Offices, funds, migration and other trends steering the Lithuanian real estate market in light of COVID

Mindaugas Vanagas. Photo Julius Kalinauskas

COVID-19 continues its march – Europe is returning to restrictions and with them come the renewed economic forecasts. Northern European markets, Lithuania amongst them, have experienced a V-shaped economic recovery. Mindaugas Vanagas, founder of the real estate project management company CITUS, board member at the Lithuanian Real Estate Development Association writes.

Economists remain wary and while they aren’t ringing the alarm bells yet, they agree that the previous optimistic forecasts could shift a little. The changes will, of course, impact the real estate market as well. I have highlighted six trends, which I currently see: the first three are dictated by the COVID-19 lockdown, while the remaining ones are already impacting the real estate sector independently of the virus.

Changing office demand

Working from home has taken root in our new reality and it appears that it will not yield its positions in favour of offices for now. While the results of a study performed by Spinter just a year ago showed that only 5% of Lithuanian citizens could freely work from home at any point and far more wanted to do so (an entire 81%), today, the situation is fundamentally different.

In April this year, the same company’s study revealed completely different numbers: 40% of the country’s working-age citizens were working from home and an entire 70% said they would like to continue this after the lockdown as well. Thus, the new reality will dictate its conditions and the demand for offices will change in its aftermath.

One of the trends is a potential return to offices with individual rooms. I have no doubt that the open-plan layout will yield its positions to the individual offices – this reduces the risk of any virus spreading. Such offices are more expensive, requiring 20% to 50% more space. So if this trend continues, the demand for office space will rise.

However, there’s the other side of the coin. Drawing on the experience of imposed remote working, over the months of March-May managers learnt to trust their staff who will likely be allowed to spend some of their time working from home going forward. This could lead to the emergence of open type offices without set work spaces.

What does that look like? These are offices with work spaces, but upon arriving in the morning anyone can take a seat in any free chair, similarly to co-working spaces. In this situation offices will decrease in size because there will no longer be a need to ensure workplaces for all staff at the same time. For example, if a company with 100 employees decides that it can allow all staff to work from home two days a week, the demand for office space could be reduced by up to 40% because instead of 100 workspaces, after making scheduling adjustment and coordinating with staff members, you 60 would be sufficient. This is a clear benefit to companies, allowing for a more effective use of resources and savings.

Based on global practices, I believe that the second trend will take hold in the end.

Home space will expand

For the past few years the dominant trend for sought-after homes has been towards the ever decreasing size, with two-room apartments of 42-49 square meters firmly at the top in terms of demand. Their purpose tends to be more around being a storage space for personal belongings, a place to stay overnight and prepare for work and socialisation. However, this situation has fundamentally changed.

The consequences of the pandemic will also influence the buyers’ expectations for apartments – the need to zone out internal spaces is emerging. Shrinking offices will lead to demand for special working zones at home to be able to maintain focus and participate in virtual meetings with clients and colleagues without being interrupted.

Work is inseparable from rest and so, after creating the first space, we will also seek room for the second – a courtyard, a balcony or a terrace with some plants, perhaps even an entire mini-garden. In the general sense, the home will regain its traditional meaning of a safe environment. In other words, we are returning to the “my home is my castle” way of thinking. Due to this, there will be growth in the square footage of purchased homes in the long term.

In the USA, the commute from and to the office is identified as one of the most exhausting and most important reasons for changing jobs. If there no longer is a need for the daily home-work-home commute, the city centre will lose some relevance and people will seek alternatives closer to nature. Perhaps opportunities will even emerge to move to the periphery and, working a few days in Vilnius, spend the rest of your time in Švenčionys or somewhere similar.

More affordable or less?

This is perhaps the most interesting and pertinent question and there are, of course, many speculations around it. A survey performed by the company Baltijos Tyrimai at the end of March this year revealed that 40% of Lithuanian citizens expect a decline in home prices, while 19% thought prices would rise.

Nevertheless, for now you shouldn’t expect to purchase real estate at lower prices. Several analysts in March and April advised not to buy homes, even cancel any preliminary contracts at the risk of losing the deposit, but then profiting when prices drop. Today they sit in silence with their heads down – instead of falling, prices are in fact rising.

Considering how huge budget deficits are patched up by launching the money printers, most governments and central banks are salvaging economies by reducing interest rates and urgently stimulating consumption. In the short term, this is a completely understandable and justifiable decision. However, when looking at the long term, it appears that what looming in the future is inflation which, among other things, will push the real estate prices up. It is difficult to predict for how long or how high they will rise, but it is inevitable.

The numbers speak volumes: the European Central Bank approved a 3 trillion euro stimulus package and the value of the package allocated to Lithuania reaches 10% of our GDP – 5 billion euro. The same ECB is implementing a 1.35 trillion euro obligation purchase programme, thus opening the way to small borrowing costs and allowing to maintain economic stability. The US Federal Reserve has spent over 2 trillion US dollars within a fairly brief time period, as well as performing a massive obligation purchase programme, which includes high-risk non-investment rating company obligations.

The US, German and Japanese governments have declared fiscal stimulus measures valued at over ten per cent of their annual budgets, while their central banks seek to reassure that negative interest norms will not go away for the coming few years. Such sums of money will definitely encourage some level of inflation and under these conditions one of the most popular means against the devaluation of money is investment in real estate, something many will rush to do, making prices grow.

Alternate financing

Real estate financing in Lithuania is still comparable to running hurdles with potholes on the track. While at the global level, for a time now we have seen negative interest rates, in Lithuania, it is difficult for businesses to make use of its advantages. The main reasons for this phenomenon are the conservative bank policies and insufficient competition. Thus, alternative financing sources are sought, with there being three of them: obligations, loan funds and crowdfunding platforms.

Both crowdfunding platforms with real estate collateral and private loan funds, and the currently rare practice in Lithuania – obligations – could become good financing alternatives in the country. In the USA, around 80% of companies borrow via obligations or other debt securities.

Crowdfunding platforms are still only gaining popularity, there are four in Lithuania at the moment. Considering how in Latvia and Estonia the alternative borrowing market share is an entire 5-6 times greater than in Lithuania, it is likely that this approach will soon become more popular in Lithuania, too. There are five private loan funds in Lithuania now. Although they finance other types of businesses too, the real estate segment makes up a considerable part of projects supported by these funds.

Funds and their benefits

Another trend is that the number of funds taking over real estate is increasing. Funds come in various sizes and purposes, but they specialise in investment and management of specific types of real estate. For example, office lease, logistics and others. This is a global trend and this type of investment will become increasingly common in Lithuania and the benefits it brings are threefold.

Firstly, it is an opportunity for people to invest. You can’t really buy a decent apartment for 10,000 or even 30,000 euro, but you can contribute just a few thousand euro to a real estate fund, allowing you to enjoy the return on investment even when you reach pension age.

Freed up capital and a more professional investment management for businesses

An example: a carwash operator is good at managing their car wash, but they know nothing about its construction, about real estate development and financing. They wish to expand their business and build another three carwashes but realise that it will take several years to accumulate enough capital based on current profits. In this case, the business owner can reach out to a fund, which has the necessary experience and capital for implementing the project. It will construct the new carwashes out of its own capital, while the carwash operator will pay the fund the agreed rent. This model can be applied to various sectors: hotel business, logistics, production and so on.

The benefit to the public sector is that it provides a more effective and rational management of available real estate spaces, as well as the opportunity to implement larger infrastructure projects. For example, in some government departments the average premise space per each staff member can reach 50 square meters because of the decreased staff numbers, but the buildings remain the same. If a ministry leases premises from a fund instead of holding property, it could reduce its rented space as needed. It is likely that a private fund would maintain and manage the same buildings far more effectively.

Also, funds are able to invest in large infrastructure projects for which municipalities may not have enough budget, such as construction of a new bypass for example.

COVID-19 – not the greatest threat to economy

The pandemic is a relatively brief period of disruption. The greatest problem for the economy as well as the real estate market are negative demographic indicators. The most important among them is the decline in number of working-age individuals.

This situation must be remedied by encouraging birth rates. That said, we need solutions right now and so, it is necessary to discuss immigration. We must hold discussions, seek solutions and create conditions for our expatriates to return, as well as for people from foreign countries to come here so they can work and stay.

Therefore I believe that now is the exact time to review Lithuania’s immigration policy and start making decisions on how to reduce the looming lack of young people. There could be several solutions but relying on the little towns feeding the major cities is something we can do no longer – their population pools are emptying. As such, we are left with just one route – encourage by all possible means the return of Lithuanian citizens from abroad and concentrate on immigration from culturally similar countries – Belarus, Ukraine. Even better if we work in both directions.

Lithuania’s demographic situation is the most important factor, which will decide both the progress of our entire economy and the development of the real estate market. If we do not dedicate enough time and effort to resolving it right now, none of the above-mentioned trends will hold any meaning.

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