Baltic investment property deals smash through EUR 1 billion ceiling

Baltic investment property deals smash through EUR 1 billion ceiling

The real estate market in the Baltic countries saw record activity in 2021, with the total value of commercial investment transactions doubling from the year before to EUR 1.5 billion. The highest-value deals were done in Latvia, the international real estate advisory firm Newsec in the Baltics reports. 

Last year, Latvia had EUR 610 million of transactions, Estonia EUR 447 million, and Lithuania EUR 444 million. The record results flowed from excess capital, global trends, and a positive mood in the market. Investors actively sought out properties, and only lack of supply prevented an even bigger investment deal total.

Neringa Rastenytė-Jančiūnienė, the Head of Capital Markets at Newsec in the Baltics, says the transaction volume of EUR 1.5 billion is a record for the Baltic region. Not lowering that bar in 2022 will be important to keep foreign investors’ attention, she adds.

“Previously, investors were hesitant to come to the Baltics due to the small deal volume, which for the last several years stayed below the level of EUR 800 million. Passing the EUR 1 billion limit has broken a certain psychological barrier. We’d never seen so many people seeking to invest in real estate as last year. Everyone was investing in 2021 – funds, private individuals, asset management companies, and businesses. For instance, in Estonia, two-thirds of deals involved non-professional buyers. There were more transactions than in earlier years, but they were smaller. Thus, average deal size, which in 2020 was EUR 50 million, in 2021 was just over EUR 23 million,” Rastenytė-Jančiūnienė explains.

International investors are most keen on properties in the logistics, office, and residential rental segments, she details. Investors with private capital, meanwhile, are most interested in small retail buildings such as neighbourhood shopping centres and retail parks.

Office segment shows growth potential

The Newsec expert notes that while the office segment in the Baltic countries is experiencing a golden age, there is a significant lack of properties available for sale.

“The office segment is showing stability, having maintained a transaction volume of EUR 300 million last year. But its potential is like a ticking bomb. Occupancy of business centres is now extremely high (in Vilnius, class A office vacancy is only 3.4%) and take-up is at record levels. For instance, on the Vilnius office market, 30% more space was leased out in 2021 than in 2020. The market is being held back by a shortage of new properties for sale that are attractive to investors. If there was more supply, we’d see even higher transaction volumes in this segment,” Rastenytė-Jančiūnienė says.

Industrial real estate met expectations

According to Newsec’s Head of Capital Markets in the Baltics, the logistics segment lived up to expectations in 2021, with three times as much investment as in the previous year. But she warns that unstable relations with China may soon be reflected in the industrial investment property segment, especially in Lithuania.

“While industrial property flourished last year, Lithuania’s conflict with China is now a source of tension for market players and it is precisely logistics and manufacturing that could be affected most. Eyeing the geopolitical situation, investors may start taking a more cautious view on such properties and put purchases on hold. Current tensions are not yet reflected in deals, where there is inertia. But in such an uncertain situation, any clear forecast of what developments lie ahead is difficult,” Rastenytė-Jančiūnienė stresses.

Retail is gradually recovering

The Newsec expert points to recent scepticism with regard to large shopping centres, since very few such transactions are taking place in Europe. For a while, there were neither sellers nor buyers on the market; the segment stagnated temporarily. What revived it was the Akropolis Group’s acquisition of the Alfa shopping centre in Latvia, which ended up being the biggest transaction in the Baltics.

“Having survived the pandemic, retail properties have reaffirmed their liquidity: the value of property deals in this segment was twice as big in 2021 as in 2020. We notice that with the easing of tensions due to COVID-19 uncertainties, this segment is recovering, and smaller, neighbourhood-type shopping centres have become a desired commodity,” Rastenytė-Jančiūnienė says.

Residential rental is a still-maturing but very promising investment segment

The residential rental property segment in the Baltics still has room to grow. Investments in this type of real estate in 2021 totalled about EUR 110 million, or some 8% of the value of all deals in the region. In other countries, meanwhile, like Finland for example, such properties accounted for 37% of all investment transactions in 2021.

“This is still a very young segment in the Baltic countries. We think the number of residential rental investment transactions will grow this year, and such arrangements will gain momentum in 2023-2024. Seeing the segment’s potential, we plan to give it more attention this year,” Rastenytė-Jančiūnienė says.

She says the investment property market will be active in the first half of this year just from the inertia built up in 2021. Moving on to the second half of the year, though, the market may face challenges – amid possibly rising interest rates, investors may put plans on hold.