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					Baltic Property
Market Review 2003
                                                   BPE in Tallinn




               Tallinn




                     Riga
                                                   BPE in Riga




                   Vilnius




The three Baltic countries comprise
a market of over seven million                     Prime Office Rents and Yields
                                             600                                                                              15
citizens. The Baltic region is one
of the most rapidly developing
                                             400                                                                              10
economic regions in Europe today.
Together with the Scandinavian               200                                                                              5
countries the Baltic region
surrounding the Baltic sea has the             0                                                                              0
                                                        Helsinki


                                                                    Stockholm


                                                                                   Copenhagen


                                                                                                Tallinn




                                                                                                                  Vilnius
                                                                                                          Riga




best prospects for development in
upcoming years.
                                                       Rent EUR/sqm/year
                                                       Yield %
                                                                           Source: BPE (Estonia, Latvia), KOBA (Lithuania),
                                                                                      Catella (Finland, Sweden, Denmark)




                     B A LT I C P R O P E R T Y E X P E R T
2




Economy

    The three Baltic countries have been very successful in developing their economies
    and democracy. One of the results of that is the acceptance by EU of Estonia, Latvia and
    Lithuania as member countries from the year 2004.


The EU-accession has been accepted to be in 2004 for all                 GDP Growth (%)
Baltic countries. Today we can notice the growing interest         15

of foreign investors towards the real estate sector and the
developers (example Baltic Property Trust from Denmark).           10




The inflation rate has stabilized in all the Baltic countries,      5

Lithuania has showed even the tendencies of deflation
(-1%, 2002). Today EUR is the “anchor-currency” of the              0
                                                                           1997         1998   1999   2000          2001          2002
Estonian and Lithuanian money (in Lithuania, starting from
February, 2002), while Latvia continues to use the curren-          -5
                                                                                  Estonia
                                                                                  Latvia
cy basket. Latvia and Lithuania have been quite USD                               Lithuania                     Source: National Statistics
                                                                                  EU                  (Estonia, Latvia, Lithuania), Eurostat
oriented countries in context of property market, but there
is trend to use more and more local currencies and EUR.
                                                                         Consumption Price Index (%)
For a some time now, the long-term loans granted in all the        12

Baltic countries have been more advantageous when fixed
to the foreign currency (lower interest rate!). Essentially, the    8
borrowers have accepted the risk connected with the pos-
sible devaluation of the national currency. The interest rates
                                                                    4
of residential loans have become very attractive and are in
many cases even lower than 5% in all the Baltic countries.
                                                                    0
                                                                           1997         1998   1999   2000          2001          2002
Estonia                                                             -2
                                                                                  Estonia
                                                                                  Latvia
The preliminary estimation of GDP growth in 2002 was 5,6%.                        Lithuania                     Source: National Statistics
GDP is expected to have a 5-6% growth rate for the next                           EU                  (Estonia, Latvia, Lithuania), Eurostat

few years. The inflation rate of 3,6% (2002) was lower com-
pared with 2000-2001 and nearly the same inflation (3-4%)                Average Monthly Gross Wages (EUR/month)
is expected also for the next years. Domestic demand has           400

been strong (influenced by rapidly growing loan stock).
                                                                   350

Latvia
In 2002, the economic growth amounted to 5,7%. The fas-            300

test growing main industries were construction, manufactu-
ring industry and services, which are to a large extent connec-    250

ted with the domestic consumption. Domestic demand has
                                                                   200
been strong. Inflation has been continuously low (1,9% in                  1997         1998   1999   2000          2001          2002

2002). Latvia has followed the idea of Estonia to decrease                        Estonia
                                                                                  Latvia                        Source: National Statistics
the corporate tax rate and the next “step” is the level of 19%.                   Lithuania                     (Estonia, Latvia, Lithuania)
                                                                                                                                                   3




Lithuania                                                                14
                                                                              Unemployment rate (%)
In 2002 the economic growth was 5.9% – the highest in
Baltic countries. The fastest growing sectors were retail,               12

agriculture and construction. As in Estonia and Latvia the
                                                                         10
growth of domestic consumption has been high and the
growth of main industries is based mainly on domestic con-                8
sumption. Some extent of integration between the coun-
                                                                          6
tries can be characterized by the fact that Estonia has the
third place after Sweden and Denmark in the context of FDI.               4
                                                                                   1998               1999   2000         2001            2002
                                                                                          Estonia
                                                                                          Latvia                          Source: National Statistics
                                                                                          Lithuania                       (Estonia, Latvia, Lithuania)




Taxation
Property Tax                                                           Tax rates (%)
Estonia has property tax only on land, but Latvia and Lithua-                                                Estonia      Latvia       Lithuania
nia have property tax on both land and buildings. Tax burden            Income Tax                             26           25              33

has been relatively low.                                                Corporate Income Tax                    *           19              15
                                                                        VAT                                    18           18              18
                                                                        Social Security Contributions          33           33              33
Corporate Tax                                                           Land Tax                             0,1-2,5        1,5            1,5
*In Estonia, the re-invested profit is tax-free, but dividends          Building Tax (for legal entities)                   1,5              1
are taxed. Lithuania has a moderate tax rate already and
Latvia is gradually moving to the same direction and conti-
nuously reducing the tax rates (to 15% in 2004).                       Property sales are subject to Notary Fee and State Duty.
                                                                       Both of those are relatively low. Commissions of brokers
Property Transactions                                                  are on acceptable level, but not always paid by the seller or
Ownership of property is obtained either by property pur-              landlord. The details of commissions must be agreed before
chase or by acquisition of shares in a real estate company.            the deal.




Property Systems and Accession to the EU
Registration                                                           Restrictions
All three Baltic countries have reliable and efficient property        Today the real estate legislation of the three Baltic countries
registration systems similar to the systems in Western                 is becoming more and more similar to each other and to EU
Europe.                                                                countries. There have been and still are some restrictions
                                                                       for foreigners, which are more or less formal.
Registration System

                                                           Estonia                              Latvia                     Lithuania
Land plots (physical parametres)                          Cadastre                             Cadastre                    Cadastre
Buildings                                             Building Register                        Cadastre                    Cadastre
Mortgages                                                 Title Book                          Title Book               Mortgage Register
Ownership etc. rights                                     Title Book                          Title Book                   Cadastre
4




Transitional Period                                              in every country have to be decided in the nearest future.
All the Baltic countries like the other candidate countries of   Nevertheless it concerns big agricultural and forest areas,
EU have got a transitional period of 7 years. The exact rules    the rest of the land and property market is already liberalized.


    Property markets are open to foreign investors, transitional period (7 years) concerns only
    agricultural and forest land.




Retail Premises
Development of retail space has been active during the last      Rents of Retail Space
years, but there is still potential for growth. Estonia takes
                                                                                                   Rent EUR/sqm/month
pride in its first modern retail premises, but the biggest
Baltic shopping and leisure centre (which besides retail                              Main Street                   Shopping Centres
                                                                  Tallinn                35-40                               15-30
premises includes large catering facilities and even an ice
                                                                  Riga                   35-50                               20-45
arena) is actually situated in Vilnius. This Akropolis-centre
                                                                  Vilnius                30-40                               15-30
(55 000 sqm) was developed by Vilniaus Prekyba and there
                                                                                                   Source: BPE (Estonia, Latvia), KOBA (Lithuania)
are even plans to have an extension. In the Baltic countries
                                                                 Development of Retail Space
there are no other centres like Akropolis, but certainly both
Riga and Tallinn have enough room for this kind of a facility.                             Tallinn              Riga               Vilnius

Alfa, which is the biggest shopping centre in Riga, has          Existing New Stock
                                                                 (sqm)                     340,000             200,000             200,000
37 000 sqm of space, the biggest centre in Tallinn is Rocca
                                                                 Expected
al Mare with an area of ca 35 000 sqm.                           Extension
                                                                 in 2003-2004 (sqm)        130,000             200,000             130,000

Tallinn                                                                                  SRV, ELL,
                                                                                        Ober-Haus,            Linstow             Vilniaus
Tallinn has reached a more stable stage of development.          Main Developers        Kesko, SOK             Varner             Prekyba

2002 with ca 80 000 sqm of new space has been the top                                            Source: BPE (Estonia, Latvia), KOBA (Lithuania)
year so far, but it did not produce any permanent vacancy.
The Viru square, the central point of new business centre,       with additional space of around 100 000 sqm and the ten-
is under construction today. The developers of the shop-         dency is expected to continue in 2003: about 80 000 sqm of
ping centre (26 000 sqm) are Finnish SRV and local Merko         new retail space will come to the market. The biggest deve-
and the project is similar to the Kamppi project in Helsinki.    loper-owner is Linstow Varner (Norway) which market share
Linstow announced new biggest shopping centre (50 000            in 2002 has reached about 51% of total Latvian market
sqm) in Tallinn to be opened in March 2004. Retail sector        (they own ca 130 000 sqm retail space in Riga). The main
is waiting for property investors. Some shopping centres         anchortenant in all these premises is RIMI. Vilniaus Prekyba
have been for sale for some years already. The yields            (Lithuania) has started its operations in Latvian market since
(supply) are around 8-10%.                                       the summer of 2001. Since that time they have opened 49
                                                                 shops including small low price shops VP Market and 3 super-
Riga                                                             markets Maxima. The third active developer is Kristensen
Riga seems to have the biggest development potential. In         Baltic (Denmark) bringing each year around 6000 sqm of
year 2002 there was a boom of new retail centres in Riga         new retail space to the market.




    Retail operating is mainly controlled by foreign companies, only in Lithuania there
    is a “local” leader. Some operators are active also in property market, but there is a list of
    shopping centres waiting for an investor.
                                                                                                                                                                   5




Office Premises


In the first half of 1990s there was a similar development in                          Prime Rents of Office Space
all the capital cities. The development of office market star-                   400

ted with the Old Towns. The rapid growth of demand resul-
                                                                                 300
ted in high rentals. Because of transport problems, the Old
Towns of all the three capitals have gradually become more
                                                                                 200
the areas for living as well as for tourist-oriented trade and
services than the areas for offices. At the end of the 1990s,
                                                                                 100
the development was different: Tallinn was affected by a
great oversupply and vacancy reached 30%. Riga was also
                                                                                   0
affected by the falling rental rates. The luckiest one was Vil-                          1997      1998      1999        2000       2001        2002        2003
                                                                                                Tallinn EUR/sqm/year
nius, because the amount of new office premises was rela-                                       Riga USD/sqm/year                     Source: BPE (Estonia, Latvia)
                                                                                                Vilnius USD/sqm/year                             KOBA (Lithuania)
tively small there. Nevertheless also Vilnius has experienced
the first substantial fall of rent levels. The construction of
new premises has been relatively modest. Increased supply
has somewhat lowered the rent levels, but at the moment                        Prime Office Space
the rental levels are stable. Vacancy has increased a bit                                                                  Rent
because of new construction (ca 16 000 sqm of new office                                                               EUR/sqm/year               Yield %
space) and is at the level of ca 15% today. Parking in the city                   Tallinn                                   180                        10

center costs 50-70 EUR/month. Future perspectives are                             Riga                                      240                        11
                                                                                  Vilnius                                   180                        12
interesting because of new developments on the other side
                                                                                                                    Source: BPE (Estonia, Latvia), KOBA (Lithuania)
of river Neris.


Tallinn                                                                        Riga
The rents and yields were highest before 1997. The crash of                    Riga is known for its Art Nouveau buildings, which cover a
the Tallinn Stock Exchange in 1997 was followed by the                         relatively large area and are partly in office use today. There
Russian crisis in 1998. These two events affected the Eston-                   is no clearly distinguishable new business center and a lot of
ian economy and the banks got into difficulties, which forced                  money is invested in renovation of these beautiful buildings.
the developers to be very careful during the years 1998-                       The rents are partly still USD-oriented with the average level
2000. When the “top” year of 1998 produced 50 000 sqm                          of 12-16 EUR/m2/month (prime rents are higher). This rental
of new office space, then in the intermediate years the vol-                   level has been stable and is not expected to fluctuate in the
ume of new premises fell to 5000-10 000 m2 a year, but at                      next year. As the biggest city of the region, Riga has the
the moment that indicator is rising again and ca 20 000 sqm                    highest levels of rent – in spite of the fact that the rents have
of new office space is rentable in 2003. Tallinn has small, but                decreased during the last couple of years. However, the
CBD-concentrated new office stock. As vacancies are al-                        vacancy rate is ca 30%. The capacity of parking lots and
ready around 10% and GDP growth is accepted to be 4-5%                         houses is still a problem, parking fee in the center is 60-130
for 2003-2004, a pressure for rental decrease can arise. Par-                  EUR/month.
king which has been the problem for a long time is in a bet-
ter condition today because of new construction of parking
houses. Parking fee in the center is 60-100 EUR/month.


   The vacancies are a bit high in every capital city. At the same time there are subsegments
   in the market and some properties are perfectly functioning with a “0”-vacancy and high
   rentals.

Time dynamics of rental levels in Riga and Vilnius is presented in USD because of USD-oriented market.
6




Main Characteristics of Rental Market

                                                       Estonia                                 Latvia                              Lithuania
 Typical Length                                        5 years                              3 - 10 years                           5-10 years
 Rental Payments                                      Monthly                                Monthly                                Monthly

                                                                                                                               1-2 month rental
 Rental Deposit                               1-2 month rental payment               1 - 3 month rental payment                    payment
                                             No indexation or Consumer                   No indexation or                     No indexation or
 Rent Indexation / Review                            Price Index                       Consumer Price Index                 Consumer Price Index

 Responsibility for Internal Repairs                   Tenant                                 Tenant                                 Tenant
                                                                                                                            18, but in many cases
 VAT on rent (%)                                         18                                     18                            not subject of VAT
                                                                                                                                Yes (landlords
 Tenants Right to Sublet                      Yes (landlords permission)             Yes (landlords permission)                  permission)

                                                                                                            Source: BPE (Estonia, Latvia), KOBA (Lithuania)




Industrial and Warehouse Premises

Tallinn                                                               Rents of Industrial and
                                                                      Warehouse Space
There is a shortage of “good” leaseholders, which means
                                                                                                                               Rent
that the potential developers are not willing to take risks. No                                                           EUR/sqm/month
speculative investments have been made and there is no                                                                            3-5
                                                                           Tallinn
potential for such kind of development in the nearest future.              Riga                                                   4-6
Rental terms are still very limited (up to 5 years) and the typi-          Vilnius                                                3-5

cal rules concerning the termination of agreements are                                                      Source: BPE (Estonia, Latvia), KOBA (Lithuania)
harmful for landlords (in case of termination leaseholder has
to pay for 2-3 months only). There are some plans for indus-           ever, there is a possibility to satisfy the demand for modern
trial parks and centres of logistics close to highroads (Pärnu         warehouse/industrial/office mix with necessary warehouse
and Tartu), where companies like Kesko, Tamro, etc. already            space of 10 000 sqm and more. Therefore such bigger com-
have their logistics centres. The total amount of develop-             panies have to construct the warehouse/administrative cen-
ment potential is up to 0,5 million sqm. There is a readiness          tre for their own needs. Retailer RIMI has planned to com-
to develop space for a concrete client, but the current                plete in 2003 the centre with a total area of 35 000 sqm
demand is very limited. The number of vacant low-quality               (28 000 sqm warehouse space). The Lithuanian construction
premises is large, but demand is continuously very limited.            company Ranga IV plans to build a new warehouse complex
There have not been significant changes concerning rents               with a total area of 40 000 sqm at the frontier of Riga by the
and vacancies. In connection with EU accession the number              end of 2003. Speaking about rents no dramatic changes
of special requirements have to be followed especially in              have been observed from one or the other side. The end of
food industry. Some kind of expectation of rental increase             year 2002 and the beginning of 2003 have shown high
was related to this, but in reality there have not been any big-       demand for land plots with an area starting from 2 hectares
ger changes because most of those premises are in own use.             located next to highroads, easily accessible, out of city traf-
                                                                       fic jams. The announced purpose of most of the cases was
Riga                                                                   the willingness to build warehouse complexes and logistic
There is a limited supply for modern, large warehouse/                 centres. Year 2003 can bring additional 100 000 sqm of
industrial space. The only industrial park is still Skanska Busi-      newly built warehouse premises to the market because of
ness Park with a rental level of ca 6 EUR/sqm/month. How-              several new projects extra to those mentioned above.
                                                                                                                                         7




Residential premises


   Residental sector has an especially good potential, because there is a growing demand
   for new quality space. It is accompanied with a stable and foreign-owned banking sector,
   interest rates for housing lowns are below 5% in all 3 countries.




In the next couple of years, the housing development will        Top Prices of Apartments
become one of the areas of priority. The existing stock can      in the Centres of Capital Cities
be characterized by high level of deterioration.
                                                                                               Renovated              non-Renovated
                                                                                              or New Space                Space

There was an extremely fast price increase of apartments in      Tallinn EUR/m2                 900- 1500                 600-800

2000-2001 (especially in spring 2002) in Tallinn, but the        Riga EUR/m2                   1000-1500                  600-800
                                                                 Vilnius EUR/m2                 900-1300                  600-800
same type and even more rapid increase of prices was in
                                                                                            Source: BPE (Estonia, Latvia), KOBA (Lithuania)
autumn of 2002 in Riga – in October and November the
prices grew 10% a month!                                         mostly one to two storeyed wooden private houses with an
                                                                 original architecture and social group of people are choosing
Development of residential houses is a growing business in       this place as place of residence. Big part of inhabitants are
all the Baltic countries. When Estonians started new cons-       well-off people from Riga region who have obtained proper-
truction of apartment houses in Tallinn in more rapid speed      ties in Jurmala during the last years. The most expensive
ca 1 year ago, then the same tendencies are also in Riga         properties are located closer to Riga and to seashore. Ave-
now. The price level of apartments in Soviet-type residential    rage price of vacant land plot is 60-100 EUR/sqm depending
houses has been under discussion in context of both capi-        on size and specific location including neighbourhood sta-
tal cities. The problem is that the prices of old space have     tus. Average prices of buildings in good condition located in
almost reached the prices of new construction. However,          the most expensive region vary from 120 000 to 500 000
the prices of new space have also risen and are continu-         EUR. The price in this case depends on location of the buil-
ously influencing the prices of existing stock.                  ding, its size, quality and extras included in the property.
Baltic countries are also known as recreation places. Espe-
cially famous is the seashore and cities like Pärnu (Estonia),   Pärnu, the summer capital of Estonia, is popular among
Jurmala (Latvia) and Palanga (Lithuania).                        Estonians and foreigners. The land plots on seashore are at
                                                                 price level 60-90 EUR/sqm. The average prices of high qua-
Jurmala has always had a specific place in Latvian proper-       lity apartments and also single-family houses are in price
ty market. It has a specific location in one of the most beau-   range 800-1200 EUR/sqm, the high end of single-family
tiful areas along Riga Bay seashore, where constructions –       houses is as high as 300 000 EUR.
BPE’s strength is founded on its 60 professionals and many years of experience. This knowledge,
combined with the ability to apply it in a practical and effective way to the client’s personal
needs, is our COMPETENCE. In this way our clients are able to place their complete TRUST
in our company. Therefore BPE’s motto is:


YOUR TRUST – OUR COMPETENCE
              Tallinn
                         Rakvere



                          Tartu
                Pärnu
                                     ACTIVITY AREAS
                  Riga

    Jurmala                          • Property and asset valuation               • Agency
                                     • Loan and Lease consulting                  • Property Management
                                     • Market research and investment analysis    • Surveying

                         Vilnius
                                     • Due diligence surveys                      • Training




OUR OFFICES
Kinnisvaraekspert Tallinn            Kinnisvaraekspert Pärnu              Baltic Property Expert Riga
Tallinn    Rävala pst 5,             Pärnu      Kuninga 36,               Riga      Elizabetes 63,
           10143, Estonia                       80014, Estonia                      LV-1050, Latvia
Tel        +372 6 309 440            Tel        +372 44 20 700            Tel       +371 7 201 370
Fax        +372 6 309 441            Fax        +372 44 20 701            Fax       +371 7 201 380
e-mail     kve.tallinn@kve.ee        e-mail     parnu@kve.ee              e-mail    inga.meiere@bpe.lv
Tambet Tiits, Director, M.Sc         Peeter Prisk, Manager                Inga Meiere, Director
Aivar Tomson, Vice Director

Kinnisvaraekspert Tartu              Kinnisvaraekspert Viru               Baltic Property Expert Jurmala
Tartu     Soola 8,                   Rakvere Laada 3a,                    Jurmala Jomas 50,
          51013, Estonia                        44310, Estonia                      LV-1050, Latvia
Tel       +372 7 371 112             Tel        +372 32 23 556            Tel       +371 7 755 917
Fax       +372 7 371 111             Fax        +372 32 23 410            Fax       +371 7 755 920
e-mail    kve.tartu@kve.ee           e-mail     kve.viru@kve.ee           e-mail    marite.kovalevska@bpe.lv
Eduard Elbrecht, Manager             Alari Reissaar, Manager              Marite Kovalevska, Broker



WE THANK FOR CO-OPERATION
Kofod-Jensen & Bach-Nielsen          Catella Property Consultants
(KOBA) Lithuania                     Helsinki Mannerheimintie 4,
Vilnius  Subaèiaus str. 7,                     00100, Finland
         LT-2001, Lithuania          Tel       +358 (0) 10 5220 220
Tel      +370 2 742100               Fax       +358 (0) 9 646 842
Fax      +370 2 742104               e-mail    jussi.palmu@catella.fi
e-mail   adm@koba.lt                 Jussi Palmu, Director
Lau Melchiorsen, Managing Director




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