Latvia: Reality Bites in Riga

Latvia: Reality Bites in Riga

Rige Latvia
View of Riga, Latvia from St Peter’s Church [Photo credits to Azmuskoka on Flickr]

Latio, Latvia’s biggest real estate company reports that Riga property prices have now fallen in two successive months; the outlook for prices in the short-term does not look good. The latest of Latio’s excellent series of monthly reports on the Greater Riga property market shows a decline of 3.5% in the price of ‘standard’ apartments in the region, which follows on from a 1% decline in May. This is an abrupt turnaround from earlier in the year, which saw Riga posting a 44.23% rise in prices in the 12 months to Q1.

Lativa has entered a tricky phase in terms of credit ratings (down in February), current account, cost of living (rising more sharply since the Spring), exchange rates and interest rates. The value of Latvia’s currency, the lats, is pegged to the euro but the Bank of Latvia has had to increase its interbank rate steeply this year and fluctuations in interest rates have been severe; the (6 month offered rate) level is currently 7.36%.
Most foreign property investors will presumably be denominating their mortgages in euros and a much more attractive 4.49% interest rate is offered by Fidentia. The only danger would seem to be the Bank of Latvia suffering its own ‘Black Wednesday’ and having to abandon the peg to the euro. This seems unlikely at present although Alfs Vanags, head of Baltic International Center for Economic Policy Studies (BICEPS), has said that the Latvia’s high level of inflation is making the country uncompetitive at the current exchange rate.

According to Ober-haus, the value of outstanding Latvian mortgages is now equal to 35% of GDP, approaching Western European levels. Latvia has recently introduced a 25% capital gains tax on properties if sold less than one year after purchase. It will be interesting to see if the Latvian government increase this timeframe in order to further stabilise what seems to have been a speculative market.

The other side of the Riga real estate picture is supply and demand for rented residential property and the picture here is one of increasing rental values but a decline of about one third in rental yields to 5%. Although this is hardly a picture of disaster, there are likely to be problems of over-supply in the near to medium term with 105 separate building projects being announced in the first half of 2007. While some of these developments are quite small, others such as ones announced by Eiromaja or Capitolia Group (which has the backing of Lehman Brothers) are very large indeed, running hundreds of dwellings.

One wonders at the commercial logic of persisting with such a high level of new developments. To give some perspective, Greater Riga has a population of slightly over one million but the country as a whole has a population of only 2.3 million. The exodus of ethnic Russians from Latvia has tended to reduce the population and, with only 56% of the remaining 640,000 Russians having Latvian nationality, it looks as if this trend could continue.

For the present, property investors with assets close to the historic centre of Riga or in coastal areas such Jurmala seem best placed to weather the downturn. The historic centre is recommended by Ober-haus and they give a strong vote of confidence in standards of renovation. Commercial integration with the other Baltic states and the Nordic countries would serve Riga well as would more harmonious relations with the Russian Federation and Latvia’s own Russian minority.