Baltic Investment Market Overview

Transcription

1 Baltic Investment Market Overview 2008 Latvia, Lithuania, Estonia Please consider the environment before printing Our Knowledge is your Property

2 Investment market development It took a while for the Baltic market to gain the interest of investors. The inert development of commercial real estate in the Baltic States restrained the development of investment market. Before 2002 the market size, properties size and properties values were too small to create a critical mass for international investors, while local entrepreneurs were focused on development that provides higher returns. Real estate development market was dominated by local or Baltic scale developers mostly focused on residential development, with some exceptions of international players like Linstow Varner (Norway), Skanska (Sweden), Vicus (Finland), YIT (Finland) and NCC (Sweden) developing commercial real estate. Following the growing economies and fast development of retail chains, a number of Built-to-Suit properties (retail, production and warehouses), supermarkets, and neighborhood shopping centers were developed and these fell in focus of the first international investors on the Baltic States market. However significant lack of commercial properties, especially of classic investment quality, limited the annual volumes of investment transactions to mio EUR for the whole region with an average transaction size of 2-5 mio EUR. Traditionally the largest volumes in the Baltic States were invested in retail segment due to strong belief of investors in growing consumption and purchasing power, as well as successful development of retail chains. Offices became the second most active sector only after more active development of offices started in the Baltic States in -. Transactions in logistics/industrial sector were traditionally active in Lithuania which had an appropriate supply, while Latvia had a significant lack of new industrial supply and therefore almost no transactions in this sector. Investment Activity by Segment, the Baltic States % 90% 80% 70% 60% 50% 40% 30% 20% 0% Office Retail Industrial Hotel months The first to come to the market were relatively small speculative Irish and American private investors, as well as some Scandinavian investors that realized similarities to their own markets. The first institutional investor that established its presence in the Baltic States in 2001 and since then created the largest property portfolios was Baltic Property Trust (Denmark), managing a number of closed-ended funds that operate in Estonia, Latvia and Lithuania. With the Baltic States accession to the European Union in the investors risk perception of the Baltic States economies and real estate markets has been reduced considerably aligning the Baltic markets attractiveness closer to already established Central European markets. Favorable lending conditions, sound legislation, title and corporate registry, clear and transparent taxation, low entrance costs, further development of commercial real estate market and yields still more attractive than in more mature markets escalated the investment volumes of to double of total volumes of with further trend of doubling year-toyear investment volumes up to the end of. The investment volumes were raised by growing transaction number (growing demand), as well as partly driven by increased property values. By the average transaction volume reached mio EUR (compared to 2-5 mio EUR in ), with the exception of large transactions like purchase of SEB Baltic real estate portfolio of 185 mio EUR by Homburg Invest (Canada) and a 145 mio EUR acquisition of DOMINA shopping centre in Riga made by Kanam Grund (Germany). However the investment property market size was still somewhat limited due to lack of qualitative supply (in terms of construction, lease and management quality). The first high volume transactions (Rocca al Mare shopping centre in Tallinn, Galerija Azur shopping centre in Riga) and some transactions which exceeded mio EUR in volume (pool of Alfa, Mols and Dole shopping centers in Riga, SEB Baltic properties portfolio, DOMINA shopping centre in Riga) have broken a stereotype of the Baltic States being too small for institutional investors and proved the ability of three countries to provide a critical mass of investment for major global players. Such investors as ACTA Kapitalforvaltning (Norway), MEINL European Land (Austria), NIAM (Sweden), Heitman (UK), Genesta (Sweden), Homburg Invest (Canada), Kanam Grund (Germany), DEKA (Germany) have realized the potential that the Baltic market provides. Year was close to break 1 billion EUR of investment volume in the Baltic States, however the volumes were corrected by US subprime mortgage crisis, its influence on European markets and limitations on real estate financing implemented by Swedish banks that dominate in the Baltic financial market. As a consequence some transactions were cancelled or put on hold until certainty with availability of financing and cost of capital. 2 C o l l i e r s i n t e r n a t i o n a l

3 Price development The average yield level of 12%- 14% noticed in reflected the overall investors perception of primitive commercial property market and average quality of products. With the development of real estate market and improvement in the quality of supply the average yields in the Baltic States went down and reached 7.5% level for office and retail and 8,5% for industrial in that reasonably reflected the risks and returns in accordance to the status of the Baltic States market among other European markets. Due to fast demand growth and lack of qualitative products, and therefore imbalanced correlation of supply and demand, the decision making speed on investment market provided significant downward pressure on net yields and compressed them to record levels of 6.0% in retail segment, 6.5% in offices and 7.0% in industrial. Some exceptional transactions in - were closed at as low as 5.45% in retail and 6% in offices. The outstanding low yields were mostly based on available upsides provided by possible improvement of cash flows through rising rents, professional costs management, improvements in concepts or additional development. According to Colliers International researches some properties purchased at 12%-14% in were further Investment Volumes and Number of transactions in the Baltic States Investment Volumes, mio EUR sold three-four years later at 6-7% yield level. Following further market development, more qualitative products developed by experienced international developers came on offer to the market and a polarization of pricing between good quality and bad quality products became evident. Investment market 2008 As a backwash of sub-prime crisis the same conservative investment approach as at the end of was applied during The speculative heavy leveraged investors were squeezed from the market and much less % 29% 35% % 65% % 30% 40% 12 70% months % 20 Latvia Lithuania Estonia Number of Transactions Number of Transactions opportunistic institutional investors became the most active players. The buyers dominance has shifted from Scandinavian investors: ACTA (Norway), Verdispar (Norway), Citycon Oyj (Finland), GENESTA (Sweden) etc. to German based equity players (DEKA Immobillien, Kanam Grund, Catella RE AG). With the increased cost of capital the offered yields have shifted by average basis points (bps) comparing to, however owners were not ready to accept significantly changed pricing. So the gap between asked and offered yields hindered the closings of many transactions and the investment Industrial Yield Dynamics Retail Yield Dynamics Office Yield Dynamics 15% 14% 13% 12% 9% 7% 6% 5% 2008f 15% 14% 13% 12% 9% 7% 6% 5% 2008f 15% 14% 13% 12% 9% 7% 6% 5% 2008f Latvia Lithuania Estonia Latvia Lithuania Estonia Latvia Lithuania Estonia B a l t i c I n v e s t m e n t M a r k e t O v e r v i e w

4 Volume of Investments in the Baltic States, by Country of Origin, mio EUR, Volume, mio EUR Germany 410 Norway 310 Denmark 230 Baltics 180 Canada 180 UK 160 Finland USA Sweden 60 Austria Transactions 2008 Name Country Segment GBA Investor "Holliday Inn" & "Ecotel" Lithuania Hotel Triangle Group 9 Maxima stores portfolio Lithuania Retail Verdispar Akropolis SC in Kaunas Lithuania Retail Deka Immobilien JSC Ormina Warehouse Lithuania Industrial Orkla Finans Duntes Biroji Latvia Office Catella Real Estate AG Avers Centrs Latvia Industrial Orkla Finans "Minsk" shopping center Latvia Retail Apex Investments Police building Estonia Office Catella Real Estate AG Marat building Estonia Office Baltic Property Trust Business Building (Mustamae 24) Estonia Retail Mustamäe 24 OÜ Bauhof retail portfolio (4 shops) Estonia Retail Gild Real Estate Magnum Estonia Industrial Catella Real Estate AG Trends 2008 Domination in investment Vendors market Buyers market volumes of 10 months of 2008 were at the level of ca 60% of the same period of with the largest drop in volumes for Latvia (traditionally having largest volumes in the Baltic States). With its more balanced and sustainable economy structure, as well as less emotionally driven market in the past, Lithuania still kept the most of attention of international investors. The volume of 10 months of 2008 even increased comparing to the same period of mainly due to the large volume sale of Akropolis shopping centre in Kaunas city. However, only 25% (by expected investment volume) of investment transactions that were available since January 2008 were actually closed. Top 10 Investors By Investment Volumes Made in in the Baltic States, mio EUR Baltic Property Trust Deka Immobilien Homburg Invest Inc Acta Domination in leasing Landlord s market Tenants market Occupiers behavior Keeping assets Intention/willingness for Sale-Lease-Back Developers behavior Keeping assets Exiting assets Debt financing Conservative Almost absent Yields Compressing->Stabilizing Rising Rents Growing->Stabilizing Decreasing Sales period 3-4 months 9-12 months Due to increasingly tightening financing conditions, more investment products are coming to the market for sale. Businesses are actively considering options to improve their liquidity through Sale-Lease-Back of their Built-to-Suit properties. A majority of developers are trying to exit operating assets in order to raise capital for other developments. Increasing supply of properties for sale and lease provided buyers and tenants certain comfort for negotiating terms of transactions and defined the switch from Vendors / Landlords dominated market to Buyers /Tenants market. Verdispar KanAm Grund Catella Real estate AG Citycon Oyj Dawnay Day Carpathian Meinl European Land Ltd With decreasing number of active players within the investment market, the investors behavior changed significantly and the turning point in the overall investment mood was the end of September-beginning of October, when most of investors realized more ground for worries number of bankruptcies, crashes at stock exchanges (Russia, US, Japan, even Germany), loss of credit of trust among financial institutions and C o l l i e r s i n t e r n a t i o n a l

5 even economies, investors worries, requirements and expectations have changed dramatically even comparing to those 1-2 months ago. A heavy re-pricing has taken place - yields shifted up for already more than 200 bps comparing to and investors expect further decline in values. Besides, experiencing drop in values of acquired assets, sometimes drops in cash flows and absence of expected improvements in cash flows, investors are much more strict and demanding in sense of commercial risks (looking for longer leases, under rented properties and larger discounts, etc.). Forecasts With low liquidity and overall global lack of trust on the financial and investment markets, as well as current slowdown in the economies of the Baltic States the yields are expected to increase sharply to the levels of reflecting increase in average cost of capital, as well as sharpening increase in market and property related risks. The worldwide lack of liquidity sharply stressed the dependence of Baltic economies on external capital. In essence the Baltic real estate market seems to return to a pre-eu era of early 2000 when higher risks reflected in higher yields. Thus until the Baltic economies rebound, its real estate market is expected to provide a double digit investment returns comparable to non-eu zone at the same time being within the European Union. Nevertheless, after over passing the recession the yields are expected to get back to the level of 7,5-, which reasonably reflects the balance of risks and returns according to the Baltic markets specifics. Together with cost of capital and return requirements, the property prices are also affected by expected changes in operating incomes generated by properties. Concerns about decrease of consumer spending and probable increase of unemployment are softening demand Rent Change Forecast Q IV 2008 Q I 2009 Q II 2009 Retail Office 10 30% 0 5% Industrial/Logistics 5 0 5% 0 5% Yields Change Forecast Q IV 2008 Q I 2009 Q II 2009 Prime products (core) 80 bps bps 50 bps 50 bps Non-core products bps bps 50 bps 50 bps - bps for rental space across all sectors of commercial real estate. The economic slowdown puts a downward pressure on rental rates of industrial, office and retail premises in a highly volatile manner. Current contracted rental rates are being revised, and rental rates for vacant premises are being substantially lowered. During this price correction tenant credibility becomes a major concern thus shorter lease terms will be contracted as well as rent rates will be pushed further down. The future of key tenants also remains somewhat uncertain, with the most recent example of partial nationalization of Latvia s second largest bank (the largest local and privately owned bank) Parex Banka. Other dominating banks are considered to be more stable thanks to guarantees assured by Scandinavian governments to subsidiaries of the Scandinavian banks operating in the Baltic countries. A large number of foreign investors have cash to invest and certain time frames for allocating resources and the Baltic markets, experiencing down turn, provide excellent possibilities of getting high immediate returns as well as future prospects of capital appreciation when the market stabilizes. Therefore the investors are expected to switch from the current waiting regime and return to acquisitions, however at much higher return basis and very selective approach. The problems in global financial system revealed the Baltic countries to be relatively simple real estate markets with no further securitization and structured investment vehicles due to primitive Baltic States stock markets. The investment products and transactions structures are expected to become even simpler and more transparent comparing to some transactions made up to However each transaction that will take place on the Baltic market during these turbulent times will be unique in its structure, thus making it difficult to predict a certain joint pattern for the nearest future. B a l t i c I n v e s tr me ae l n t E smt a rt ke ert e vo ive ew r v2 i0e 0w 8

6 Our Knowledge is your Property In five years of the company s growing presence in the Baltic States and Belarus, Colliers has provided consulting services to almost 15 billion EUR worth developments on the commercial real estate market. The Brokerage team has negotiated over sqm 305 thousand square meters of space and land, including the largest single transactions in the office (GE Money and Nordea) and logistics (DHL) segments in the region. The valuation specialists have evaluated over 27 million square meters of space and land, with portfolio evaluations of the leading development and financial companies. The Capital Advisory department has proposed a quarter billion EUR worth properties for investments and sales. Following the success of the performed real estate operations in the Baltics, Colliers International received a prestigious Euromoney Liquid Real Estate Awards 2008 as the best consultant in Latvia and Estonia, and the nomination in the Corporate Real Estate services category in Lithuania. For more detailed information please contact: Laurynas Žilys (Lithuania and Belarus) Associate Director CRE & Capital Advisory Department, Lithuania Colliers International, Lithuania Laisvės av. 3, Vilnius, Lithuania Tel: Mobile: Fax: l.zilys@colliers.lt New address from Valanciaus St. IA/V.Mykolaicio-Putino St. 10A, LT-03105, Vilnius Olga Kozina (Latvia and Estonia) Associate Director Capital Advisory Department, Latvia Colliers International, Baltic States Balasta dambis 1a, Riga, LV-1048, Latvia Tel: Fax: Mobile: O.Kozina@colliers.lv New address from Mukusalas 101, Riga, LV-4, Latvia C o l l i e r s i n t e r n a t i o n a l