The Benefits of Latvian Laws

The Benefits of Latvian Lows

REAL ESTATE CATALOG - NO. 58, APRIL, 2009, TUESDAY, APRIL 14, 2009
By Irina Kislitsyna, Property Consultant, AVC Real Estate

Despite demonstrating an array of negative economic figures in recent months - including in the property market - Latvia is still attracting limited investment in real estate. With low prices, a wide range of properties and a climate in which buyers are able to barter, the Baltic state is also providing opportunities for foreigners still looking for a longterm investment.

Over the last decade Latvia, which has been an EU and NATO member since 2004, experienced the most significant economic growth of the three Baltic States. From 1996 to 2007 GDP increased at around eight percent a year. Development in the real estate market was equally fast and significant. Property price growth was the strongest in Europe: in only two years, from 2004 to 2006, prices more than doubled.

The average price for residential properties in the country rose from 211 euros ($279) per square meter to 529 euros ($700) per square meter over these two years, according to data from the Central Statistics Bureau. In Riga the average price per square meter in the same period rose from 327 euros to 832 euros. The same strength was noticeable in all of the country's regions in the same period, the highest, 180 percent, in central Latvia and the lowest, 90 percent, in the southeast.

A range of factors lies behind these increases. Firstly, a combination of reduced unemployment, from 12 percent in 2002 to 6 percent in 2007, and the availability of low-rate mortgages that did not require an initial deposit stimulated a sharp growth in demand. At the same time, supply did not keep pace, as the rate of construction was much lower.

It was not only real estate prices that rose. Consumer costs also increased thanks to the fast economic growth and the credit policies of banks, which provided consumer credit at rates less than inflation.

This and the consequent increase in consumer demand led inflation to rise and in March 2007 it became clear that the economy was overheated. The government took measures to reduce inflation and speculation on the real estate market by raising taxes, dramatically cutting government spending and introducing limits on obtaining credit - a ten percent deposit and proof of legal income are now required. Nevertheless, the real estate bubble broke, property prices began to drop sharply and overall economic growth slowed.

Similarly, the current global economic downturn has hit inflation. Latvia, once the fastest developing country in the EU, is in the most difficult financial situation of the three Baltic states. GDP decreased by an annualized rate of 10.5 percent in the final quarter of 2008. The country, whose economy is set to contract by 12 percent this year, received a $9.56 billion IMF bailout at the end of 2008, which was supported by Scandinavian countries, whose banks have loaned large sums to the country, the EU and other eastern European nations. Several analysts are currently describing the situation in the country's real estate market as a ‘harsh landing' after a sudden take-off.

Investment

An attractive investment during the years of sharp economic growth, real estate in Latvia is again becoming an appealing opportunity for long-term gains. Following two years of economic difficulties, prices are again affordable. Over the last year prices have fallen, on average, by 40 percent. Despite the possibility that real estate prices in the 64,600-square-kilometer country may decrease further, now is a profitable time to buy. The large quantity of available properties and the ability to barter and push prices even lower provide many with a wide choice. But, again, any purchase needs to be a long-term investment.

In the current climate, demand for rental properties remains. Both investment real estate and properties acquired for personal use can be rented out to take advantage of this situation.

What's more, stable institutional factors make the country an attractive option for Russians. Owning a property in Latvia, an EU member state, allows a foreigner to acquire a year-long Schengen multi-entry visa without needing an invitation. Excepting a few limitations on land purchases, there are no legal restrictions on foreigners buying real estate in the country. Aside from this, 36 percent of the population speaks Russian.

There are also aesthetic attractions. Much of the country's real estate is in picturesque, old towns and Latvia's great sandy beaches, dense green forests, covering 44 percent of the county, and kilometers of lakes, rivers and untouched land can satisfy the most demanding house hunter. Funds have been set aside from local and state budgets for the protection of the country's natural environment and the development of its regions.

However, acquiring real estate in Latvia needs to be seen as a longterm investment. Many of those now purchasing real estate in the country are looking for long-term gains - this includes developers who are buying land. While Russian interest in the market is slightly limited, it includes those looking for properties for long-term personal use.

The Real Estate Market

Although many new high-quality properties were built during the years of economic growth, the basic housing stock remains typical Soviet-era properties. The average area of residential real estate per person in the country is a little over 24 square meters, which is very low by European standards.

As the economic situation in the country has led to a fall in demand for real estate, the choice of properties on the market is large and varied. Apartments tend to dominate in urban locations, while Latvia's coastal and resort towns have a supply of individual houses as well. Small farmsteads with a surrounding plot of land are also available and are relatively common in Latvia. Originally considered a property with agricultural land, usually up to 10 or 15 hectares, farmsteads are now attractive for people from all
walks of life as they provide owners with their own woods or lake.

In 2008 construction of new properties came to an almost complete standstill; however, many projects completed previously remain unsold, as even now they are too expensive in the current situation.

In the private housing segment undeveloped sites for private construction with good infrastructure are enjoying the greatest demand, while the most requested real estate is detached properties of 150 to 200 square meters in areas served by good infrastructure. The fall in prices for private housing and land in 2008 stood at between 30 and 35 percent.

Experts believe that in 2009 the price falls for real estate may continue although the supply of apartments is not going to increase substantially as there are few new properties entering the market. Cheaper rental and purchase deals will dominate the market in the near future. This will allow buyers with limited funds to acquire real estate in the country.

Riga

The capital of Latvia, with its interesting and rich history and culture, is in effect an open-air architectural museum. Often considered one of Europe's most attractive cities, Riga's center is a registered UNESCO World Heritage Site. The city includes architecture ranging from Gothic to Classicism, Baroque and Modern. Located on the banks of the Riga River, it is also the largest Baltic capital with around 700,000 residents.

The city, which during Soviet times was always considered a small slice of Europe not only because of its architecture but also because of its atmosphere, consolidated its status as a respectable European capital after the country gained independence.

The city's real estate can be divided into various forms. Firstly, there are the standard Soviet-era apartments, for which prices start from 40,000 euros ($53,000). The average price of standard housing in Riga has fallen by 56.2 percent since the middle of 2007, according to data from the Central Statistics Bureau. The price per square meter now stands at around 1,000 euros ($1,320). These can then be let out for rent, bringing in between five and six percent of the property price in profits.

Prices for apartments in central Riga start from 2,300 euros per square meter, as does quality housing elsewhere in the city. Undeveloped sites ready for construction in and around the city start from 200 euros per square meter.

The price drop in mass-produced housing in 2008 stood at 39.1 percent while in December alone prices fell by 13.5 percent. Many sellers do not want to put their properties up for sale at low prices and so are taking them off the market and letting them out. Over the last year the supply on the rental market in Riga has grown by 70 percent while the demand has only increased by 30 percent. As a result rental rates have fallen by half. The current average rental payment per month is around 5 to 7 euros per square meter.

Jurmala

Jurmala is on the shores of the Gulf of Riga, 20 kilometers from Riga and is made up of several small settlements, including Majori, Dzintari and Bulduri, that are spread along the coast. The resort is well-known for its 32-kilometer sandy coastline and mineral springs. The beach at Majori has been awarded an EU Blue Flag for the quality of the sea water, security and service. Particularly characteristic of the resort are its old wooden Art Nouveau-style houses with small towers, intricately decorated roofs and verandas with stained-glass windows.

Real estate in Jurmala has always enjoyed a steady demand and been reasonably expensive. At the moment, as across the country, prices are low and the choice is varied. There are apartments in old renovated buildings, new low-level blocks and houses of varying sizes with their own yards. While it is possible to find apartments and houses starting from 1,100 euros ($1,460) per square meter, the average price is between 2,000 and 2,300 euros per square meter. Land can range in price from 60 to 800 euros per square meter, depending on the prestige of the site.

Liepaja

The western Latvian city of Liepaja, in the Kurzeme region, is the country's third largest, with 86,000 residents. First mentioned in records in 1253, the coastal city has an open port all year round. Only 50 kilometers from the Lithuanian border, Liepaja has international air connections and is only a 200-kilometer drive from the capital.

The city has experienced considerable growth in the number of visitors coming each year. While there were only two hotels in Liepaja a couple of years ago, there are now five times more not including the city's hostels and guesthouses.

There has been little major development in the city over the past few years, but it is still possible to acquire apartments,
houses and land more cheaply than in Riga and Jurmala.

Undeveloped sites on the coast around the city are particularly attractive. Its proximity to Lithuania means the city is not far from the well-known Lithuanian resorts of Klaipeda and Palanga. Unlike in Lithuania where the surrounding coast is completely built-up, the Latvian part of this coastal region is made up of untouched, sparsely populated settlements and farming land. The country's legislature originally banned construction around the dunes and coastline and limited the density of construction on farmland of national importance. In this region permission was given for only one house on an area of ten hectares. The area has great potential for development. In total there are 50 kilometers of sandy coastline, forests and meadows where resort developments, hotels and small settlements could be built. And, although development has stopped in the region because of the economic situation, it is currently a very good time to invest in land in this area, as the government is beginning to permit further construction here. The choice is very attractive ranging from sites where a resort complex or hotel could be built to areas for individual development. Prices are also attractive, starting from six euros per square meter.

Specifics of Buying Real Estate in Latvia

Foreigners have the right to buy real estate in Latvia, although restrictions exist in relation to buying land in border or coastal regions as well as farmland and forest. Despite these limitations foreigners are able to rent sites in Latvia for up to 99 years. Shared ownership of property and land is permitted; however, permission from the authorities is needed for some transactions and in some situations only a company can buy land. When applying to the local authorities for permission to acquire land it is important to demonstrate the intended use of the land in relation to the local development plan. This is likely to influence the authorities' response.