Baltic countries have learnt to compete Western-style after turning away from Eastern neighbours
Now that many of the former emerging markets of central Europe are maturing, opportunities for early birds into those markets to score the big returns have dwindled.
Americans, Scandinavians, and increasingly, Germans and Austrians, are turning their attention to other places like the Baltic states of Estonia, Latvia and Lithuania.
US investor Apollo Real Estate Fund with its European partner, the UK’s Pelham Partnership, has invested around $20m in local developer and agent Ober-Haus.
Apollo partner William Benjamin says: “On our equity our returns should be in excess of 25% to 30%. In 1992 our return on capital was almost 100% in Moscow and St Petersburg, but it’s now less than 5% for political and economic reasons.”
Benjamin says that the Baltic states countries were forced to switch their focus away from the east to west.
“We look for selective merging markets that have western politics and economies that need western-type real estate.
“Out of necessity, the Baltics turned their backs on their historical neighbours and have learned how to compete western-style. They are able now to turn back to the east and to Russia and look at their markets in an upside way,” he adds.
Ober-Haus founder and chairman, American-born Paul Oberschneider, came to the Estonian capital Tallinn to check out where his family originated, and stayed after sizing up the local business opportunities.
The property company has assets valued at $39m. They include residential and commercial projects and span the three countries. He is spending more time looking for expansion opportunities in St Petersburg and Poland, with a new hotel project about to be signed up in Krakow.
“As well as hotels, we are looking to create retail centres – not big box with leisure, nor hypermarkets, but small centres catering to the everyday needs of local people,” says Oberschneider.
Ober-Haus has just won a project to develop a piece of land around the passenger port and Estonian capital city of Tallinn. “The land has two faces, one to Scandinavia which would be tourist-oriented and another facing the city itself and the local community. We are looking to put in destination retail and leisure, maybe a hotel and even something civic,” he says. German group ECE was one of the underbidders on the scheme.
Oberschneider says that 3.1m tourists are projected to visit Estonia this year. “If visa requirements for Russians were eased, the growth in tourists could be as much as an additional 1.7m,” he adds.
Part of Oberschneider’s group is invested in three hotels in the Baltics, two in Tallinn and one recently opened in Latvia’s capital Riga. Together with Norway’s sixth largest real estate groups, Industrifinans, Oberschneider founded Schlössle Hotel Group; Industrifinans has a 40% stake in the venture.
According to managing director Einar Skjerven at Industrifinans: “We want to grow the Schlössle group by creating a boutique hotel company containing projects with 50 to 60 rooms in prime locations in the historical city centres of former eastern European countries.”
The group is negotiating on a site in Krakow and Gdansk in Poland, Kaliningrad and St Petersburg in Russia, plus one in Vilnius, Lithuania’s capital.
The commercial arm of the EBRD, Finance Corporation International, has granted loans for the three standing hotels, and will lend more on the planned projects. “It has a good lending rate, and this increases our return on equity, which we estimate will be 25%. Our exit strategy is to sell the hotels or float the company after about five years,” says Skjerven.
Meanwhile, another pointer to overseas investors’ confidence in the region’s growth is evidenced by the presence of UK serviced-office company Regus, which has a centre of 45 suites in Lithuania’s capital Riga. According to regional sales director Leo Curren: “It’s a important gateway to interesting marketplaces, and is a link to the Nordic markets.”
Decade holds promise for Baltic region as growth speeds up
The Baltic region is set to be one of the fastest-growing regions in Europe over this decade. It is well-placed to share in the growth of the Scandinavian countries and to be instrumental in the restoring of the economies of the St Petersburg and the Leningrad region of Russia.
The three Baltic Republics, Estonia, Latvia and Lithuania, are on the waiting list for entry to the EU. Estonia’s currency, the kroon, is tied to the German mark but some senior bankers have floated the idea of the country joining the euro before it becomes an EU member.
The states have very similar economies. Timber, pulp and paper is a leading manufacturing industry for all three countries. Telecommunications, particularly mobile telephony, is expanding, while electronics manufacture is becoming increasingly important. And the banking and financial services sectors are fast consolidating and developing pan-Baltic networks.
Lithuania has a larger agricultural sector than the other two countries, accounting for 10% of GDP compared to 4% and 5% in Estonia and Latvia respectively, according to Cambridge Econometric’s European Economic Research and Advisory Consortium (EERAC).
All three states are becoming closely related to the Scandinavian economies. The tightest relationship is between Finland and Estonia, while Sweden has large investments in Latvia. Denmark and Norway are the leading investors in Lithuania.
Compared with the EU, the republics are relatively poor. Estonia’s per capita GDP is around €3,900, while the figures for Latvia and Lithuania are between €2,700 and €2,900 (EERAC).
The three countries had similar levels of economic development when they attained independence from the Soviet Union in 1991. Estonia is judged to have advanced the most along the market economy route and was accepted as a candidate for EU membership before the other two.
Latvia and Lithuania are still more affected than Estonia by the collapse of demand from Russia since that country’s 1998 crisis. Lithuania, which used to be a major exporter of processed food to Russia, is thought to have had no GDP growth last year, and Latvia’s growth rate was an estimated 1.5%, compared with 3% growth in Estonia.
Public finances are weaker in Lithuania, where the budget deficit is -7% of GDP, compared to -3.8% in Latvia and -3% in Estonia. In all three countries the trade deficit is around 45% of the value of exports.
Retailers play waiting game for logistics sector implementation
While there is great potential for retail development in the republics, international retailers are not represented, and are likely to remain so until a logistics sector to serve them is in place. Investment markets in all sectors are also yet to be established.
The CBD of the Estonian capital Tallinn is located in the old part of the city bordered by the ring road Liivalia Pils and the waterfront. According to local agent Ober-Haus, prime office rents bottomed out at the end of last year. In the best building, the 16,000m2 Uhispank tower, rents have decreased by 20% since its opening in May 1999, with current monthly levels at €15 per m2 a month.
Uhispank also owns an office building at Roosikrantsi 2, totalling 10,000m2 of space. Tenants include Finnair, Estonian Telecom and Landesbank Schleswig-Holstein, and rents are €15 per m2 a month. Rents are unlikely to rise soon: Finnish SRV Properties has completed a 7,500m2 prime office block and this will keep rental values depressed.
Near Viru Square, a new SAS Radisson hotel is being built which will contain 3,000m2 of offices with rents being quoted at €18 per m2. After these spaces are absorbed, the market should stabilise as no new class-A projects are in the pipeline.
Rents for western-standard class-B space have fallen from an average monthly level of €12 to €7 to €10 per m2 a month. Lease lengths across the market are typically for five years.
In Lithuania’s capital Vilnius, new development has resulted in a softening of rents for partially renovated space in old buildings in the centre and the old town. Rents for this type of space are down to between $8-10 per m2 a month.
Last January, Lithuanian investment firm Hanner completed an office tower on Gostauto Street overlooking the Neris river. These new premises have added 2,700m2 of prime space to the market at a rent of $18-20 per m2 a month.
Other new offices set to open this year include a secondary building of 1,500m2 at $9-15 per m2 a month. Meanwhile, Lithuanian investor Invalda is building 5,000m2 on Seimyniskiu Street where rental levels will be $12-15 per m2 a month. Primus Propilius is asking $25-30 per m2 a month for its prime 3,000m2 building on Gedimino and Logailos Streets. Offices are taken on a three-year term, although leases can be for as long as 10 years.
Latvia’s capital Riga lags behind the other two state capitals, partly due to few sites being available for new development and an abundance of architectural monuments.
Most investment has gone into converting existing buildings into western-standard class-B space at rents of $10-16 per m2 a month.
Riga’s first new class-A space, the Valdemara Centre was brought to the market by Sweden’s Skanska last summer. It is thought that the high asking rent of $27 per m2 a month is responsible for it being 60% vacant.
|
Vilnius – office rentals |
||||
|
Address |
m2 |
Rent $/m2/m |
Class |
Date |
|
Gostauto St |
181 |
18 |
A |
Feb |
|
Gostauto St |
140 |
20 |
A |
Feb |
|
Gedimino Ave |
76 |
14 |
B |
Feb |
|
Kalvariju |
99 |
8 |
B |
Jan |
|
Traku |
103 |
7 |
B |
Jan |
|
Juozapaviciaus |
107 |
10 |
B |
Dec |
|
Source: Ober Haus |
||||
|
Tallinn – offices lettings |
|||
|
Address/district |
m2 |
Rent €/m2/m |
Date |
|
Narva Hwy 31, city centre |
500 |
9 |
March |
|
Roosikrantsi 11, city centre |
270 |
15 |
March |
|
Prnu Hwy 139c, city centre |
263 |
10 |
Jan |
|
Narva Hwy 31, city centre |
380 |
9 |
Dec 1999 |
Source: Ober Haus
