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Baltic states Latvia and Estonia have experienced steady growth despite facing geopolitical challenges and high inflation. Market participants remain cautious as the region moves towards 2024, resulting in lower construction volumes and generally subdued market activity. However, buoyed by low household debt and low population growth rates, Baltic capitals remain upbeat about the future.
Estonia: Economic Recovery
Estonia faced an economic contraction of 1.3% in 2022, but is expected to see steady growth in 2023. The office space market has seen new projects and is expected to expand further in the coming years. While there were limited retail projects in 2022, the industrial sector experienced growth due to increased e-commerce activity. Residential properties in Tallinn experienced significant price increases due to a variety of factors. Meanwhile, the rental market saw a decrease in supply and an increase in prices, partly due to the influx of refugees from Ukraine. However, rental prices have not increased as much compared to property prices, with average rental yields falling from around 6% to 4-5%.
In 2022, Tallinn's apartment market experienced contrasting trends. The number of apartment transactions decreased by 11%, indicating a decline in activity, but the total financing volume increased by 8%, indicating that higher value transactions contributed to overall financing growth. On average, 190 new apartments were sold each month, accounting for 24% of all apartment transactions in Tallinn. This indicates that there is still demand for new apartments despite the decrease in the number of transactions.
In 2023, the housing market is expected to be affected by rising interest rates, which may affect buyers' ability to purchase a home and market trends. However, despite the decrease in activity, the average transaction price continues to rise. In the second quarter of 2023, there were 2,459 residential real estate transactions in Tallinn, with an average price of 3,136 euros per square meter. Compared to the first quarter of 2023, the average price increased by 6.7%.
The majority of property transactions are taking place within Tallinn city and within a 25km radius outside the city, particularly in districts such as Lae, Saku, Saue, Halk and Viimsi. These districts have higher average prices and some locations are showing price increases, especially in established private residential areas such as Nomme, Kakumae, Pirita and the districts adjacent to Tallinn. Over the past year, the popularity of the districts of Kyili and Saku has also increased, indicating changing tastes and new opportunities in these areas.
The rapid deceleration in inflation is expected to bring relief to Estonian households. Compared to other Baltic countries, Finland, Sweden and Germany, Estonian consumer expectations are relatively low. As household savings have declined from their high levels in the middle of last year, the impact of inflation on household savings and consumption has decreased. While rising interest rates may have a short-term impact on households, the deceleration in inflation will bring some relief. Euribor is expected to peak later this year, but any decline will be gradual.
Despite the prolonged recession, real wages in Estonia have started to rise since spring 2023. Strong wage growth is contributing to an increase in real wages, which has a positive impact on consumption. The average gross salary reached a record high of EUR 1,981 in June 2023.
However, it is expected that it will take until next year for real wages to fully recover from the previous decline. Estonia's labour market is relatively stable, with a high employment rate and a moderate unemployment rate. Real wage increases, combined with good employment conditions, are expected to support household consumption. However, consumption growth depends on improving household confidence. Tax increases planned next year may boost private consumption towards the end of the year, but overall consumption is expected to decline this year. In 2024, private consumption is forecast to increase, but growth is expected to be below the long-term average.
Latvia: Overcoming challenges
Latvia initially projected a brighter outlook following the COVID-19 pandemic but now predicts a mild economic downturn. Retail sales increased but real net wages decreased. The office space market is expected to grow and rents to stabilise as companies favour smaller, more energy-efficient spaces due to the prevalence of hybrid working arrangements. Housing and land markets saw mixed results, with demand and prices fluctuating throughout the year, influenced by speculation and cautious consumer behaviour.
The Riga real estate market faced fluctuations in apartment prices in 2022. Sales prices fell slightly due to a decrease in demand for apartments in the second half of the year. However, the overall price of apartments increased by 4.5% throughout the year. Prices of new apartments in the city center were higher, ranging from 2,900 to 4,300 EUR per square meter by the end of 2022, but reached highs of 7,000 EUR per square meter in luxury projects and locations. New apartments in the suburbs were sold for between 2,100 and 3,500 EUR per square meter.
The Riga real estate market faced challenges for both developers and buyers in 2022. Various world events, such as the war between Russia and Ukraine, had a severe impact on the market. The war initially halved searches for real estate ads, but in the spring customers returned with renewed interest. The war made construction prices unpredictable and led to an emphasis on compact apartments with functional layouts. However, a shock occurred in autumn 2022 when the Central European Bank raised interest rates, slowing down sales. Despite the rise in prices and interest rates, there is still interest in new projects, especially energy-efficient housing.
The number of apartment sales transactions in Riga in 2022 decreased by about 4% compared to 2021. The war and its consequences, including unpredictable construction prices and inflation, affected demand. The beginning of 2022 showed a stable sales volume, and demand also increased in the summer. However, sales slowed in the third quarter due to rising inflation, increasing prices of construction materials, reduced availability of materials, and the European Central Bank's interest rate hike. Many buyers were unable to obtain loans, which led to a decrease in demand. The market saw an increase in series-type apartments, as owners sold their old units and purchased apartments in new developments.
In 2023, wages in Latvia increased in line with the inflation rate, leading to an increase in purchasing power. However, private consumption struggled due to the high cost of living. Although purchasing power has been gradually increasing since the middle of the year, it is expected to take some time to fully recover.
The purchasing power of Latvian workers is expected to rise again in the second half of 2023. According to Swedbank client data, nominal wages were already rising above the rate of inflation in June. Although high overall price levels may continue to alienate some consumers, a resumption of real wage increases and improved consumer sentiment are expected to support private consumption going forward. Furthermore, investments linked to EU funds are expected to boost the economy.
Conclusion
Despite challenges and caution from market participants, the Baltic countries continue to demonstrate resilience and adaptability in their real estate markets. With a focus on prudent decision-making and a long-term positive outlook, these countries aim to weather economic and geopolitical uncertainties and ensure sustainable growth in their real estate sector.
Estonia and Latvia are Reinvest24's local markets and we have extensive experience and knowledge in these regions, with an impeccable track record of our real estate projects in this sector. We currently have several real estate projects underway in these markets which we are confident will be successfully completed and deliver above-market returns to our investors.