The rise and rise of the ballistic baltics

So what’s all the fuss about?!

Over the last year there has been increasing media hype surrounding the property markets of the three Baltic States – Lithuania, Latvia and Estonia.  At the beginning of 2006, the three countries were tipped as a property investment hotspot by Channel 4’s “A Place in the Sun”, coming in fourth position in their “20 Best Places to Make Money” table.  Estonia, in particular, has received considerable media attention, and with 28% growth in property values over 2005, it topped the 2006 European Housing Review of the Royal Institution of Chartered Surveyors back in March.  The country was back in the headlines in May, after recording the fastest growth in house prices of any country in the world in the first quarter of 2006, according to property specialists Knight Frank.  So what’s all the fuss about, you may be wondering - is this all just a bit too good to be true?

The emergence of the Baltic Tigers

Having gained independence from the Soviet Union at the beginning of the 1990s, the three so-called Baltic States - lying on the Baltic Sea between Finland and Russia – spent the 1990s transforming their former centrally planned economies to a capitalist mode of production.  It wasn’t until 2000, however, that the economies of Lithuania, Latvia and Estonia really took off.  After major economic reform, foreign investment flooded in, as multinational corporations looked to exploit the strategic position of the region between Europe and Russia, as well as the local supply of highly skilled but cheap labour.

This influx of foreign capital created a boom in the region, and with the highest economic growth rates in Europe between 2000 and 2004, the three countries were dubbed “the Baltic Tigers” (echoing the emergence of the Asian Tigers of Singapore, Hong Kong, Taiwan and South Korea over the 1970s and 1980s).  In 2004, GDP grew by 7.8% in Estonia, 8.5% in Latvia and 7% in Lithuania; for the following year, growth accelerated yet further reaching the dizzy heights of 9.8% in Estonia, 10.2% in Latvia and 7.5% in Lithuania.  The three economies now enjoy falling levels of unemployment, low inflation and low budget deficits while international observers such as the IMF and EU have praised sound macroeconomic policies.

Who wants a Soviet house?

As the Baltics’ economies have grown, so too have local employment and salary levels.  And, with an increasingly competitive banking sector offering high loan-to-value mortgage finance at low interest rates, more and more citizens within the three Baltic countries have looked to purchase residential property.  Interest is centred on the three capitals – Vilnius (Lithuania), Riga (Latvia) and Tallinn (Estonia) – but the popular resorts along the Baltic Coast are also subject to much attention.

There is just one significant problem, however: That at present the vast majority of housing stock in these countries consists of high density pre-fabricated residential blocks dating back to the Soviet era.  Not only do these units not suit the tastes of the emerging middle class who aspire to the quality of life of their western counterparts, but, on a more fundamental level, the build quality is often low and these apartments are now mostly in a very dilapidated state.  And in any case, with workers crowding in to the urban centres from the countryside, the current housing supply is not sufficient to meet the spiralling demand…

Enter the foreign property investor

In 2004, Lithuania, Latvia and Estonia were three of the ten countries to join the EU.  Since this time, international property investors have begun to pile in to the Baltic property markets and property prices have really started to take off.  With prices low at present but inflating rapidly as local construction fails to keep pace with the meteoric demand, the Baltics are a place to invest with a view to medium to long-term capital gains, not rental income.

Chris Davidson, Product Manager at E-Quity.com, commented:

“It is not without reason that Goldman Sachs has described the Baltics’ recent economic performance as ‘ballistic’.  The region is already enjoying meteoric rates of economic growth and foreign investment thanks to its accession to the EU.  At present, property prices are still relatively affordable and there is great potential for medium term capital growth.”

So it looks like the Baltic boom isn’t over just yet….