects, the development of which is going to take place in the nearest future. There are announcements from the market-players about their intentions to develop a new industrial or business-hosting park that generate considerable public excitement. However, realisation of the majority of the projects announced is doubtful, at least in the short-term. In the majority of cases, the construction and designing plans of any industrial park and storage facilities start to be known not before an active marketing campaign takes place. It very often happens that the construction of some actively-declared projects is delayed or even cancelled. However, under the circumstances of scant supply and rather low competition in the market, the utilization of industrial parks is growing. This, in its turn, results in an increase of the rent rates. Nordic Industrial Park in Olaine similar to other Central and Eastern Europe countries. Subsequently, a number of trends including development of the industrial sector and industrial real estate property are analogous. We can forecast development pace of the sector similar to CEE countries in the mid- and long-term. We suppose that in the short and mid-term run, the market in Riga and its area could absorb at least 250 000 sqm of high-class industrial and warehouse premises. The beneficial location of Latvia and presence of ice-free ports provide good perspectives for development of the logistics market. An efficient transport scheme, in particular a developed railway network accessing both a number of functioning and outdated objects, provides preconditions for the development of the warehouse immovable property sector. Latvia’s accession to the European Union and the growth of trade has had a truly positive impact on the country’s logistics sector as well. We expect the market to be further dominated mainly by local developers. However, the possibility of “speculative developers” coming from the Netherlands, Great Britain and Scandinavia should not be excluded. The preference of choosing the place to allocate future industrial, logistics and warehouse premises will be given to the locations around Riga’s ring road and surrounding highways. The rent level of new warehouse and industrial premises should not seriously change in the upcoming 2- years and, most probably, it will remain at the level of .5–4.5 EUR/sqm/month. Rents The average basic rent rates (excluding VAT and maintenance/operational costs and service charges) of industrial premises in Latvia recently fluctuate at about .0-6.2 EUR/sqm/month. Rental rates vary according to typical factors: the location of the building, technical and qualitative parameters of the premises, the rentable area. The lease term is usually -10 years. Over the last two years, the average rent of the production premises in industrial parks has increased by more than 25%, warehouse premises - by Liepāja almost double. Valka Limbaži Ventspils Talsi Valmiera VEGA Industrial Park Nordic Technology Park Rīga Cēsis Gulbene Aluksne Balvi Kuldīga Tukums Riga Industrial Park Granita Industrial Park Aizkraukle Madona Saldus Jelgava Ludza Jēkabpils Preiļi Rēzekne NP Jelgava Business Centre SIVA Business Park Forecasts Latvia has undergone a path from a planning-type economy to the market economy, NP Business Centre Krāslava Daugavpils Industrial Facilities 15 HOTEL SECTOR he hotel industry in Latvia is booming. It is being facilitated by a sharp rise in foreign tourism since joining the European Union, by events of international relevance and improvements in the business environment. The major events expected in 2006 are the World Hockey Championship and the NATO summit. Hotels are concentrated in the major cities of Latvia, but Riga, as the capital, dominates among them. The number of hotels and guesthouses in Riga is 57 as of September 2005, and the total number of the hotel-beds has reached 7 527. During the summer months the resort city of Jurmala and Ventspils, the city on the Baltic Sea, experience a high level of visitor activity. T 2. . Priority countries (Denmark, Poland, Belarus, Ukraine, Norway, Netherlands, Italy and Spain). One general marketing campaign is planned in each of these countries to present Latvia as a distinctive and recognizable country as a tourist destination. Perspective countries (USA, Japan, China and Slovakia) - cooperation with other Baltic states to elaborate tourism targets. Demand The number of non-resident travellers reached 2.9 million in September 2005, i.e., 25 % more than at the end of the same period in 2004. It is estimated that it will reach .8 million at the end of 2005. Tourism Development Policy Tourism is a rapidly growing industry. In 2004 tourism made up 2% of GDP, but in 2001 this ratio was 1.4%. The added value by tourism was 2.5 times more than in 2001, i.e., it reached EUR 197 million. Guidelines of Tourism Development Policy for 2005-2008 set out the principal goal of attaining an annual growth rate of added value 10%-15%. On the basis of the Policy in 2005 the marketing strategy was developed for 2006-2010. There are three country groups put in order of importance: 1. Higher priority countries (Germany, Finland, the United Kingdom, Sweden, Russia, Estonia and Lithuania) – Latvia has good air traffic and maritime traffic with these countries. Different marketing campaigns are planned to attract tourists from these countries. Number of Visitors in Hotels and other Accommodation Establishment Source: CSBL 16 The number of visitors in hotels during the three quarters of 2005 has grown by 26% compared to 2004. It is noticeable that growth occurred every quarter of the year. This fact confirms the prolongation of the tourism season and positively affects occupancy indicators. The main aspects stimulating demand are: Latvia’s accession to the European Union, the entrance of discount airline companies and the new excursion itineraries. Visitors from Germany, Finland, Lithuania and Estonia dominate among international visitors. Visitors from France, Italy, the United Kingdom and the Netherlands demonstrated the highest growth ratio. The average growth rate was about 40% a year. Hotel Benchmark Trend Report, Riga Supply The main activities of the hospitality business take place in Riga. There were 45 hotels and guest houses in Riga at the end of 2004, i.e., 17% of the total Latvian hotel and guesthouse market. The total number of hotels reached 57 in September, 2005. The number of hotels without star-nomination doubled during the nine * YTD- Year-to-date. Average of values starting January 1 of the given year ** ADR-Average daily Room Rate. Room revenue divided by the number of occupied rooms *** RevPAR- Room revenue divided by rooms available Number of Hotels and Beds in Riga, 2004 Hotel TOMO – three-star hotel, 75 rooms, opened in August, 2005 The average room occupancy level in Riga’s hotels during the three quarters of 2005 was 55.2 %. In summer months hotels were occupied by 78% and in the winter period by 0%. The average daily room rate in August reached EUR 81 which was 10% higher than in the previous year. Room revenue ratio achieved its maximal value - EUR 61. This number is 1.6 times more than in 2002. Forecast Demand in the hotel sector is stable and increasing. There is a deficit of international hotel chains and of two or threestar hotels at this moment in Latvia. International hotel chains attract foreign visitors who expect to receive particular standards of service. Comparatively cheap hotels & “bed &break- Number of Hotels and Beds in Riga, September, 2005 Source: CSBL months. At the same time the number of beds in this type of hotels decreased by 1%, presumably at the expense of expanding supplementary facilities. The hotels in the capital could supply  787 rooms for foreign and resident visitors at the end of the rd quarter of 2005. The majority of hotels opened in 2005 were not new structures but represented reconstructed buildings. In fact, there are no free land plots in Riga city centre for hotel construction available. Another market trait is lack of international hotel operators, except SAS Radisson in Riga and Kempinski in the renovated Kemeri former spa-resort house (not started operations yet). The most recent hotel projects: Albert Hotel – three-star hotel, 46 rooms, opened in November, 2005 Hotel Monica – four-star hotel, 80 rooms, opened in October, 2005 Source: CSBL fast” are good choices for people who are not interested in the full spectre of amenities. Latvia has long-term experience in spa hotel segment, which began to develop in the XIX century. Hotels with additional health care services experience permanent longer-term demand, particularly on the coast. Hotel Sector 17 RESIDENTIAL MARKET iga’s residential market is characterised by high demand from the customers’ side and increasing prices. Riga’s residential market is one the most dynamic developing economic sectors in Riga. Many developers in Riga are attracted by residential market due to shorter realisation terms and relatively high returns. Currently the total housing stock in Riga amounts to more than 16.5 million sqm which is more than 0% of Latvia’s total housing stock. According to official statistics housing stock per resident in Riga is 22.5 sqm. This figure is comparable with Moscow and St.Petersburg, both cities with developing real estate markets. In com- R parison with developed cities, such as Helsinki or Berlin, the housing stock in Riga is not sufficient, which indicates the positive potential for Riga’s residential market. Supply 40 new residential buildings were built in Riga in 2004 with a total area of around 200 000 sqm. In 2005 the supply of newly build apartments was more than  000 units, which is a significant increase compared to 200 when only 72 newly built units were completed. It is expected that Riga’s residential market will enter more than 2500 newly built apartments in 2006. The total floor space of completed residential buildings in the first three quarters of 2005 increased by 29% compared with the same period in 2004. Almost 81% of the total residential stock in Riga is privately owned while 19% live in rented apartments. This indicator is one of the highest in Europe, only in Spain, Hungary and Slovenia is the percentage of homes that are owner-occupied higher and amounts to 84%, 92% and 9% correspondingly. In Germany and Austria this indicator is the lowest in Europe and amounts to 42%. More than 90% of Riga’s population live in apartments in multi dwelling houses and only 4% in privately owned houses. Most of Riga’s population reside in 2-room apartments (42%). The demand for apartments in newly built projects is also the strongest for 2-room flats. International Comparison of Residential Stock per Resident in Selected European Cities 18 One of the tendencies to evolve in recent years is the renewal of construction of social housing by and for the needs of the municipality. The target audience of these projects is low income and young families. These projects are mostly being developed in the outskirts of Riga, such suburbs as Dreilini and Bolderaja. Demand There are many factors that influence the demand for residential premises; among them are such macroeconomic factors as economic growth, unemployment, inflation and expectations of future events. The Latvian macroeconomic situation is favourable for residential market development. The most important individual factors that influence the demand for residential premises are location and the price of the apartment, other factors are the layout of apartments, materials used in construction and the reputation of the developer and constructor. In terms of demand preferences, the most popular residential districts are Purviciems, Imanta, Mezaparks and Agenskalns. Hansabanka, it has issued mortgage loans for a total amount of LVL 281 million and accounts for 26% of all issued loans. The total volume of issued mortgage loans in Latvia as at the end of December 2005 exceeded LVL 1 billion. Apartment prices in newly build residential houses in Riga vary depending on finishing and location, in suburbs on the right and left banks of the River Daugava on average between 1000 EUR/sqm to 1600 EUR/sqm. In the central part of city, apartments are the most expensive (reaching 4000 EUR) and are offered mostly with grey or white finishing. The largest demand for exclusive type apartment buildings in the city centre come from foreign investors. Current Development Tendencies The districts located further away from the Riga city centre have gained active development in recent years. This is primarily connected with the development of infrastructure and overall restructuring of Riga, including the construction of new bridges over the Daugava river (Southern Bridge and Northern Bridge or tunnel), the expansion and planning of new highways, such as a ring road around Riga and new highways parallel to Brivibas iela, a motorway connecting Riga and Jelgava, the development of the airport and sea port areas, construction of industrial parks around these territories. All of the above mentioned projects assume not only the development of infrastructure around these territories but also the creation of new work places. Taking into consideration undergoing changes and the city’s development tendencies, developers plan the construction of new residential premises in the proximity of these areas. Another tendency is a decrease in speculative deals in residential projects. Prices Compared to the prior period, prices in 2004 on apartments have increased by 0%. In 2005 this tendency continues, with an average monthly increase in prices of 1-%. One of the main drivers behind the consumer demand for residential apartments is the availability of mortgage loans and low rates provided by Latvian commercial banks. Banks are very willing to issue mortgage loans and many of them have initiated aggressive marketing campaigns to get the customer. These campaigns have paid off, especially for a leader in the market of loan mortgages JSC Residential Market 19 OVERVIEW OF THE BALTIC STATES n 2005, a lot of important transactions have been settled. They were all basically medium-size but their importance lies in moving the market, in keeping the market active. By comparison, poor supply caused certain difficulties in the previous years. The transactions of Olympia (Riga) or Rocca al Mare (Tallinn) centres confirmed the first signs of real activity in the market. Scandinavian funds are mainly involved in investment transactions in the Baltic States: Baltic Property Trust (Denmark) – there are approx. 20 different properties in all three Baltic States in their portfolio; Citycon (Finland) – acquired Rocca al Mare Centre in Tallinn in July 2005, Niam Fund III – has acquired Rimi’s central distribution centre and head offices in Riga on a sales lease back scheme. That investment was one of the largest in Latvia in 2005. The Baltic States’ investment market is interesting for all major European and USA market players, including institutional funds, and we expect many more deals and a more transparent situation in the supply of investments in the Baltic region in 2006-2007. We expect property investments made in the Baltic States next year could reach EUR 150200 million. INVESTMENT I Main Problems: Lack of experience from developers; Certain problems with project concept and structure, including short-term lease agreements with no security for break up options. Latvia It has to be pointed out that Latvia’s growth rate is the fastest in the Baltics. Market activation has invited a considerable amount of speculative investors and developers to start projects. Many are moving their activities from Estonia (where the entrance level is higher and yields slightly lower) to Latvia, searching for higher profits. At the same time – as mentioned above – the market is developing fast and can be considered ready for institutional investors to look for bigger portfolios. The trend is that the most active region remains the capital and its closer surroundings. Latvian FDI in 2005 was 5.% of GDP. According to IMF and Eurostat data, GDP is growing at an expected volume of EUR 11 (2004) - 12 (2005-f.) - 1 (2006-f.) billion. That is respectively 7.2% for 2005 and 6.9% for 2006 and one has to notice that actual GDP growth has already exceeded expectations. For 2006, the focus shall be on quality and professionalism. An overly active market pushes the players to develop with its speed. Developers and investors with longer perspective are already taking examples from their northern neighbours and focusing on specific features to make the property stand out amid aggressive competition. 20 LITHUANIA Contents 22-25 26-29 30-33 34-37 38-41 42 ECONOMIC OVERVIEW OFFICE PREMISES RETAIL MARKET INDUSTRIAL FACILITIES HOTEL SECTOR INVESTMENT OVERVIEW 21 ECONOMIC OVERVIEW velopment and the improving expectations of business and of the public. On the other hand, the rapid growth of the economy was impaired by the high oil prices on the global markets, the labour emigration and the growing costs of remuneration, the lack of green-field investments. Political In December 2005, it was one year since the fourparty coalition Government started its work. This year saw improvement in the living conditions, growth of people’s income, pensions, an increase in salaries for teachers and medics, an excess of the budget by more than EUR 289 million, a drop in the unemployment rate, distribution of EUR 44 million worth of EU funds. A rigid fiscal policy and the ever-decreasing relative national debt indicator probably is one of the positive characteristics of today Government’s activity. Economic Growth Economic Overview The economic situation in Lithuania was stable last year and is likely to remain that way in the next year as well. Last year, the growth of the economy was driven by consumption, EU structural funds, the highly-invigorated services sector, the exports deThe GDP growth rate was and in the mediumterm will probably be among the highest in Europe. In 2005, the GDP growth rate is expected to stand at 7. per cent against the 7.0 per cent as of 2004. Just like over the previous years, the main reasons behind the GDP growth were as follows: the expansion of the domestic market driven by the growing salaries and in- f - forecast; e - estimate, * - I-III Q, Source: Lithuania Statistics Departament, Lietuvos Bank, Ministry of Finance of the Republic of Lithuania, Leading Banks (e.g. SEB Vilniaus bankas AB, Hansabankas AB Bankas) 22 vestments, the lifting of the last trade barriers and the improving terms of export, the banks’ flexible policy on lending and the extremely low interest rates. Particularly fast growth rates were observed in the business of financial brokerage (12.5 per cent), construction (12.0 per cent), retail and wholesale (11.6 per cent), hotels and restaurants (11.1 per cent), transport and communications (10.9 per cent), electricity, gas and water supply (9.8 per cent), and manufacturing (7.6 per cent), which were growing faster than or in line with the country’s gross domestic product. The extensive domestic market was the underlying factor behind the economy expansion. The existing boom in domestic demand was actually caused by the extremely low interest rates. The raising of the ECB basic interest rates would first of all directly affect the industries that provide services on the domestic market – construction, domestic trade, real estate, lease and other business activities, i.e. the industries that have recently been growing faster than average. Following accession to the EU, Lithuania’s foreign trade entered a stage of a very rapid development. Since the 2nd quarter of 2004 inclusively, the annual trade export growth rate has never fallen below 22 per cent, and that of import – below 14 per cent. During 9 months of 2005, the exports increased by 25.1 per cent, and imports – by 20.9 per cent. The sales of goods on foreign markets have been growing faster than the imports of the same. EU Member States remain the key region in terms of Lithuania’s foreign trade. Russia, Latvia, Germany, France and Estonia lead the ranks of the main exports partners. The main imports partners have not changed over the year and were as follows: Russia, Germany, Poland, the Netherlands and Latvia. deficit and the state debt are fully complied with, while the main problem now lays with the inflation rate. As of May – November 2005, the average annual inflation rate in Lithuania stood at 2.4 per cent and was 0.2 percentage point lower than the Maastricht criteria of 2.6 – 2.8 per cent that is currently under development. Typically, the high oil prices on the global markets are deemed one of the principal culprits behind inflation. The inflation was also caused by the growing prices of manufacturers (mostly due to the increase in the oil products prices), the increase in salaries, the construction boom. The monthly inflation values of the start of 2006 will be key, since conclusions on continuous satisfaction of the Maastricht criteria as provided in reports by the European Central Bank are based on annual inflation details as of past three or six months. The demand for labour has been on a further increase. Natural demographic reasons and migration has caused the total number of people that make the labour go down by over 1 per cent, resulting in a subsequent slight upsurge in the unemployment rate. During the rd quarter of 2005, the unemployment rate was 7.2 per cent, against the 10.6 per cent as of the respective period of 2004. The existing deficit of labour causes the cost of labour to go up. The average monthly gross salary in the country’s economy (apart from private companies) over the rd quarter of 2005 stood at EUR 99 and has improved by 9.4 per cent as compared to the rd quarter of 2004. Debt Indicators During January to November 2005, the debt of the central authorities dropped by EUR 9.79 million to EUR .5 billion or to 16.9 per cent of the 2005 GDP as forecast. The Lithuanian ratio between the state debt and the GDP is one of the smallest in the European Union (the Maastricht criteria cap the authority sector debt at 60 per cent of GDP). Inflation Lithuania is making preparations to join the euro zone at the start of 2007. The requirements for budget Economic Overview 2 Investment - FDI During nine months of 2005, the flow of foreign direct investments amounted to EUR 56 million. Comparing to the nine months of 2004, the flow had decreased by EUR 18.9 million, or 28.1 per cent. Over the period of comparison, the overall foreign direct investment flow had decreased primarily due to the drop in reinvestments and other equity flows. According to the data as of September 0, 2005, investments into manufacturing accounted for .2 per cent, investments into wholesale and retain – for 14.9 per cent, into financial brokerage – for 14.8 per cent, and investments in transport, warehousing and remote communications – for 12.4 per cent of total foreign direct investments Lithuania. The largest investments were made by investors from Sweden (1.9 per cent), Denmark (1.7 per cent), Germany (1.2 per cent), Russia (12.8 per cent), Finland (8.1 per cent) and Estonia (7. per cent). Investments by (25) EU Member States stand at 74.7 per cent of total investments, of which amount investments by 15 EU old-timers accounted for 62.9 per cent, and investments by CIS countries accounted for 1.1 per cent of total investments. Economic Indicators Economic Overview Forecast The GDP growth prospects are stable. The tendencies that date back to 200 indicate that domestic consumption will continue to affect the growth of economy much. In 2006 to 2008, investments and consumption will undergo rapid expansion, and the positive tendencies pertaining to Lithuania’s exports indicators will remain stable. The growth of nominal export will be promoted by the liberalisation of trade with the EU, providing for better terms of trade. With investors’ confidence in the stability of the economy improving, investments will account for more and more of the GDP. In 2007-2008, the impact of high oil prices on GDP growth would be off-set by better economy infrastructure and higher production outputs, all thanks to EU support. Over the period in question, faster growth of salaries, the decreasing unemployment rate, new labour markets in the European Union and good expectations of consumers regarding the development of the economy will serve as a positive driving force for consumption. Over 2006 to 2008, the situation on the labour market will undergo further improvement. The tendencies that started in 2004 are expected to survive, causing the average monthly salary in Lithuania to grow. The forecasts show that the average gross monthly salary will go up to EUR 46 in 2008. The possible introduction of the euro as of January 1, 2007 would facilitate foreign investments and growth of exports. Based on estimations of the effects of the introduction of the euro made by other countries, the GDP is expected to grow at a rate of 6.8 per cent in 2008. The fast growth rate of production outputs is likely to remain after 2008 as well. 24 LITHUANIA FREE ECONOMIC ZONE CASE STUDIES PROJECT: CLIENT: CITY: SERVICE PROVIDED: TOTAL SPACE: RESULTS: Kaunas Free Economic Zone Kaunas FEZ Management, UAB Kaunas • Feasibility study • Co-exclusive brokerage 8 hectares (Phase 1) Colliers International prepared 1st phase consultancy report, territory zoning and provides co-exclusive brokerage service on Kaunas free economic zone. 25 OFFICE PREMISES Overview Over the recent years, continuous quantitative and qualitative growth of the Lithuanian office premises market was observed. Increasing requirements of tenants for technical characteristics of the premises, quality and variety of services, work environment, stimulate construction of new business centres and refurbishment of administrative premises meeting established top standards. Irrespective of certain common development trends of the office premises market, great differences in this market are observed in the major Lithuanian cities. Supply The office premises market in Vilnius city is the largest and most mature with the total area of modern (newly constructed and refurbished) office premises making 16,800 sqm of which 1.2% are attributed to class A premises. The most impressive growth of the office premises market was in 200 and 2004 (65,805 sqm of office premises, or 1.5 times more as compared with 1998-2002). In 2006, supply of nearly 24,000 sqm of modern office premises of which 64% are class A premises to Vilnius’ office premises market was projected. The market growth pace will be similar to that of the year 2005. The office premises market of Kaunas, the second largest city, is underdeveloped as compared with those of Vilnius and Klaipėda. In Kaunas, tenants of office premises are dominated by small and medium-sized service companies, which tend to choose cheaper, economy-class offices. The level of rent prices in Kaunas is nearly twice as low as in the capital city of Vilnius, which is urging professional developers to tend to the well-matured demand for office space in Vilnius, as the costs of construction are the same in both cities. That is one of the reasons impeding the growth of the supply of modern office premises in Kaunas. On the other hand, the city of Kaunas lacks any professionally-developed economy-class offices. This fact is a limiting condition when it comes to the assessment of the supply/demand balance. The highest development of modern office premises was observed in the year 2004, after major repairs of three business centres, i.e., the Business Leaders Centre (6,000 sqm), the Tower (6,000 sqm) and a business centre next to the Tower (5,600 sqm). It is expected that in 2006, modern office premises supply in Kaunas will grow by 9,000 sqm Development of the office premises market in Klaipėda is putting on pace namely from 2004. In 2005, the market was offered the largest area of modern office premises, i.e., 10,260 sqm It is planned that during the following several years supply of modern office premises will grow two-fold (more than 0,000 sqm office premises). An abrupt growth of modern office premises supply may affect the increase of the vacancy rate of the business centres in the short-term. Demand In the year 2005, international companies starting their operations in the local market, firms having several representative offices in the country, existing tenants developing their activities and moving to larger premises 26 New Office Supply 2005 (over 2,000 sqm) Major Projects 2006-2007 Office Premises 27 and tenants migrating from old and obsolete premises to new offices were the most proactive in the market. Improving financial standing of companies gives a possibility to a large number of companies to lease modern offices. The majority of such companies require class B properties. The largest demand of small office premises (about 50-120 sqm) is observed among the local companies and especially in the office premises markets in Kaunas and Klaipėda cities. Irrespective of a continuous increase in demand of local companies for large office areas, such areas are the most popular among international companies (Commercial Union Gyvybės draudimas (life insurance), GlaxoSmithkline Lietuva, Elli Lily, Amber Bay Shipping Ltd., Unitam Marine Baltic Ltd.). Large pharmacy corporations with the strong presence in the Lithuanian market, financial consultants, information technologies and telecommunication companies, banks, leasing and insurance companies, embassies, etc. are the main tenants of class A offices. Recently, interest in class A premises in Vilnius slightly declined taking into consideration almost finalised construction and started lease of BCC2 and Vilniaus Asking Rental Rates in December 2005 (€/sqm/month, net of VAT, excl. service charges) Vartai offices. Within a short period of time, the market offered large areas of class A premises, therefore lease of said premises will be time consuming process. The market has to mature for each building of class A, whereas class B premises market maintaining an upward trend of demand and high occupancy rate remained stable. Technical and qualitative parameters are of great importance to tenants in Vilnius city. Selection of premises to be leased by businessmen in Kaunas and Klaipėda is determined by several major criteria such as location of the business centre, parking area and rents prices, however certain qualitative changes are already observed in the premises market. Office Premises Interest of tenants is growing in districts remote from the centre due to shortage of plots of land in the central parts of the cities, growth in land price, traffic jams during rush-hours and shortage of parking area. cient number of parking lots, high rent prices, etc.). In the environment of fierce competition such premises will not be competitive. Rental Rates In the year 2005, rent prices of office premises in Vilnius and Klaipėda remained rather stable, as compared with the start of the year 2005. During the above-mentioned period, rent prices of office premises in Kaunas dropped slightly due to low demand for modern offices. Forecast Dynamic local macroeconomic environment, improving financial standing of corporations will result in growth of demand for qualitative modern offices, and especially of those attributed to class B1 with technical and qualitative parameters, as well as rent prices meeting requirements of the majority. The leader’s position in constantly increasing competition will be taken by such business centres that will offer the optimum combination of quality and price meeting opportunities and expectations of the potential tenants. To ensure long-term competitiveness and attractiveness of investment, a larger portion of investments will be allocated for engineering equipment of the business centres. Due to shortage of land and car parking, increase in land plot prices, traffic jams during rush-hours at present a trend of new premises construction moving to regions remote from the centre is observed and in the nearest future, this trend with continuously strengthen (e.g. implementation of new projects in Savanorių and Pramonės streets in Kaunas or Taikos streets in Klaipėda). Seeking to diversify risk, developers will continue construction of multi-functional properties what will result in higher supply of office, trade and residential premises (eg. Vilniaus Vartai, Helios City in Vilnius or Gandrališkės, Jūros Vartai in Klaipėda). Rapid development of the market segment of the office premises built for selling purposes (in the multifunctional objects, the majority of office premises are built for selling purposes) will cut the number of the potential tenants who require a small area (50-150 sqm) of B1 or B2 class premises. Vacancy Situation in the office premises market is gradually changing in the result of increasing demand for offices. At present, vacancy rate of the office premises attributed to class A in the office premises market in Vilnius makes 12.8 %. Such higher vacancy rate was determined by the fact that in the year 2005, three large spacious business centres, i.e., Victoria, BCC2 and Vilniaus Vartai (the total area of 21,600 sqm) were offered to the potential tenants, while construction of business centres BCC2 and Vilniaus Vartai will be completed only in the begining of 2006. The vacancy rate in class B office premises has dropped slightly and is now about 5 % (against the 7-10 % as of the start of 2005). In future, the vacancy rate in class B buildings is likely to remain the same. The vacancy rate in business centres of the city of Kaunas stands at 10 %. Currently, vacancy ratio of the office premises attributed to class B premises in Klaipėda makes nearly 7%. If the market growth pace is not slowed down, vacancy ratio of the office premises will rise. Rather high vacancy ratio of certain premises today signals about shortages of premises for lease (inadequate quality of engineering equipment, insuffi- 28 LITHUANIA OFFICE CASE STUDIES PROJECT: CLIENT: CITY: SERVICE PROVIDED: TOTAL SPACE: Vilniaus vartai Ranga IV Investment, UAB Vilnius Brokerage 8 060 sqm CLIENT: CITY: SERVICE PROVIDED: TOTAL SPACE: RESULTS: Vilniaus Akropolis, UAB Vilnius Brokerage 109 000 sqm Introduction of the new brand Promod 29 RETAIL PREMISES ius and in Klaipėda, Akropolis under construction in Kaunas), Eika UAB (the Jūros vartai investment project in Klaipėda, a shopping centre in Utena), Ogmios Centras AB (multi-functional complex Babilonas in Panevėžys), Rubicon Group UAB (the shopping and entertainment park Ozas in Vilnius). Of international companies, there are E.L.L. Nekilnojamas Turtas UAB (the Panorama shopping centre in Vilnius, the multi-functional complex Saulės Miestas in Šiauliai) or Baltic Shopping Centre UAB (super regional power centre Mega in Kaunas). Supply Vilnius city has the largest retail premises market including modern retail premises with the total area of 282,700 sqm. During several recent years, the largest growth of modern retail premises was observed in the year 2004 (10,00 sqm). In the year 2005, few shopping centres such as Mandarinas (9,500 sqm) and Grand Duke Palace (5,500 sqm) were opened. The year 2005 was extremely successful for the retail markets in Kaunas and Klaipėda cities where the highest ever growth of the retail premises supply was observed (80,700 sqm and 84,200 sqm, respectively). The super regional power centres – Mega and Akropolis (restructured and developed HyperMaxima) were opened. Shopping centres represent the major share of the retail premises market. Over the recent five years, the number of small retailers was continuously decreasing, however the area of retail premises (shopping centres) was increasing. The current trends show that the number of small retailers will shrink in future. Today, Vilniaus Akropolis (109,000 sqm) is the leader of trade centres by turnover volume as well as by the number of visitors. Overview The Lithuanian retail premises market is rapidly developing and the number of investors in this real estate segment is growing. Irrespective of implementation of a large number of new projects, the retail premises market is not saturated. Common development trends of the trade premises market are observed in the large cities and towns. The development of shopping and entertainment centres first of all has the involvement of local companies, the largest of them being VP Market UAB (Akropolis in Viln- Main 2005 Completions (more than 10,000 sqm) 0 Supply (area not less than 10,000 sqm) In 2006, the largest growth of the retail premises market is expected in Kaunas, after putting into exploitation of super power centre Akropolis (72,000 sqm). Supply of modern retail premises in Vilnius city will not exceed 46,000 sqm (Vilniaus Vartai and Gedmino 9 included). Due to various political aspects the projected construction of trade and entertainment park Ozas by Rubicon Group was not started, however the Group already announced about the start of construction of the largest indoors Aqua Park (1,400 sqm) in Europe (completion date: the second half of 2006). Shopping centres in Klaipėda to be constructed in the year 2006 will be considerably smaller (up to 10,000 sqm), as compared with those opened in the year 2005. Demand In 2005, growth of the local retail premises was limited by several factors. Primarily - it is the positive developments in the country’s economy, the increase in the buying capacity of people. Secondly - development of the local companies and fierce competition to occupy a larger retail market share. Thirdly– new international trade companies appearing in the market. Growth of demand for shopping centres was slower than that of supply. Irrespective of the fact that the main part of the premises in newly built shopping centres are still leased prior to the date of opening of such centres, tenants became more demanding, i.e., they do not rush to lease premises in any shopping centre and focus on location and concept of the centre, impact zone, etc. Major 2006-2007 Projects Retail Premises 1 Successfully launched trade centres in fact did not report about any vacancy. While in some trade centres with a weak concept the vacancy level made up 10-20% (VCUP or Mada in Vilnius, Kapitolijus in Klaipėda). Anchor lessees of the shopping centres are hypermarkets or supermarkets owned by the major food product companies such as VP Market, IKI, Norfa and RIMI, followed by service companies, retailers of electronic equipment (Elektromarkt, Topo centras), wearing apparel (Apranga, E-5 Mode), shoes (Danija, Žygio batai), cosmetics (Kristiana, Sarma, Drogas) and other shops. Entertainment sector becomes more and more important in the trade centres (e.g. ice arena, cinema centre, bowling, playground for children, catering in Akropolis). It should be noted that a mix of tenants in different trade centres is actually identical, therefore selection of a shopping centre by the buyers is mostly determined by its location, access, parking space, types of entertainment, etc. Monthly Rental Rates for Modern Shopping Centres (EUR) in Dec 2005 Retail Premises Insufficient number of the potential buyers and purchasing power of the local population were the main reasons of delay in starting activities by the international trade companies in the local market. In the year 2005, such wearing apparel companies as Karen Millen, Pietro Filipi, Motivi, Takko, Promod, Tally Weijl, Tintoretto, Quicksilver, and also shoe company Bata, Italy, and others started to work in the Lithuanian market. The majority of international trade companies work on franchise basis. Rental Rates High Street Retail The formation of rent prices for premises in shopping centres and in retail streets takes different routes. When it comes to shopping centes, rent prices depend on the location and the concept of the shopping centre, the turnover of the trader. In 2005, as compared with the year 2004, rent prices of the retail premises in the shopping centres irrespective of certain insignificant fluctuations, remained stable. Such stability of prices was determined by several factors. Primarily - unsatisfied market demand and secondly – competition among shopping centres. In future, the rent prices of amateurish projects will decrease in fierce competition environment. Monthly Rental Rates for High Streets Central parts and old towns of major cities have several historically formed retail streets: in Vilnius – Gedimino ave., Pilies, Didžiosios, Vokiečių, Vilniaus and Trakų streets, in Kaunas – Laisvės ave. and Vilniaus street, in Klaipėda – H.Manto, Tiltų and Turgaus streets. Supply of the retail premises in retail streets is minimum and does not meet the existing demand. The majority of new shops in these locations are opened subject to the change in owners of premises or tenants. The major and the largest retail street is Gedimino prospektas in Vilnius (shopping centres Flagman, Zara, Grand Duke Palace, Gedimino 22, and a new shopping centre Gedimino 9 to be opened in the year 2006), in Kaunas – Laivės alėja, in Klaipėda – H.Manto street (Mega Plaza, Kapitolijus). Each retail street differs by intensity (Euro) of pedestrians, customer segment and premises rent price. Forecast Development of major shopping centres in the largest cities as well as in smaller towns resulting in their market share growth and decrease of number of small and medium-sized shops. In large shopping centres hypermarkets and supermarkets will remain the main tenants as well as DIY shops (Senukai, JYSK), retailers of electronic goods (Elektromarkt, Topo centras), cosmetics, wearing apparel, shoe shops, and the entertainment sector becoming more and more important. 2 Demand for the retail premises will drop in such shopping centres that do not have a clear concept, or do not assure a sufficient flow of buyers, or are in locations non-convenient for buyers, etc.. Shopping centres seeking to decrease vacancy level will have to decrease rent prices of the shopping centres and offer competitive rent prices. Vilnius and Kaunas retail premises markets will be able to assimilate several super regional power centres such as Akropolis, but the new shopping centres to be launched in Klaipėda’s retail market will not exceed 10,000 sqm In other Lithuanian towns, such as Šiauliai, Panevėžys, Utena, Alytus, etc., the potential of the retail premises market is huge. A number of started and planned new projects show that developers focus on towns (e.g. Saulės miestas and Bruklinas in Šiauliai, Babilonas in Panevėžys, shopping centres in Utena and Alytus). Invasion of the major Lithuanian trade companies into underdeveloped retail markets of the neighbouring countries (e.g. VP Market UAB development in Bulgaria, Latvia, and Romania). Penetration of the German low price company is expected in the market (a large network of shopping centres to be opened on the same date) should considerably reduce market shares of such local trade companies as VP Market, IKI, Norfa, RIMI. Much more attention will be paid to the architectural concept of shopping centres (a tendency like that can already be seen in super regional power centre Mega). LITHUANIA RETAIL CASE STUDIES PROJECT: CLIENT: CITY: SERVICE PROVIDED: Shopping center MEGA Eurohypo AG Kaunas Valuation of the super regional shopping mall Mega (72, 000 sqm) Colliers International prepared a valuation report. RESULTS: Retail Premises  INDUSTRIAL FACILITIES Overview Lithuania, the largest of the three Baltic States, has a favourable strategic location between the EU and CIS (Commonwealth of Independent States) countries. Communication infrastructure in Lithuania is highly developed: two important European corridors go through its territory, i.e., in the North-South direction (Tallinn – Riga - Kaunas – Warsaw) and in the East-West direction (Kiev – Minsk – Vilnius - Klaipėda) and branch-lines thereof, 4 international airports, ice-free seaport, railroad network and roads meeting the EU requirements. Local developers are the main participants in the Lithuanian industrial premises market, and foreign investment funds show interest in the developed properties. Supply Today, the industrial premises and warehouses market is concentrated in the industrial territories of the major Lithuanian cities such as Vilnius, Kaunas and Klaipėda and close to the main highways up to 15 km from the city centre. In terms of the geographical location and communication means, every city has certain competitive similarities in respect of each other. Today, Vilnius city has the largest market of modern industrial premises. The industrial premises market in Kaunas and Klaipėda, as compared with that of Vilnius, at present is only starting its proactive development. In the year 2005, growth of the industrial premises market in Lithuania was rather rapid, i.e., the total area of new industrial premises offered to the market made up 56,000 sqm of which 8,500 sq. m. were in Vilnius city. Nevertheless, not all technical and quality parameters of the newly constructed industrial premises or construction in progress meet the international standards, thus such properties are morally obsolete (in the majority of cases insufficient height of premises, inefficient position of columns, exceeded site coverage ratio, etc.) and territory development opportunities are limited. The office premises usually occupy about 10 per cent of the total area of the industrial premises and are equipped in the entresol what enables to use the building area and height at the loading/unloading gates to the maximum extent. In the year 2006, growth pace of the industrial premises market should be maintained. In the beginning of this year, the industrial premises market in Vilnius city should increase by 2 thousand sqm In 2006, in 4 Demand The main lessees of the industrial premises (industrial premises and warehouses) are the compa- Growth of Industrial Premises Supply Major Projects Delivered in Lithuania in 2005 Industrial Facilities 5 Kaunas city the industrial premises market should grow by ~ 29 thousand sqm of modern warehouses (of which the Kaunas Terminal will make 27 thousand sqm). In Klaipėda city, the developers will start construction only after attraction of anchor lessees (e.g.: Klaipėda Business Park, III stage, the total area up to 10,000 sqm). The specific features of Klaipėda seaport such as high concentration of warehouses and especially that of refrigerators in the seaport territory should be mentioned. The shortage of new industrial premises determined appearance of non-traditional developers in Klaipėda city – trading companies lease certain area of the premises built for own needs (e.g.: Lemora Trade Centre). In future, higher growth of the industrial premises market is expected. The largest concentration of the industrial premises should be observed in Vilnius city in the nearest future. Major Projects under Construction (2006) nies engaged in logistics (e.g. Baltic Logistic System Vilnius UAB, Baltic Transport Logistics Systems UAB, Schenker UAB, DHL UAB, etc.); local and international trade companies (e.g. VP Market UAB, CBA Aibė, etc.), manufacturers of consumer goods, electric goods, construction materials, manufacturers and importers of spare parts for cars (e.g. Ramirent UAB, Peri UAB, Onninen Lit UAB, etc.), as well as companies engaged in wholesale of pharmaceuticals and food industry companies. For some local companies that lease the industrial premises the price barrier is still too high. (lease price of the old industrial premises ranges from 2.2 to 2.90 EUR per sqm). Lately, the demand for warehouse or industrial premises making 400-800 sqm grew considerably. Taking into consideration proactive performance of foreign companies in the Lithuanian market the growth of demand for premises is expected. Due to favourable economic environment a large number of foreign companies transfer manufacture to Lithuania. Such cases are observed in the process of takeover of the operating companies as well as when transferring industrial orders to local viable companies from the countries where labour costs are much higher. In the near future, we also expect “green field” foreign investment to be attracted by the industrial parks and free economic zones. All the above factors will make positive impact on demand for warehouse/industrial premises. Industrial Facilities At present, vacancy level in fully equipped buildings is minimum. A tendency when the potential lessees show their interest in the premises close to the date of construction completion is observed. It is expected, that in the year 2006 warehouses and industrial premises market will grow rapidly, and it will raise the vacancy level. The vacancy level may stand at about 15 % for short time. Rents As a rule, prices announced to the public are decreased by negotiations. The prices fluctuate depending on the leased property, lease maturity and reliability of the lessee. We believe that in the nearest future when new premises are put into exploitation, lease prices in the market should drop to 4.34-4.63 EUR/sqm/month. Lease price of the new industrial premises is limited by the cost price, therefore probability that lease price will drop below 4 EUR/ sqm/month. + maintenance costs plus VAT is low. Maintenance costs are about 0.85 EUR/sqm/month. Forecast Favourable geographical location of Lithuania, highly developed road, railroad, air and sea transport network, skilled specialists and the EU membership enable us to expect increase in the transit flow in future. Kaunas is in extremely good geographical position in terms of the transit cargoes (at the cross-roads of two international corridors) as well as Klaipėda (ice-free, multi-purpose seaport with a considerable stevedoring potential). Due to shortage of large plots of land for the industrial purposes in the cities, real estate taxes, increase in land plot prices, heavy traffic conditions, more and more industrial premises and warehouses are constructed not far from the cities or in the suburbs close to the international trunk-roads, i.e., at the distance of more than 15 km from the city centre. The same reasons determine moving of the industrial regions located in the city centres to the suburbs. The above processes already started, however moving of manufacture is time consuming process what will result in demand growth within a longer period. Demand for the new industrial premises is sluggish, i.e., lessees need time not only for accepting higher lease prices of the new industrial premises and also for assessing the importance of qualitative parameters but also for fulfilling their obligations to operators of currently leased old industrial premises. Supply for lease of multi-purpose manufacturing premises will rise (at present, actually almost all new manufacturing premises are built for own needs) therefore built-to-suit projects will decline in the nearest future (the potential lessees are unwilling to wait 8 or 9 months by the date of construction completion). Asking Rental Rates for Modern Warehouses and Office Premises (EUR/sqm/month, maintenance of VAT, excluding service charges) in Dec 2005 6 LITHUANIAN INDUSTRIAL CASE STUDIES PROJECT: CLIENT: CITY: SERVICE PROVIDED: TOTAL SPACE: RESULTS: Kaunas Terminal YIT Kausta Kaunas • Feasibility study • Exclusive brokerage 27 000 sqm Colliers International prepared logistics terminal project development concept and is currently involved in tenant search. End of construction - autumn 2006 PROJECT: CLIENT: CITY: SERVICE PROVIDED: TOTAL SPACE: Class A warehouses and office premises Autoverslas UAB Vilnius Brokerage 7 000 sqm PROJECT: CLIENT: CITY: SERVICE PROVIDED: TOTAL SPACE: Logistics Center UAB “Prioritetas” Šiauliai Concept development 17 650 sqm in a 4 ha land plot 7 HOTEL SECTOR European landscapes). Proactive growth of the country attracts more and more business tourists. Lithuania is easy to reach by air ( international airports), sea transport (ferryboats or cruise ships) and overland routes (developed route and railroad network). Supply The greatest concentration of hotels in the Lithuanian market is observed in Vilnius, Kaunas and Klaipėda cities and resorts (seaside resorts – Neringa, Palanga, wellness resorts – Druskininkai and Birštonas). The most dynamic growth of the hotel market is identified in Vilnius due to the largest flow of tourists typical of this city as compared to other Lithuanian cities. Klaipėda city is popular among residents and also among foreign tourists due to its geographical location, therefore by the number of hotels Klaipėda is in the second position surpassed only by Vilnius. Insufficient number of hotels in Kaunas, as compared with Vilnius and Klaipėda, shows that Kaunas has a remarkable hotel market growth potential, and especially taking into consideration numerous ancient monuments and events in this city and also identical access to the national sights from Kaunas. Hotels in Vilnius and Kaunas mostly satisfy the needs of business tourists and organised groups of tourists, while hotels in Klaipėda city are popular among holidaymakers and business tourists. Lithuania, compared to other Baltic States, offers the largest variety of *, 4* and 5* international hotel chains. Such international and regional hotel chains as Le Meridien Hotels & Resorts, Summit Hotels & Resorts, Radisson SAS Hotels & Resorts, InterContinental Hotels Group, Crowne Plaza Hotels & Resorts, Best Western Hotels, etc. operate in Lithuania. Vilnius city is in the leading position by number of the international and regional hotel chains (14). In addition to the hotel chains functioning in Lithuania, Kempinski Hotels, international chain of luxurious hotels, has plans to open 5* Kempinski Hotel AAA in the beginning of 2007. In the nearest future, the most considerable development of the hotel sector due to good geographical location is expected in Klaipėda and Kaunas cities. Overview In the year 2009, Lithuania will celebrate its one thousand-year anniversary and in the same year, Vilnius will be granted the European culture capital status. The total area of Lithuania making only 65 000 sqkm is attractive for cognitive (historical heritage cities), leisure and health improvement tourism (golden beaches and calm recreation in sanatoriums and rural tourism homesteads). The Republic of Lithuania has four objects included into UNESCO cultural and natural Word Heritage List and the most famous among them are Vilnius old town (one of the largest and the most beautiful cities in the Eastern and Central Europe) and the Curonian Spit (one of the most unique Number of Classified Hotels in Lithuana Demand Within a nine-month period of 2005, as compared with the equivalent period in 2004, the number of guests accommodated in hotels and guest homes was higher by 21.6 per cent and the number of foreigners – by 16. per cent. The number of guests accommodated from the EU countries grew by 18.5 per cent. The majority of guests came from Germany – 109.8 thou. (22%), Poland – 68.7 thou. (14%), Latvia – 28.4 thou. (6%) and Russia – 27.6 thou. (5,5%). Within a nine-month period of 2005, the largest increase in the Source: Lithuanian Association of Hotels and Restaurants, 2005 September 8 Hotel Sector 9 number of guests was from the following neighbouring countries: Byelorussia (1%), Latvia (2%), Estonia (14%), Poland (10%), and also from the West European countries: the United Kingdom (49%), Spain (27%), Norway (27%), France (21%), Germany (24%), Sweden (20%). Seasonality factor makes impact on the hotel business in Lithuania, i.e., the largest number of guests is accommodated from spring to autumn. During the remaining period of the year, business guests make the majority of hotel guests. Proactive and travelling tourists usually are willing to select non-distant, safe and economically stable and easily reachable countries they have never visited before. Lithuania meeting the above criteria and still undiscovered by tourists from the European countries has ambitions to be recognised as frequently visited by foreign tourists. In 2005, occupancy rate of hotels improved. During a nine-month period of 2005, the average occupancy rate of rooms stood at 42. % (in 9 month in 2004 – 7.4 %), occupancy rate of beds – . % (in 9 month of 2004. – 28,8 %). In January – August 2005, income of the Lithuanian incoming tourism totaled EUR 562 million, i.e., income of incoming tourism grew by 24.1%, as compared with that in 8 month of 2004. Individual tourism prevails in the Lithuanian incoming tourism sector. Within the period of 8 months of 2005, 75% of income was generated from the individual tourism and 25% - from the business tourism. Number of Hotels, Rooms and Beds in Lithuania Source: Lithuania Statistics Department (2005, September) Any international hotel chain, after its position strengthening in any Lithuanian city, in the long run will have plans of development in other towns. Attention should be paid to the fact that price per hotel room in the major Lithuanian towns is lower than that in other European countries and in the nearest future (in -5 year period) it should go up. Taking into consideration a long-term perspective, forecast of the Lithuanian tourism development is optimistic, and it may result in accumulation of capital from increased demand for tourism and receive the maximum benefit from the EU membership. After entering of low fare flights aircraft companies Ryanair and Wizz Air into the market the number of incoming tourists by air transport should grow significantly. Low fares will stimulate visits of foreign tourists Forecast to Kaunas (low fare aircraft companies offer flights from Kaunas international airport) and other destinations A possible trend of international hotel chains that in Lithuania. Privatisation of the state owned company selected one of the Baltic countries further developshould also improve communication by air transport. ments in the remaining Baltic countries is displayed The number of tourists coming by ferryboats and (e.g. Radisson SAS Hotels or Reval Hotels chains cruise ships is growing. Klaipėda city is expanding the are represented in all three Baltic countries, while range of passenger services and developing city infraUniqueStay Hotels are operating in Lithuania and exstructure for receiving a larger number of cruise ships. panding in Latvia). In future, the number of independent hotels should decrease; the Number of Guests in Hotels operator’s contracts will become more popular in line with strengthening trend of the hotel operator and owner functions’ differentiation and increasing number of investors who are willing to acquire property by signing the operator’s contract. At present, continuously rising demand for wellness resorts should not shrink and in future it should determine increasing supply of accommodation servSource: Lithuania Statistics Department ices (Europa Group Hotels chain representing Lithuanian capital company has plans to open 4* hotel Europa Royale Druskininkai in spring 2006). Rural tourism is becoming more and more popular in Lithuania, i.e., in the year 2004, the number of holidaymakers in rural tourism homesteads was higher by .5 per cent than in the year 200, and similar growth pace was maintained in 2005. It should be noted that due to various types of services offered additionally, impact of seasonality factor on rural tourism is less significant. Occupancy Rate of Rooms and Beds in Hotels Source: Lithuania Statistics Department LITHUANIA HOTEL CASE STUDIES PROJECT: CLIENT: CITY: SERVICE PROVIDED: RESULTS: Respublika Hotel UAB “Kauno verslo rūmai” Kaunas • Feasibility study • Valuation Colliers International prepared a market research, feasibility study and valuation report. 40 INVESTMENT Overview The commercial real estate has a strong link to market maturity. In 2005, investments into the commercial real estate were proactive. It was determined by several factors. Primarily, membership in the EU and NATO attracted more investors to Lithuania. Secondly, prices of the commercial real estate are considerably lower than those in other new member states of the EU (especially in Poland and Czech Republic). Thirdly, the growth of the country’s economy was quite dynamic lately (projected GDP growth – at least 6.5 % during the nearest two years). Several years ago, investors were extremely interested in Vilnius, the capital city, however due to low supply of the commercial property, the investors started to look for more lucrative investment opportunities in the major Lithuanian cities. In Lithuania, the average yields range from 8% to 9 %. Demand Large-scale investment opportunities in Lithuania are limited. Investors mostly are interested in low risk commercial property generating income such as offices and retail premises, warehouses and industrial buildings. Demand for the above property is extremely high. It can be proved by the fact that more than 15 investment funds declared about their intentions to acquire Power Centre Babilonas (developers Ogmios centras UAB and Norfos mažmena UAB) in Panevėžys after a -month period of opening of this Centre. Major 2005 Investment Transactions in Lithuania Supply The commercial real estate market in Lithuania is underdeveloped. Investments into the real estate are prevented by several factors. Primarily, owners of the commercial real estate postpone selling of their properties due to favourable credit terms offered by the banks, low interest rates and rise in real estate prices. Secondly, inadequate quality of lease agreements: insufficient duration, clauses of the agreement termination prior to maturity, prices indexation requirement not applied, etc. 41 Investment Overview Today, Baltic Property Trust (BPT) is the main player among investors. Investors of funds managed by BPT include leading Danish, Swedish, Finish banks and insurance companies. BPT owns several business centres and modern logistics centre in Vilnius, shopping centres in Vilnius, Kaunas and Klaipėda (one in each) and modern logistics centre in Kaunas. Proactive performance of investment fund Middle Europa Investments Baltija (MEI Baltija) mainly participating in development of projects should be mentioned (e.g. construction of settlement on the plot of land making 42 ha in Trakų District, that is one of the projects implemented by the Fund in cooperation with Eika UAB). MEI Baltija portfolio includes 1 projects worth nearly EUR 0. billion. Real estate (Shopping Centre Mega Plaza in Klaipėda) in Lithuania was also acquired by the Irish investment fund KLW, Ireland. Grand Duke Palace is the first shopping centre acquired by property fund Evli Property Investment (EPI) Baltic of investment bank EVLI, Finland. Forecast Dynamic development of the commercial real estate sector in the market and increasing interest rate of banks should significantly increase investments into the commercial real estate in the nearest future. In terms of yield, more advantages will have such investment funds that will be the first to invest as the commercial real estate market in Lithuania is small, prices of the commercial real estate are growing and market transparency increasing. In the year 2006, investment funds in Lithuania will be more aggressive. It is expected that those who already invested in Latvia and Estonia (eg. Heitman Fund, the USA or subsidiary company Niam III Holding of the Nordic Real Estate Management Fund Niam Fund III that acquired a new logistics centre Rimi Latvia of 6,000 sqm) will also invest in the Lithuania market. 42 ESTONIA Contents 44-45 46-49 50-51 52-55 56 ECONOMIC OVERVIEW OFFICE PREMISES RETAIL MARKET INDUSTRIAL FACILITIES INVESTMENT OVERVIEW 4 ECONOMIC OVERVIEW n 1 May 2004, Estonia became a part of the European Union, alongside with nine other countries. In 2004, Estonia’s economic growth accelerated to 6.2% and surpassed the economic growth of the European Union by .9 percentage points. By the end of 2005, Estonia’s economic growth reached ca 10.8%, exceeding a 5.9% growth forecasted by the Ministry of Finance. The growth of GDP was driven by two main factors – rise of consumer spending and real export growth. In September 2005, growth of consumer prices has reached a critical mark in comparison with the last years and has O made 4.9%, but by November of the same year it has slowed down to .9%. Increased level of inflation, in comparison with .% in 2004, has been influenced by increase in oil prices. In 2006, the inflation rate is expected to decline to .4%. The rise of consumer spending (6.7%) has been accelerated since the first half of 2005, promoted by continued improvement of the situation in the labor market, and growth of wages – 7.% compared with 5.1% in 2004. According to the data of the Bank of Estonia, by the end of 2005, the current account deficit has decreased to 11.2% of GDP, as compared to 12.5% of GDP in 2004. In absolute value, the deficit was EUR 191.8 million, which is EUR 70. million more yearon-year, and nearly EUR 127.9 million less quarteron-quarter. That situation was caused by the increase of trade volumes due to the rapid increase in Estonia’s goods export. Goods export has comparatively grown by 29% and import by 14.5%. Fast growth of export of goods and services was backed by an increased external demand, due to successful economic development of our basic trading partners and accordingly the increasing number of potential consumers in Finland, Sweden, Latvia, Lithuania and Russia, as well as the competitiveness of Estonian goods and services. Low rates of import growth are connected with the base of goods’ stock appeared before the entry into the European Union. The foreign trade turnover was EUR 6.6 billion in the first part of 2005. Exports made up 4% (EUR 2.9 billion) and imports 57% (EUR .7 billion) of the total turnover. The balance of trade deficit amounted to EUR 856.8 million, 16% less than in the same period of 2004. No rapid decrease in balance of trade deficit is to be foreseen in 2006. By the end of the second quarter of 2005, Estonian state debt formed 9.4% of GDP. Estonia’s Credit Ratings 44 Economic The Dynamics of the Most Important Estonia’s Economic Indicators Economic Overview 45 Rapid economic development and membership in the EU encouraged the inflow of foreign investments. According to the data of the Bank of Estonia, in the third quarter of 2005, foreign investment into Estonia increased by 5% (compared with 2004), amounting to EUR 18.5 billion by the end of the year. During the year of 2005, the share of direct and portfolio investment in the structure of foreign investment in Estonia slightly decreased, whereas the share of other investment increased. By the end of the third quarter, direct investment amounted to 56.%, i.e. EUR 10.5 billion. The share of portfolio investment was 1.8% and that of other investment was The Dynamics of Key 29.9%. The most preferred fields of activity Indicators 2000-2005 for foreign direct investment in Estonia were financial intermediation (46% of direct investment), real estate, renting and business activities (16%), manufacturing (1%), and wholesale and retail trade (9%). Direct investment mainly came from Sweden (56%), Finland (20%), Latvia and Russia. The positive balance of direct investment was EUR 0.1 billion. Foreign direct investment in Estonia increased by EUR 0.24 billion and direct investment of Estonian residents abroad by EUR 0.1 billion. OFFICE PREMISES Overview Office market has been in a stage of stable growth since the 2004. Estonia joining EU marked a new era for the office premises market as well as for many other segments. Vacancy rate has been constantly dropping due to the growing demand for spaces and lack of new projects on the market. Local economy has been growing vastly and entrepreneurs are expanding their activities and offices. At the same time many European companies started to establish the local branches and open their representative offices in Estonia. That has caused the demand to grow Figure 1: Existing and Future Stock in Tallinn based on outside invasion. Local developers on the other hand have held back the investments to the office market, remembering the end of 1990s when after several mergers of commercial banks, having recently completed the construction of their new headquarters, there was a rapid growth in supply of modern high-quality office space, increased vacancy and downward pressure on rents. In the most active and developed Tallinn market the vacancy rate of most popular 100-00 sqm spaces has dropped to almost inexistent 2% in Class A and most of the new projects are pre-booked up to 70%. Overall vacancy rate at the end of the year was around 5% in the centre and 8% towards the suburbs. Low vacancy rates are starting to have pressure on the prices. Considering that there has not been noticeable price escalation for 2- years the upwards pressure shall stay strong even after new developments reaching the market in 2006-2007. Outside Tallinn the trends are similar. In Tartu and Pärnu being the most active, the vacancy rates are respectively 15% and 10% with the trend of vacancy dropping and pressure on the price upwards. At the end of 2005, the total stock of Class A and Class B office premises constituted ca 220 000 sqm. Supply In the biggest cities of Estonia (Tallinn, Pärnu, Tartu) the total supply of newly constructed A and Class B office space amounted to 5 000 sqm during the 1st three quarters of 2004 and about 70 000 sqm of new office space was added during the same period of The list of Class A and Class B major office buildings that have been started or completed in 2005, is presented in Table 1. 46 Table 1: Major Office Buildings in Tallinn Started and/or Completed in 2005 According to developers’ plans the construction of approx. 30 000 sqm Class A and Class B office will be completed space in 2006. Office Premises 47 2005. Under the evident increase in the supply of new office space, the amount of Class A office premises is still not sufficient to satisfy the tenants’ demand. The highest demand is for the spaces in the centre of Tallinn, where the amount of vacant office premises and new office space is still very limited. Therefore the demand will be shifting to the nearest environs of the CBD, close to the main roads (Pärnu Rd., Tartu Rd., etc.) and partly to the suburbs (the surroundings of former Dvigatel factory and Suur-Sõjamäe St. in Lasnamäe) where the supply of new office space is now mainly coming from. Demand The demand for small office premises (100-150 sqm), with a convenient location in the centre of Tallinn, good access and parking possibilities and rental rates not over EUR 11-12 sqm/mo remains high. At the same time the demand for office space of 200-500 sqm significantly increased compared to the demand presented at the beginning of 2005. That situation is caused by increasing of business activity of both domestic and international companies (foreign investors) and the continuous economic growth in Office Premises Estonia. An amplifying tendency of the office market is growing number of sale deals, as well as the growing number of prelease and pre-sale deals. The high purchasing activity of tenants is the result of favourable credit terms and low interests rates for loans offered by commercial banks, making sale deals more advantageous. At the end of 2005, the number of sale deals in office sector increased and amounted to 25% of all transactions (compared to nearly 0% at the end of 2004) and the number of pre-lease deals amounted to about 45% of all transactions. For Class A office premises located in the CBD the total volume of pre-lease and pre-sale deals reaches 100%. As the demand for the office space in the centre continually exceeds the supply, the tenants are forced to shift to the nearest environs of the CBD. Figure 2: Average Vacancy Rates for A and Class B Offices In the 1st quarter of 2006 the average vacancy rate for Class A and Class B offices will probably increase, due to the augmentative amount of new office premises, but in the longer perspective, under the conditions of continued invariably high demand, the vacancy will stay at the same level. Vacancies By the end of 2005, the average vacancy rate for Class A and Class B office premises was decreased: from 5% to 2% for Class A office spaces (0-2% depending on the location inside the CBD) and from 7% to 5.5% for Class B. The decrease of the average vacancy rate was favored by constantly growing demand for Class A and Class B office space from both domestic and international companies and by the shortage of the supply of Class A office space. In spite of the growing number of tenants wishing to improve their work conditions and willing to move from previous Class B to new Class A offices, the average vacancy rate for Class B premises is not on rise. It is related to increase in the number of new companies interested in relatively inexpensive and at the same time good-quality office premises. 48 Rental Rates/Sale Prices Despite the quick increase in prices for land and in the prime cost of constructions, rental rates for Class A and Class B offices in the CBD increased slightly and in the non-CBD did not change, due to the balance of supply and demand. In 2005, the growth of rental rates in the CBD approx. equaled 5% (ca 10% for some Class A premises of the highest demand). Since the interest in out-of-date offices is constantly diminishing along with the constant price growth of construction in the Estonian market, Colliers forecasts that belated increase of rental rates in Tallinn will take place in 2006-2007 and reaches 1015% in the CBD and 5-10 % in the non-CBD (the figure varies depending on the class of office space and the location in relation to the CBD). Deficiency in the real estate sale market of new Class A and Class B office space, under conditions of increasing recognition of real estate as an investment asset with falling capitalization rates, resulted in the significant increase (15-20 %) of sale prices over the last year. Colliers forecasts that in 2006 sale prices and number of sale deals will continue to grow, driven by the stable growth of demand and clients’ interest in sale deals. Table 2: Average Rental Rates and Sale Prices in Tallinn Forecast About 0 000 sqm of Class A and Class B office space new construction is forecasted to be added in 2006. Level of demand in the office sector is expected to remain high or even to slightly increase, stimulated by increasing business activity of both domestic and international companies, along with increasing number of pre-lease and pre-sale deals. Under the conditions of growing demand and limited supply, along with the constant price growth of construction and land, the rental rates of Class A and Class B office premises are expected to slightly increase. Office Premises 49 RETAIL PREMISES Supply While the year of 2004 saw several big shopping centres entering the retail market (Viru Centre, Ülemiste Centre), there were no significant developments added to existing retail stock of ca 447 000 sqm in Tallinn in 2005. In autumn 2005, Selver opened two new supermarkets in Tallinn suburbs (Lasnamäe and Pelgulinn, both of ca 5 000 sqm). After holding just one position in Pärnu for some years, Lithuanian based VP Market opened its first T-Market discounter shops in Tallinn. In 2006, no bigger development is expected to come to the market, thus leaving the further supply of retail very limited. New developments for single tenants include 10 000 sqm Prisma hypermarket in Lasnamäe (Tondiraba area) and several shops by Lithuanian largest retail chain VP Market, operating its discounter shops under the T-Market brand name. Demand Lithuanian based VP Market entered the Estonian market, opening its stores in Tallinn and Pärnu as well as planning to open another three stores in 2006, mostly in already existing premises. Similarly, in spring 2005, the German retail developer Lidl announced its plans to expand to Estonia in 2006. During the last years, the demand for retail space has been shaped by large retail centres: the demand for a good-location shopping space is constantly high, significantly exceeding the supply. Demand for existing ground-floor retail spaces in Tallinn city centre and other streets with active foot traffic (elsewhere than in retail centres) is continuously high and exceeds the supply. Shopping spaces in Tallinn’s Old Town are oriented mainly to tourists and the demand keeps growing due to the increasing number of tourists visiting Tallinn. Overview Estonia has been enjoying a rapid economic growth for over the last 5 years. With 8% GPD growth, inflation of 4%, nominal wage growth .9% (average monthly gross wages just around EUR 50) and peak low unemployment rate of 8% as of fall 2005. General economic welfare fuels the higher consuming and therefore demand for additional retail space. In high-quality shopping centres at the best locations vacancy has dropped close to none and tenant sales level is growing. Top positions in the retail market in Tallinn are held by Kristiine Centre, Rocca al Mare and Viru Centre, which are continually enjoying high foot flow. Likewise, over the last year Ülemiste Centre has significantly strengthened its position despite the centre’s slow start in 2004. After a considerably difficult year of 2004, when the retail spaces supply grew faster than consumption power, 2005 was a year of stabilization and growth. Significant changes were Finnish Citymarket’s chain merger/takeover by Rimi. In July, Finnish property investment company Citycon acquired Rocca al Mare Centre, setting a benchmark to the retail investment market of the Baltics. Vacancies The vacancy in existing modern shopping centres is close to non-existent. There are rather queue lists of perspective tenants waiting for spaces to rent in the most popular shopping centres. The vacancy rate is expected to stay very low. However, retail centres with poor foot flow will be facing both increasing vacancy as well as downward pressure on rents. Rental Rates/Sale Prices Summer 2005 faced a large-scale retail investment transaction, when Finnish property investor Citycon acquired Rocca al Mare Centre (transaction value over EUR 60 million). 50 Throughout the year of 2005, there were no significant changes in rent rates. Due to the lack of supply, the rent prices are relatively high. Average investment yields for retail space were as high as 9-11%. Yet, in the context of current situation of rapid economic growth, low interest rates and steady rents, there are no landlords willing to sell and offered yields go well below the 9% level. Retail Rent Rates in Tallinn, Estonia (EUR/sqm/month) Forecast The supply of new retail space will be as low as it was in 2005. Further development will be limited, major new constructions will be done for developers’ own purposes. Demand will continuously exceed supply, and may even increase for top loca- tions. Vacancy rate will stay very low, however, with a slight tendency to increase in longer perspective. Rents will stay stable in the shorter perspective, but in the long-run, are expected to grow. In contrast, retail centres with poor foot flow will be having increasing vacancy rates and might be forced to lower their rents. Existing Retail Stock in Tallinn* * Selected and approximated data Retail Premises 51 INDUSTRIAL FACILITIES Overview As compared to the other sectors of commercial real estate market, warehouse sector is the most undeveloped in Estonia, due to the period of stagnation lasting for last 2- years. Positive trends in the Estonian economy and increased market activity were reflected in increasing demand for European-standard industrial projects in 2005. In spite of that, local property developers still do not pay enough attention to the industrial market, being restrained by the certain degree of risk, related to the shortage of clients wishing to conclude long-term leases. Major investors in this sector are foreign and domestic logistics or manufacture companies and distributors building for their own use. Despite the growth of new industrial construction, the proportion of industrial facilities, built in the period of the Soviet Union, in the total stock is still high, but is in a decrease. In 2005, total stock of modern industrial and warehouse space amounted to more than ca 400 000 sqm. Under the overall expansion of this sector, there was no growth in rent rates. Supply In 2005, the total supply of industrial and warehouse facilities in Tallinn and its region was estimated to be approx. 145 000 sqm., where ca 40% of it meet- ing international requirements. About 70% of the total supply formed warehouse premises. At the end of 2005, the supply of warehouse space practically caught up with demand. One of the most significant tendencies at the market which started since 2004 is the concept of industrial parks. Forming of industrial parks was induced by the shortage of new developed industrial sites suitable for warehouse and manufacture development, with good logistic solutions (the location along the highways: Pärnu Rd., Peterburi Rd., Tartu Rd., etc.), communication lines and a building permit provided. Overwhelming majority of new industrial space stock is expected to allot to the industrial parks. By the end of 2005, there will be six industrial parks in Tallinn and its region: Dvigatel’s Technology Park, Tänassilma Technology Park, Maardu Technology Park, Jüri Technology Park, Laagri Technology Park, and Vana-Narva Rd. Technology Park. As a matter of fact, all these parks are mainly counted on built-tosuit projects. The greatest part of delivered European-standard projects in 2005 was developed by the companies increasing their warehouse and production space. The biggest investment of warehouse market in Tallinn this year is the new project of Smarten Logistics with the total area 9 000 sqm. Schenker Logistics opened this year a new warehouse with the total area 4 500 sqm. 52 2005 Selected New Supply 2006 Selected New Supply Selected Warehouse and Industrial Premises in Tallinn Industrial Facilities 5 Under the conditions of growing demand, it is forecasted that the share of speculative projects in the total supply will increase. The expected supply of new industrial facilities by speculative development amounts to ca 5 000 sqm. Under the conditions of growing demand, it is forecasted that the share of speculative projects in the total supply will increase. The expected supply of new industrial facilities by speculative development amounts to ca 5 000 sqm. Demand The growth of domestic consumption in Estonia is accompanied by rising demand from distributors, manufacturing companies, importers of FMCG and foods and accordingly logistics companies, for highquality warehouse space. The greatest demand for industrial spaces applies to the area of the main transit routes within 25-0 km from Tallinn. Companies are moving from central locations to suburbs because of the better access and infrastructure, development possibilities and lower land taxes. The demand for industrial facilities located in the central regions of Tallinn is becoming progressively smaller. Local industrial companies occupying old or restored premises tend to move to new quality facilities. This tendency is caused by the expansion of both small and big industrial enterprises’ operations. Another recent trend is that more and more firms have started to outsource the distribution function from logistics companies. In September 2005, for instance, Smarten Logistics signed a contract with Estonian Post to provide logistics services for them. Existing situation will account for developing of new warehouse spaces. Industrial Facilities Rental Rates/Sale Prices In conditions of the dominant share of built-to-suit projects and sale deals in Estonia, related to the contin- Rental Rates of Industrial and Warehouse in Tallinn uously favorable loan conditions, low interest rates and growing quality of industrial facilities stock, rental rates for international quality industrial premises remained unchanged in 2005. Despite growing prices of construction and land, rental rates for industrial premises are not expected to increase in 2006. In comparison with levels of rental rates in neighboring countries of EU, current rent levels in Estonia are relatively high, resulting from demand exceeding supply. There are not reasons for the further reduction of prices either, because of continually rising prices for construction and land. In the situation of the dominant share of built-tosuit projects and sale deals in Estonia, related to the continuously favorable loan conditions, low interest rates and improving quality of stock of industrial facilities, rental rates for high-quality industrial premises remained unchanged in 2005. Despite growing prices of construction and land, rental rates for industrial premises are not expected to change in 2006. As a result of demand exceeding supply, current rent levels in Estonia are relatively high, in comparison with the rental rates in the neighboring countries of EU. Land Following the growing demand for industrial sites, there have been a lot of appropriate projects developed in 2005 and scheduled for delivery in 2006. The prevailing majority of successfully developed industrial spaces 54 were issued in technological parks. For today, the most progressive and actively developing is Tänassilma Technology Park (Pärnu Rd.), with the biggest number of industrial completions. Other successfully developing parks with gradually increasing number of new buildings are Jüri Technology Park (Peterburi Rd.) and Dvigatel’s Technology Park (Tartu and Pärnu Rd.). Developers tend to promote their new projects in regions of highways and roads with large flows of freight, in sites equipped by technological systems, with well-functioning infrastructure, favourable price levels and location in the vicinity of successfully developing new projects. There is a very strong demand for industrial sites of  000-6 000 sqm. At the end of 2005, prices for industrial land, equipped with technological systems, were of EUR 2-51. /sqm. Forecast Rental rates for industrial premises will not increase, except the most prestigious international quality projects. The share of speculative projects in the total supply will increase but will not be dominating. In 2006, logistics operators will continue to actively build their own premises, spurred by the growing number of companies outsourcing distribution to logistics. The biggest part of investments in this sector will be connected with construction for own use. Average Rental Rates in Different Districts of Tallinn (2005) Prices for Land Planned for Warehouses and Production Facilities (2005) Industrial Facilities 55 INVESTMENT nvestment climate is continuing to be favorable both to the developers and investors. Vast economic growth all over the Baltics and an active market have pushed the business environment to catch up with the European ethical and professional standards. Legal environment for investments has been established in accordance with European standards and principals already in the end of 1990s. Plans of joining the Euro Zone have also applied the positive pressure for the market being even more transparent and understandable for investors. This argument shall stay strong even if the joining shall be postponed by a year. Year of 2005 showed to the market dropping yields and bigger volumes – signs of the market being ready for the professional investors with longterm perspectives. Estonian net FDI in 2005 was .8% of GDP that is EEK 6.085 billion or EUR 88 million. 10.6% of FDI (approx. EUR 40 mln) was made to real property, I lease and business sector (biggest segment for FDI being financial) (info by the Bank of Estonia). The FDI for 2006 is expected to be .1% (source: IMF). The word of 2006 shall be the “professionalism”. Previous years have been carried by the spirit of speculative deals that took an advantage of rapidly growing markets and sensational price escalation in every field. Such a trend has mostly been carried by the decreasing interest margins and/or private investors from abroad. The owners and developers in every segment of the commercial property market are making more effort to put together portfolios consisting of higher value and liquid assets. As the legal environment continues to be solid, more focus will be given to the contractual structure and quality of the property. For the last years, the biggest obstacle for the investment has been the lack of sales objects that would be acceptable for the middle-size investors or institutional investors. The market participants (and the observers) are talking about dropping yields but actual deals can be counted on fingers and predictions are based mostly on the ask bids of the owners. 56 Central Office Balasta dambis 1a Riga, Latvia, LV 1048 Tel.: (+71) 778  Fax: (+71) 778 4 colliers@colliers.lv www.colliers.lv Vilnius Office Laisves pr.  Vilnius, Lithuania, LT 04215 Tel.: (+70) 5249 1212 Fax: (+70) 5249 1211 colliers@colliers.lt www.colliers.lt Tallinn Office Pärnu mnt 102c Tallinn, Estonia, 1112 Tel.: (+72) 662 2777 Fax: (+72) 662 2771 colliers@colliers.ee www.colliers.ee