Lithuanian economy and RE market report 2015 H1

This year ECB launched a programme of expansionary monetary policy to stimulate the economy (quantitative easing) – by purchasing bonds in the secondary market. Although the economic growth in the euro area is fragile, the preliminary macro-economical rates are already showing better forecasts of economic growth. The expansionary monetary policy of ECB has a direct influence on the interest rate expectations, and that is particularly important to those having housing loans. Currently, loan holders who pay floating interest and are very susceptible to changes in their loan instalments already have to think about the fixed interest rates in order to avoid a significant amount of additional costs in the future.

The start of the first half-year of 2015 was particularly sluggish in the Lithuanian real estate (hereinafter – RE) market; although the situation started to improve in the second quarter, however, the statistics of the purchase-sale transactions in the first half-year and second quarter were worse than in the corresponding periods in 2014. In the second quarter this year, the liquidity of RE market in different segments in Lithuania equalled to the corresponding period in 2013 and was significantly lower than in the beginning of 2014. 

According to the data of SE Centre of Registers: 

• There were 12,212 apartment purchase-sale transactions concluded in Lithuania during the first half-year of 2015, i.e., by 22.1 percent less than in the corresponding period in 2014. 
• There were 5,365 private house purchase-sale transactions concluded in Lithuania during the first half-year of 2015, i.e., by 12.6 percent less than in the corresponding period in 2014. 
• There were 13,142 land plot purchase-sale transactions concluded in Lithuania during the first half-year of 2015, i.e., by 5.9 percent less than in the corresponding period in 2014.

Despite the fact, that the number of RE purchase-sale transactions was decreasing in all segments in Lithuania in the first quarter this year, the RE market has remained active and liquid enough for RE prices not to decrease. On the other hand, the presumptions for RE prices to grow are difficult to observe, therefore the prices will likely remain stable in the upcoming period. 

Noticeably, the decrease in RE purchase-sale transactions in the second quarter of 2015 was not as significant as in the first quarter, and it was mostly influenced by the following reasons:

• Less influence of “the war of sanctions” on Lithuanian economy, export and transport sectors than expected; 
• Abated conflict between Russia and Ukraine (or at least the escalation thereof); 
• Greek financial crisis is under control. 

In the first quarter of 2015, the highest activity was in the capital city, which significantly overtook the markets of other cities. There were 4,100 apartment purchase-sale transactions concluded in this period – this covers a third of all transactions concluded in Lithuania. RE developers have sold about 1,820 new construction apartments in Vilnius, i.e., only by 1.5 percent less than in the corresponding period last year. It should be noted that after a year-break the economy-class purchasers returned to a new construction apartment segment; who had previously had postponed their plans to purchase housing as a result of military conflict between Russia and Ukraine as well as “the war of sanctions”. One should not exclude the fact that the latter purchasers were encouraged to return to the RE market due to the intensions of the Central Bank of Lithuania to tighten the rules on responsible lending, in respect of which some of potential buyers could no longer purchase the desired housing. We forecast that the sales of new construction apartments will be decreasing in the second half-year; especially, in the economic class segment. On the other hand, the increase in sales of higher-class apartments is noticed: spacious apartments (100-150 sq.m. and more) are usually acquired from own funds. RE developers are often compelled to merge several apartments into one large apartment, in order to meet the demand. This shows, that the market is changing, and the developers are trying to adapt to it. 

The new construction market is significantly more moderate in other cities. About 150 apartments were sold in Kaunas, about 80 apartments – in Klaipėda, about 95 – in Palanga, and about 20 – in Neringa. In comparison with the corresponding period last year, the number of transactions on new construction apartments has decreased by 26.1 percent in Kaunas, by 50 percent – in Klaipėda, by 57.8 percent – in Palanga, and by 75 percent – in Neringa. 

Despite the new currency, the slowdown in economic growth, “the war of sanctions”, indefinite geopolitical situation, and Greek crisis, the trends in the commercial sector have remained positive in the first half-year of 2015. Three business centres were finished in Vilnius; they supplied the market with about 16,600 sq.m. GLA. Two business centres were finished in Kaunas (GLA - about 4,500 sq.m.). So far, RE developers are only gaining momentum, because 10 new business centres are expected to be opened in Vilnius within the next two years, what should lead to additional GLA – about 142,600 sq.m. The construction of a business centre (14,000 sq.m.) is foreseen in Kaunas. Such development rates were also observed during the last boom in 2008. 

In the first-half of 2015, no new shopping centres were opened in the country. The expansion works of “Babilonas I” were finished in Panevėžys; the object was expanded by 1,600 sq.m. and renamed to RYO. Scheduled construction works of shopping centres were continued as well. 

In comparison with the corresponding period last year, the increase in the average vacancy rates in the segment of shopping centres in the country is observed. Although the Lithuanian economy is growing and the domestic consumption is increasing, it however does not ensure that all retailers will manage to remain in the shopping centres. In the first half-year, a quite active turnover of tenants was observed in the shopping centres, particularly, in the major ones, where some less popular and weaker retailers had to stop their activities. Nevertheless, the demand for commercial premises is high, thus the vacated area is occupied by new tenants, and the vacancy rates remain low. 

In the first-half of 2015, the Industry Confidence Index was improving and reached the level of 2013. Moreover, the forecasts related to exports and output levels in the sector remained quite positive. It seems, the industrial and warehousing segment representatives managed to adapt to the changes in business environment, therefore, it is possible to predict, that this segment should maintain a moderate growth. 

geopolitical risks. Much more often the industrial and warehousing segment representatives are looking for the opportunities to “employ” their profit safely. One of the methods is to acquire industrial and/or warehousing objects, in order to avoid rental costs. This is rather a new phenomenon in the Lithuanian industrial and warehousing segment, since the majority of representatives in this segment was avoiding investments into RE for several years from the emergence of the crisis, by considering it as freezing of funds, required for business expansion; however, the situation has already changed and investing into RE is more common in this segment.
The rents of warehousing premises, either new or old construction, have remained stable in the market for some time and they should not change in the short-term. Although the vacancy rates in this market remain low, and the demand exceeds the supply, there are no sufficient preconditions to raise the rents, because potential tenants have the alternatives – they can look for the opportunities to acquire own RE.
Recently, a more conservative risk management, moderate lending policy and strict lending conditions applicable by banks and other credit institutions more often make people consider the alternatives to traditional RE business funding.

Issued corporate bonds, crowdfunding, peer-to-peer lending – the financial measures, which are rapidly becoming popular throughout the world. They ensure the availability of funding for more companies, especially, in small and medium-sized enterprises. In turn, it allows large companies to diversify their business funding resources and provides flexibility in managing lending-related risks. 

So far the alternative RE business funding tools are more discussed in Lithuania only. Moreover, a rough legislative framework does not promote significant changes and a breakthrough in this field. However, the P2P (peer-to-peer) lending, which is increasingly growing in Lithuania, is a perfect reflection of the openness to financial novelties and the climate in financial markets. This is the matter of time before we get B2B (business-to-business) platforms, which are already operating in other countries.

The public sector also sees the demand of alternative funding opportunities for business – the Bank of Lithuania, the Ministry of Finance and the Ministry of Economy have already drafted a package deal, the implementation of which could provide the opportunity to use crowdfunding, as well as expand the opportunities for companies to issue and distribute bonds. Let’s hope that these alternatives of funding will become a reality in the nearest future.