The Latvian economy newsletter provides an overview of the real estate market in Latvia. Residential real estate growth is expected to be slow due to high debt levels, low incomes, and weak job growth limiting demand. Commercial property, especially production buildings and warehouses, is seeing stronger growth driven by exporting sectors. While construction declined during the recession, some segments like production facilities are starting to recover as exports increase. Overall, the real estate market recovery remains uneven and demand is weak constrained by economic conditions.

1. The Latvian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Dainis Stikuts No. 5 • 29 June 2011
Real estate market: slow and uneven development
• The construction sector was still declining in annual terms in the first quarter of 2011.
However, it is expected to start recovering slowly, in line with rising economic activity.
Future demand will depend on the entrance of long-term investors, availability of
financing, export growth, and increase in purchasing power of the population, as well
as regional policy.
• Residential real estate has experienced a dramatic fall, and its recovery will be slow –
the heavy credit burden, low incomes, and slow job creation are weighing heavily on
demand growth. Existing stock of already built, but still unsold, real estate will
continue to undermine new residential construction. At the same time, there is good
potential for supply growth of premium-class dwelling in Riga and Jurmala, as
demand in this segment seems to exceed supply.
• Construction of commercial real estate will mainly be driven by exporting sectors,
especially production buildings and warehouses. Demand for office, as well as for
wholesale and retail trade, buildings is still weak and most likely will remain so in the
coming years.
The construction sector constituted 4.5% of GDP in advanced EU countries resulted in exaggerated
2010 (down from 7-7.5% in 2006-2008). optimism about future incomes and easily available
Construction is a good indicator of economic credit. Excessive optimism led to a real estate
development, especially investment activity. bubble. Prices grew to inflated levels – in the peak
Construction of commercial and infrastructure of May 2007, 4.5 monthly average net wages were
objects has a larger influence on economic potential necessary to buy 1 square meter of a standard
than residential real estate construction, as the blockhouse apartment in Riga. After the recession
former increases production capacity. Amongst the corrected real estate prices and improved housing
sectors of the economy, construction suffered most affordability, apartment prices in Riga declined by
during the recession in 2008-2009 – by the first about 70%, returning to the 2005 level. Housing
quarter of 2011, value added had fallen by 61% affordability has improved to 1.3 monthly average
from the peak in the second quarter of 2008, and net wages per 1 square meter, but demand remains
employment had decreased by 80,000 persons limited.
(which is almost half of those employed in the
sector in late 2007-early 2008). Real estate prices bottomed out in autumn 2009;
there were several reasons behind this. The
Although construction was still declining in the first general economic situation started to improve
quarter of this year, the number of building permits slowly – global uncertainty decreased, consumer
started to rise in some segments. Future growth of confidence and unemployment expectations in
demand will depend on several factors – the Latvia stabilised, and the recession ended in the
entrance of long-term investors, availability of fourth quarter of 2009. Those inhabitants and
financing, export growth, and the business companies who had liquid assets exploited the
environment (including improvement of legislature), opportunity to buy property for low prices, thus
as well as rise in incomes and purchasing power, contributing to the rebound in prices. As a result,
i.e., employment and wage growth. real estate prices started to recover quite rapidly
(growing by more than 2% in some months). Banks
Residential real estate market – slow and also began to get involved more actively, e.g., by
regionally uneven growth creating separate entities (daughter companies)
dealing with real estate, which also added to price
Following EU accession, the decreased risk stabilisation. Apartment prices in Riga increased by
assessment and income convergence with 17% in a year’s time. However, activity in the
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46 8 5859 1000.
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46 8 5859 7720.
Mārtiņš Kazāks, +371 6744 5859. Lija Strašuna, +371 6744 5875. Dainis Stikuts, +371 6744 5844.

2. The Latvian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 5 • 29 June 2011
market remains very low and demand is weak; most Household loans, LVL m
transactions occur in cash (mortgages are issued
only in 20% of cases). Consequently, real estate 7000 200
prices have remained by and large flat since July 6000
2010. 160
5000
Residential real estate market in Riga 4000 120
2000 6 3000 80
5 2000
1500 40
4 1000
1000 3 0 0
Jan.05 Jan.07 Jan.09 Jan.11
2
500 Mortgages Other Total, % of wage bill (rs)
1 Source: BoL, CSBL
0 0
2003 2005 2007 2009 2011 Regional aspects are also important when one is
Nr. of transactions assessing demand for dwellings – not only
Source: CSBL,
domestic and external migration, but also
Average price, EUR/m2 Land register
decreasing population due to low fertility rates. 2
Affordability, net wage per 1 m2 (rs) Swedbank
With population falling, housing supply per
inhabitant will grow as long as the existing housing
Demand for real estate is weak, as overall incomes stock is maintained. The biggest opportunities are
remain low. In the first quarter of 2011, just 16% of for Riga and its surroundings. Riga centre and
households had mortgages, constituting about 80% Jurmala are interesting for foreign investors, while
of all household loans. However, the range of Riga’s suburbs have attracted inhabitants from Riga
potential clients is relatively limited – only 28% of and other Latvian regions. Riga is a regional centre
employed earn more than LVL 500 (EUR 711) per of economic activity – it is attractive for inhabitants
month, and only 6% more than LVL 1,000 (EUR in other Latvian regions both in terms of higher
1,423). 1 In addition, a relatively large share of these incomes (the average net wage is about one-third
wealthier inhabitants has already obtained higher than in other regions) and lower
dwellings, either paying cash or taking mortgages. unemployment (in May 2011, the registered
Those who already took mortgages most likely will unemployment rate was 9.3% in Riga vs. 13.2% in
not be able to undertake new loans due to the the country overall).
already heavy debt burden – household credit stock
accounted for 164% of the annual wage bill in early Change in population, 2000-2010
2011. Consumers’ willingness to take loans is
Rīga
undermined by caution, following the recession. Pierīga
Consequently, while employment growth is slow Vidzeme
and the rise in real wages nearly “eaten up” by Kurzeme
inflation, domestic demand for new dwellings will be Zemgale
Latgale
weak. Daugavpils
Jelgava
Jēkabpils
Jūrmala
Liepāja
Rēzekne
Valmiera
Ventspils
-60 -40 -20 0 20 40 -15 0 15
thousands percent
Source: CSBL
1
These are official data – most likely the number of inhabitants
2
with such incomes is higher (due to tax evasion, as in many For more details, see the Swedbank monthly newsletter,
cases a part of incomes is paid in “envelopes”). However, as “Demographics – can one see a forest behind the trees?”
mortgages are issued to those with official incomes, credit http://www.swedbank.lv/eng/docs/materiali.php?nmid=0&naid
availability is still constrained for the others. =6
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3. The Latvian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 5 • 29 June 2011
However, increasing demand will not imply Number of building permits
immediate construction growth. Since 2009, new
housing construction growth has been minute, 200
about five times smaller than in 2008. The number
160
of issued building permits stabilised last year, but
this is not likely to result in rapid construction 120
growth. Existing housing stock (built in boom years)
is still large. It is expected that approximately five 80
years will be needed to sell out this stock. The
situation is not so straightforward, though – demand 40
for housing depends on location and quality. For
0
instance, the supply of premium-class housing in
Riga and Jurmala is still limited, and prices are 1Q03 1Q05 1Q07 1Q09 1Q1
sufficiently high to make new construction Production buildings and warehouses
profitable. Therefore, there is potential for new Wholesale and retail build. (incl. petrol stations)
supply in this segment. Offices
Source:CSBL
Existing housing stock and new construction, 2011- The outlook for office construction remains
2016
favourable – A-(prime) and B-class office space per
7000 inhabitant in Riga is twice as small as in Tallinn and
three times as small as in Warsaw. The supply of
6000
prime-class offices remains inadequate. However,
5000 occupancy rates in Riga are still low (72% in 2010,
4000 down from about 90% in 2005-2008); this is the
3000 main reason why demand for new office
construction will remain weak in the near future.
2000 Still, owing to the growing economy, demand for
1000 new and better-quality office spaces will rise
0 gradually.
2011 2012 2013 2014 2015 2016
Sold housing Source: Prime office rent and space (vacancy level), and GDP
Swedbank growth, %
New construction
Existing stock, beginning of the year forecasts 30 20
20
Commercial property – stronger growth in 15
export-related sectors 10
10
The commercial property market is very fragmented 0
– one can distinguish among production building,
5
office, and trade building segments. Commercial -10
property construction also declined in 2008-2009,
together with economic activity. With the recovery -20 0
of exports, demand for production capacities and, 2004 2005 2006 2007 2008 2009 2010
thus, investments is increasing. The number of Real GDP growth
issued building permits for production buildings and Vacancy level in Riga Source: C SBL,
warehouses increased by 167% in annual terms in Riga prime rent, €/m2 (rs) Swedbank
the first quarter of 2011, reflecting the rise in
demand, especially in exporting sectors. Riga and Demand for construction of trade buildings is also
surroundings (where approximately two-thirds of the likely to remain weak. Before the crash, the space
country’s total value added is produced), as well as of shopping centres increased rapidly, and its ratio
the other large cities with more concentrated per inhabitant reached or even exceeded levels of
resources and developed infrastructure, are places other Central and Eastern European (CEE)
in which one would naturally expect stronger countries. Consequently, vacant trade space is still
demand for construction. sufficient for those retailers and wholesalers who
entered the market in 2009-2010.
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4. The Latvian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
No. 5 • 29 June 2011
Space of shopping centres in CEE capital cities, 2Q A new player can enter the market in two ways –
2010 either by buying an existing property (implying a
redistribution in the market, but without much
1076 influence on new construction), or by starting with a
1 200 914 completely new concept and building, e.g., outlet-
824 840
1 000 790 type shopping centres outside the city. Taking into
680 account the high concentration of the retailers’
800 550 market and increased profit margins, there is an
600 450 opportunity for a new player to enter the market.
300 However, the low purchasing power of the
400 population is still a challenge.
170 150
200
0
PL CZ HU RO LV LT EE HR SL BG SR
Thousand sq.m. Sq.m. per 1000 inhabitants
Source: CB Richard Elis
Dainis Stikuts
Swedbank
Economic Research Department
Swedbank AB. SE-105 34 Stockholm. Swedbank’s monthly newsletter is published as a service to our customers. We believe that
we have used reliable sources and methods in the preparation of the analyses reported in
Legally responsible publisher this publication. However, we cannot guarantee the accuracy or completeness of the report
Cecilia Hermansson, +46 8 5859 7720 and cannot be held responsible for any error or omission in the underlying material or its
use. Readers are encouraged to base any (investment) decisions on other material as well.
Neither Swedbank nor its employees may be held responsible for losses or damages,
Martiņš Kazāks, +371 6744 5859 direct or indirect, owing to any errors or omissions in Swedbank’s monthly newsletter.
Dainis Stikuts, +371 6744 5844
Lija Strašuna, +371 6744 5875
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