The three Baltic countries—Lithuania, Latvia, and Estonia—experienced
real economic growth of 6,3% during the past year.
This figure makes the region one of the most prosperous on the continent. Its close proximity to the Nordic economies to the north
Poland and Russia offer them good prospects in the short and medium term and have sparked the interest of international investors.
This, in turn, is reflected in a booming property market,
with a long career ahead.
The Baltic countries are in a very advantageous position to reap the benefits of their future accession as member states of the European Union, scheduled for May 2004. They are strategically located on the axis of the Baltic Sea region, which includes not only Lithuania, Latvia and Estonia, but also western Russia, along with the four Nordic economies (Sweden, Finland, Denmark and Norway), as well as northern Poland and Germany, constituting a vast area of around 100 million consumers.
The truth is that, as a whole, the three countries are relatively small—comparable to Switzerland—with only 7,3 million inhabitants in total. It should also be considered that the starting point for growth in all three countries is relatively low, with a gross domestic product (GDP) per capita among the ten candidate countries for EU membership. However, the Baltic states have experienced significant economic development since gaining independence from the former USSR in 1991. They are currently attracting international interest. Their ambitious program of economic reforms, privatizations, and commitment to strengthening public finances, along with their strong entrepreneurial tradition, place them among the most dynamic economies in Europe.
The real estate market
But how is the dynamism of the Baltic economy reflected in the local real estate market? In this respect, the Estonian capital, Tallinn, has gone through a typical emerging property market cycle. The supply of modern office space has been developing since 1995, leading to market saturation at the end of the decade, when the Estonian economy experienced a brief recession. Tallinn now has a supply of modern business premises amounting to 200.000 square meters, of which around 50% is Class A. This inventory is considerably larger than that of other major Baltic capitals such as Riga (Latvia) and Vilnius (Lithuania). Recently, vacancy rates have increased and, according to the local real estate company Ober Haus, currently stand at around 10%.
However, the supply of high-quality office space remains limited compared to the Nordic countries. Rents range from €130 to €190 per square meter per year. Ober Haus anticipates a slight decrease in rents due to rising vacancy rates.
In the longer term, opportunities for office supply and modernization are numerous, with a high availability of land for development, in response to a potential increase in demand. An estimated 1,5 million square meters of projects are awaiting approval. However, the development process is slow, and the local banking sector has shown reluctance to finance construction projects for commercial premises, having fared quite poorly in 1998-1999.
The supply of retail space has increased rapidly in recent years and is expected to continue to do so. It is currently estimated at 380.000 square meters. Estonia's largest shopping center, currently under construction near Tallinn Airport, will occupy 50.000 square meters and is scheduled to open this year. However, proportionally, the total retail space per capita remains well below the Scandinavian average. Like their Nordic counterparts, Tallinn consumers prefer to shop in large shopping centers, although these still lack international tenants.
Domestic investors have traditionally been the most active in the Estonian property market. In recent years, there has been increasing interest from international investors, primarily in retail properties, although a Russian investment group recently acquired the business premises of Estonian Union Bank. Tallinn's location as a gateway between Eastern and Western Europe, along with its port infrastructure, should also attract potential developers in the logistics sector.
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