The Alliance of Real Estate Developers (NIAA) brings together real estate players across all market segments in Latvia and represents them a collective manner on state and local government level.
CEEREM: Could you give us a run through of the Latvian real estate market and the sectors that bear most opportunity presently?
The housing sector offers the highest untapped potential. About 73% of Riga’s inhabitants still live in soviet-era apartments — it is a truly striking number especially if you consider that Riga is home to about half of Latvia’s two million population. We also haven’t had much investment in renovating these properties so we need new housing which correponds to the needs of the 21st century. People here will jump at the opportunity to move if they are presented with the option.
CEEREM: Why do you think investment in the residential sector has been so slow?
We had a real estate boom before the financial crisis and Latvia was hit hardest among the Baltic countries. Banks were reluctant to offer loans — Estonians, for instance, have borrowed twice as much as Latvians throughout the past 10 years. Perhaps this is one of the reasons why, in the last 10 years, Riga commisioned only 8,000 apartments, whereas Vilnius commisioned 24,000 and Tallin about 22,000.
Loans are no longer a problem nowadays and investment is being made, but there is still room for growth in this sector.
CEEREM: What about the office and industrial sectors?
Offices are essential in a service based economy such as Riga. Up until recently we had a shortage of office space which caused international companies to shy away from establishing their global business services here. But this is changing, we have 120,000 square meters of office space under construction and another 150,000 square meters in development. I would actually discourage investment in the office sector because the market is fairly saturated at this point.
We also have a boom in logistics, driven by the growing sector of e-commerce which requires generous storage space. Land is not a problem, especially around the Riga airport. Worth noting also that we are now developing Rail Baltica, a high speed railway connecting Tallin, Vilnius, Riga, Warsaw and Berlin which will be available for both passengers and cargo. This makes the sector even more attractive.
CEEREM: How does the local capital compare with foreign one in terms of investment volumes?
We have 32 developers as our members — out of them, 29 come from outside of Latvia. Typically we have Lithuanians investors in offices, Estonian, Finnish and Swedish in residential. There are a few Israeli investments as well.
CEEREM: Sounds like the local business environment is very welcoming to foreign investors – are there are notable incentives in place?
Sure, this has always been the case. Riga is an international city and there is no dispute regarding the value of foreign investment.
Furthermore, we work hard to understand the real challenges of the industry and resolve them. For example, we managed to unburden territory planning by eliminating redundant activities, enabled amendments to the law of construction so that if someone contests a permit in court this does not automatically halt construction, and we have fast track for large investment projects.
Notably, we managed to change an obsolete law for residential tenancy. In the past, if the tenant didn’t pay rent the landlord had to go to court and endure an eviction process that could take up to five years. So if we were to discuss development of rental housing (which has been growing in importance in Latvia) it would have been very risky under the previous law. What we did together with the Ministry of Economy was to develop a new framework – probably one of the most competitive in Europe – where if the tenant doesn’t pay its rent it can be evicted in a matter of four months.
These may appear as small things individually but they add up and make for a good business environment.
CEEREM: What can investors look forward to in the coming two-three years?
We are working on developing an infrastructure development fund in Riga. One challenge we have now is that developers must also take care of the infrastructure that surrounds their projects. We are discussing with authorities to change this, specifically to evaluate to amount of taxes that the new construction will attract and if the city gets relevant benefits, to cover part of the investment. This is still under works but I am confident investors will find this very attractive.