Shopping centres and modern office buildings attract international investors to the Baltics
The appeal of the Baltic real estate to foreign investors is increasing: investment funds and private investors are looking for quality assets in the region. Investors are tempted by yield premium and the opportunity to diversify their portfolios.
These are the trends identified by the investment consultant Bernardas Velikonis working at the international real estate advisory company Newsec. “Until recently major real estate investors would not even consider the Baltic region, however, now the tables have turned and our region attracts great attention,” he noted.
According to Mr. Velikonis, investors’ interest in the Baltic region and large-scale transactions were mainly fuelled by the region joining the Eurozone, which coincided with very rapid equity growth and reduced return on investment in the Western markets.
“The Eurozone eliminated currency limitations, thus, Lithuania and other Baltic countries are now restricted only by product, small market and liquidity. We are at the periphery and our transactions are relatively small, reaching around EUR 15 million, while standard real estate transactions in the Western markets exceed EUR 100 million and sometimes reach billion euros,” states Mr. Velikonis .
According to the investment consultant, investors in the Baltic region capitals are mostly interested in acquiring dominant shopping centres and office buildings, which, due to their scale, quality and liquidity are the most realistic targets for Western investors.
“In Lithuania, a potential source of new transactions is the retail sector as many shopping centres were developed a long time ago or are still under the developers’ control. Similarly, Riga retail sector also has high potential as its shopping centres are still held by developers or opportunistic owners – American closed-ended funds, which are likely to exit this market within 5 years. Estonia’s situation is alike,” Mr. Velikonis said.
During the first half of 2017 shopping centres accounted for 43 percent – the largest share of total investment volume in the Baltics. Investment share into shopping centres grew by 9 percent and in 2016 it comprised 34 percent of all transactions.
Mr. Velikonis believes that investors should soon become tempted by rapidly growing Vilnius business centres.
Newsec representative states that pension and insurance funds investing into real estate are those who are most actively seeking return on investment in the Baltic region. In the Western region these opportunities are dwindling and this in turn led to extreme competition for revenue-producing objects.
“These in their essence highly conservative funds are tempted by newly developed properties which feature long-term lease contracts and strong international tenants. This type of real estate in the Baltic region is expanding and the funds therefore start focusing on this region. Investment is also promoted by good quality of new assets in our region, higher yields compared to those of the Western region and possibility to gain exposure to the different region,” Mr. Velikonis said.
The highest interest in Lithuanian real estate is seen from American, as well as Scandinavian, German, French, British and RSA investment funds. Another emerging trend is the growing real estate investment by private investors who are looking for new possibilities and have larger capital to deploy. According to Mr. Velikonis, the most realistic foreign investors in the Baltic region are the so-called opportunists who are ready to take higher risks and are looking for large-enough single assets or portfolios with value add potential. At the same time, the opportunists who have already invested in our region are considering exiting their holdings within 2-5 years and “park” the funds for a new economic cycle.
Mr. Velikonis noted that real estate investors are discovering other countries beside Lithuania which until now were less popular on the real estate map: Hungary, Portugal and Greece. Alternative investment into real estate segments – retirement homes, students’ accommodation, data centres and parking lots – is growing too.