● THE BALTIC PROPERTY MARKET
NEWSEC PROPERTY OUTLOOK • AUTUMN 2017
THE BALTIC PROPERTY MARKET CONTINUES TO BE AN ATTRACTIVE INVESTMENT MARKET Estonia There are currently no major economic or political risks that might affect the real estate market negatively in the short term, and the economic outlook in Estonia remains positive. Because there are many new development projects there is a slight risk of oversupply, especially in the retail segment. In 2018, when the new T1 and Porto Franco projects are completed, the GLA of shopping centres in Tallinn will be over 1 m2 per capita. The increased supply may increase vacancy and create downward pressure on rents.
The investment market The investment market in Tallinn is active. During the first half of 2017 the K-Rauta DIY store, VGP Logistics Park and several other large investment properties were sold. The demand for quality properties is strong and this has pushed yields steadily downward. A few transactions with yields below 7% were made and we forecast the trend to continue in the next few years. The most active investors are mainly domestic and Scandinavian property funds.
The office market The office stock in Tallinn increased by 23 500 m2 during the first six months of 2017, a rate lower than the nearly 60 000 m2 of growth during 2016. Vacancies in Class-A buildings are close to zero. The top rent for A+ premises is currently estimated at around EUR 16 to EUR 17.5 per m2 per month and for Class-A, EUR 13.5 to EUR 17 per m2 per month. The average rent for Class-B offices lies between EUR 8 and EUR 12 per m2 per month, although rents in quality buildings with sufficient parking located close to the City Centre are as high as EUR 10 to EUR 13 per m2 per month. In the second half of 2017 the office market is expected to remain stable. Vacancy rates or rents are not expected to change significantly.
In 2018 the expected delivery of new office space will be over 100 000 m2. This will increase vacancies and may put pressure on rent levels – especially for buildings located outside the CBD – until the premises are absorbed. Vacancy rates in the buildings completed in the first half of 2017 are still high, indicating that the supply of Class-B buildings is exceeding the demand.
The retail market The expansion of the Norde Centrum shopping centre will be opened in Tallinn in the second half of 2017, adding 12 000 m2 to the stock. Vacancies there have been close to zero in recent years. Two new shopping centres (T1 and Porto Franco) with a total GLA of 90 000 m2 are currently under construction with plans to open in 2018. The Ülemiste shopping centre is planning an expansion of 13 000 m2 that will be opened in spring 2019. New shopping centres and expansions are focusing on entertainment and restaurants in order to attract more customers. Rent levels have been stable for several years. Rents for anchor tenants lie between EUR 8 and EUR 13 per m2 per month and for other tenants between EUR 10 and EUR 50 per m2 per month. We expect rent levels to remain stable through 2017.
Lithuania Lithuania is among the leaders in Europe in terms of its recent rate of development. Statistics Lithuania reports that the country’s GDP increased by 4.0% in the first half of 2017. Together with a significant year-on-year increase in annual gross wages as well as positive trends in foreign direct investments, inflation and employment, the Lithuanian economy and its property market have good
development prospects in the near future.
The investment market The beginning of 2017 was very active in terms of property transaction volume. Lithuania recorded a volume of more than EUR 215 million in the first half of 2017, which is only 20% less than for the whole year of 2016. Retail and office were the most active sectors and accounted for nearly 85% of all investment volume in the half-year. The logistics segment was also active, taking nearly 10%. In the second half-year only an insignificant increase in the investment volume is expected. Average yields for prime retail and office assets in Vilnius remain around 6.5%, with the most attractive properties being bought at yields up to 50 basis points lower. Secondary properties are producing yields around 7.50%. Local Baltic, Nordic and Eastern European investors are still the key players in Lithuania, but more interest from Western European investors has recently been noticed and this trend is likely to increase in the near future.
The office market By the end of June 2017 the stock of modern office premises in Vilnius was 550 000 m2. During 2017 the total office stock has increased by 14 000 m2 of leasable area and it is expected that between now and 2019 a further 150 000 m2 of new office space will be completed in Vilnius. Developers are still focusing mainly on prime schemes, and more than 70% of the new stock will consist of Class-A offices in the CBD. The latest openings of new office projects have increased office market vacancy rates in Vilnius to an average of 3.0% in Class A properties and 5.3% in Class-B properties. The overall average vacancy