• Newly constructed properties with strong cash flow is a focus of both - International and local investors.

• Due to the shortage of properties, sales-leaseback transactions come into practice

• All the commercial real estate sectors saw a striking compression of yields.

With favourable economic situation and global accumulation of the capital, the demand for investment properties and opportunities is constantly strong. In Lithuania the yields in all real estate segments have gone through strong compression during 2006.

2006 was very successful for locally active and with local origin funds, which were able to get most of the attractive deals just because of the fast decision making process and in-depth knowledge of the local market. As asked yields are very aggressive, most of the investors are looking for upside in opportunities. That from the other side has resulted in owners trying to develop to the limits the properties and get more out of the cash flows. The market has yet to understand that the yields can not compress forever. Strong compression of yields in industrial segment has brought the prices close to office and retail price. Many deals in 2006 in Lithuania were closed at similar levels as in central European market–close to 7 percent. The expectations are high and economic  growth has triggered overly optimistic emotions over the future perspectives.

For the income generating product, most important development has been changes in lease structure, to make cash flow stronger. Solid leases and longer lease periods have been the main issue for the developers and the owners, the market has taken more professional approach to such criterions. Investment into the development opportunities has also been one of the interest points for foreign investors. Shortage of income generating property and compressing yields are gearing this trend.

As the legal background is understandable, political risks minimal, business ethics show strong improvement – more investors are looking to go into the development business.

Forecast for 2007

• Plans are to launch a lot of larger scale projects in 2007 and more deals will be concluded. We expect the yield compression to stabilize as the supply grows and professional developers find confidence to develop more retail and office premises.

• The yield levels are expected to be compressed below 7 percent in office and retail towards the 2008. In the industrial segment the yields are comparable with larger Central European economies and Nordic countries yields. Compression in this segment will be slow.

• The quality of the product is improving and the volume of the market is growing along with it.

 

• Rapid expansion of local an international companies in the market stipulates the demand for high quality office premises

• Demand for B1 office premises close to the main road arteries in regional towns

• Absorption of new office space is more rapid than the economical growth

• Vacancy rates drop close to zero

• New CBD districts in Vilnius are under development 

In 2006, the office markets in Lithuania’s three largest cities, Vilnius, Kaunas, and Klaipeda were marked by different rates of development with Vilnius still maintaining its leading position. The development of the Vilnius office market had been inert for some time but the situation changed markedly during the 2nd half of 2006. The domestic economic development, continuous growth in the number of economic entities, and particularly excellent performance of the service sector resulted in intensive growth in the demand for modern office space in Vilnius, a low vacancy level, and higher rents in those business centres that are attractive to tenants, i. e. a seller’s market.Nevertheless, it is likely that the current situation will gradually begin to change during the year. The domestic economic development, continuous growth in the number of economic entities, and particularly excellent performance of the service sector resulted in intensive growth in the demand for modern office space in Vilnius.
The primary office projects in 2007-2008

Supply

In 2006, the Vilnius market was augmented with 7,900 sq. m of rentable office space and at the end of the year totalled 144,700 sq. m, of which class A office space comprised 55,700 sq. m (38.5 percent of the total modern office market). The formation of the first CBD, the so-called Business Triangle, was virtually completed. Meanwhile the development of a second CBD on the right-hand bank of the River Neris is just gaining momentum. The boundaries of the latter expanded greatly with the beginning of the construction of new commercial properties on former industrial territories at the roundabout intersection near the Hanner Business Centre. With a view to the future, the sleepy districts in the northwestern, northern, and northeastern parts of Vilnius, where class B1 properties are the most likely to appear, could be considered the most attractive places for realising new projects.

Although office space in Klaipeda is developing at a much slower pace, it was still quite active in 2006. The creation of office space next to commercial facilities and residences has become especially popular for risk diversification reasons.

Unlike the other major cities of Vilnius and Klaipeda, the Kaunas office market was rather slow. The assimilation of new office space continued to be very sluggish (for instance, the occupancy of Business Centre 32), which has persuaded the majority of developers to proceed with residential projects. In terms of the number and extent of the planned projects, Vilnius will remain the clear leader countrywide. Up to 97,600 sq. m of rentable office space is expected to be available on the market there in 2007–2008. The growth of the Klaipeda office market in 2007 will primarily be affected by the completion of the construction of the Neapolis business centre (over 8,400 sq. m). Meanwhile further intensive market growth will most of all be influenced by the realisation of Juros Vartai and Memelio Miestas waterfront projects in the medium term.Business development in the regional cities Panevezys and Siauliai will influence constructions of new Office buildings in the near future. Today mostly residentialprojects are being built.
Office rent rates in Lithuania

Demand

Tenants have recently become more fastidious. The demand for professional projects with professional management has increased. After the effect an office has on work efficiency was understood, the technicalqualitative parameters of modern office space have become particularly important. Due to this, even with a seller’s market (like in Vilnius), lower rates for office space offer no guarantee that the space will be leased out soon. In the Kaunas and Klaipeda business centres, small office space (about 50 to 120 sq. m) is still in demand, especially among the local companies. Small offices (50 to 200 sq. m) are also popular with international companies as the headquarters, representative offices, and embassies of large international corporations are normally set up in Vilnius. B1 class properties are very promising as they possess an excellent price-quality ratio, are located next to main transport arteries, and have a well-developed service infrastructure. B1 class properties are very promising as they possess an excellent price-quality ratio, are located next to main transport arteries, and have a welldeveloped service infrastructure.

Large office development potential was determined by the high demand for modern office premises and limited supply in 2006, which resulted in low vacancy rates and high rent prices in the Vilnius office market.

 

• Back offices and call centres will be created in class B1 business centres away from city centres and next to the main transport arteries in well-developed social and business surroundings.

• An increase in the number and size of financially sound local companies as well as the entry of new foreign companies into the market will drive the demand for 500+ sq. m office space upwards (in the Vilnius market).

• In order to diversify the risk, mix-use projects will be especially popular in Kaunas and Klaipeda, which have smaller markets.

 

• Rapid development in 2007-2008 in all main Lithuania’s cities.

• Short construction period based on the experience of advanced European countries.

• Economical growth and wage increase affect higher consumption and drive forward the demand for new retail centers.

• Modern centers have enjoyed zero vacancy rates for the last 3 years.

 

The Lithuanian retail space market is one of the fastest developing markets with more and more investments being made in this real estate segment. In spite of the realisation of many new projects, the retail space market is not yet overfilled. Retail trade is one of the most stably growing sectors in the Lithuanian economy. According to preliminary Lithuanian Department of Statistics data, the turnover of retail food companies in 2000–2005 increased 39.94 percent; retail nonfood companies 74.84 percent; and restaurants and bars even 116 percent. The important thing is that the added value created by companies operating in the market grew 13.1 percent to € 3.3 thou. mln. Last year, exceeding even the most optimistic forecasts. The good perspectives are mostly due to the growing domestic consumption and wage increases.
Main 2006 completions (at least 10,000 sq. m.)

Vilnius still has the largest retail property market with the supply of modern retail space amounting to 341,400 sq. m. BIG shopping centre with a gross area of 28,000 sq. m was the only new shopping centre to open in Vilnius in 2006 (October). In 2007, the largest retail space growth is likely to be in Kaunas with the opening of the Akropolis shopping and entertainment centre (72,000 sq. m). The supply of modern retail space in Vilnius will not exceed 26,000 sq. m, Vilniaus Vartai and Gedimino 9 included. The retail market of Lithuania’s major cities will probably enter a phase of substantial growth beginning in 2008 especially after the Panorama and Ozas shopping centres and the shopping and entertainment centre on the grounds of the former Velga plant are completed in Vilnius; Akropolis develops another shopping centre at the city limits in Kaunas; and the shopping and entertainment centre being developed by Edfermus Projektai at the city limits and the second development phase of the BIG shopping centre are completed in Klaipeda as well as when large Klaipeda projects like Juros Vartai, Memelio Miestas, etc. have been developed.

Demand

Although the retail space market is developing fairly rapidly and most of the floor space in new shopping centres is still leased out before the centre officially opens, some new trends have recently emerged: tenants do not lease retail space in just any shopping centre and are focusing on the shopping centre’s location, accessibility, concept, catchment area, parking facilities, entertainment sector, etc.

The vacancy rate was close to zero in successfully developed shopping centres. The anchor tenants in shopping centres remain the same, i. e. Hypermarkets or supermarkets belonging to the largest food retail chains: VP Market, IKI, Norfa, and RIMI, which generate some 50 percent of the turnover in the largest shopping centres.

In spite of the realisation of many new projects, the retail space market is not yet overfilled. Increasing consumption drives the demand for new retail space and increasing spectrum of new international brands on the market! The rent rates equal to the price level in other CEE and Baltic countries.
Major retail projects (properties > 10,000 sq. m.)
Retail rents for modern shopping centers in CEE Europe and Baltics
Retail rents rates in Lithuania

• The demand for retail space will decline in shopping centres that do not possess any clear concept, do not guarantee a sufficient shopper flow, are situated in  an inconvenient location, etc. Such shopping centres will be forced to reduce their retail space rates and offer more attractive lease conditions in order to minimise vacancies.

• The retail space markets in Lithuania’s major cities will be able to assimilate several super regional malls and power centres.

• Vacancy rates on high streets will rise as a result of the opening of the new super regional malls.

• Under fierce competition, rents in unprofessionallydesigned properties will decline but should remain stable elsewhere.

 

Hotel Market

• The growing number of tourists and hotel guests in Lithuania is reflected by improving hotel occupancy indicators.

• Growth in the popularity of wellness resorts across the country.

• Rapid expansion of international and local hotel chains in the country, followed by new transactions.

• Transparent hotel classification system and VAT reduction to 5 percent from the standard 18 percent.

 

In terms of the number of hotels and the market development rate, Vilnius has remained the leader among Lithuania’s cities. The city is active preparing for 2009 when it will be declared the European cultural capital and is expected to be visited by up to 2 mln. tourists.

 

About 0.86 mln. guests stayed at hotels and guest houses in Lithuania over the first nine months of 2006, i. e. around 18.5 percent more than during the

same period of 2005. The number of foreign guests increased 10.1 percent while the number of EU visitors rose 7.9 percent.

The growing popularity of health resorts is evidenced by the fact that over the first nine months of 2006, 34.4 percent more guests stayed at lodging establishments in Birstonas and 17.7 percent more in Druskininkai compared to the same period of 2005.

The travel and tourism sector in Lithuania is expected to grow 8.9 percent in 2006 and about 6.9 percent year-on-year on average from 2007–2016. The active construction of new conference centres and hotels as well as the expansion of spa services is likely in Lithuania over the next few years. The government plans to support the development of conference tourism in order to have Lithuania become attractive even in the off-season to foreign tourists through the variety of its services and to international companies and organisations through the possibility of holding training courses, conventions, and conferences here. Low-cost airlines Ryanair are still expected to start offering flights not only from Kaunas International Airport but also from other Lithuanian airports, thus leading to an increase in the number of tourists arriving by air.

In 2006, the industrial space market was defined by fast growth and increasingly popular investment sales. Although Vilnius still remains the leader, new regions, e. g. Panevezys and the municipality of Elektrenai, are also becoming logistically attractive. The transport and warehousing sector is keeping pace with the entireeconomy (in the 3rd quarter of 2006, the transport and communication sector grew 8.4 percent), the demand for warehousing, sorting, and assembly services especially rose after the retail indicators jumped.

Nearly 90,000 sq. m of warehousing space was offered in Lithuania’s major cities in 2006. Just like in previous years, Vilnius is in the lead with 73 percent of the total new supply. The rapid increase in Klaipeda’s industrial space in 2006 was the result of the completion of stage 1 of the construction of the Laistu International Trade Centre (being developed by V. Paulius & Associates, UAB). In terms of the planned warehouse floor space, it is one of the largest, published, private industrial projects in both Klaipeda and all of Lithuania (the planned industrial floor space is over 65,000 sq. m).

 

Vilnius and Kaunas industrial projects that entered the market in 2006 were completely leased out. The largest lease deals in 2006 were VP Market’s tenancy in the Dobrovole Logistics Centre (10,000 sq. m of warehouse and 2,500 sq. m of office space) and a forward lease agreement whereby Combifragt Lietuva leased 13,000 sq. m in Kaunas Terminal. Vilnius and Kaunas industrial projects that entered the market in 2006 were completely leased out.

 

Lithuania’s strategic location, well-developed transport network, and access to the Baltic Sea makes it attractive as a 3PL (third-party logistics) country in the Pan-European logistics network. Demand for modern speculative industrial premises is rapidly increasing due to the quality requirements set by the EU. The lack of modern industrial facilities boosts up the rents. However the prices in Lithuania are more competitive than in other Baltic Countries and equal to the level of other Eastern European countries withbalanced supply and demand.

The specifics of the industrial space markets inLithuania’s major cities are becoming clearer:

• Warehouse facilities in Vilnius are designed to serve the local market and primarily target the largest consumer

market.

• Due to its convenient geographical location, distribution hubs are being set up in Kaunas to serve the entire Lithuanian market.

• Klaipeda’s (population 187 000) relatively small market and its greater distance from other Lithuanian cities have resulted in seaport-related companies, which are engaged in creating added value in the logistics chain, being founded in this city.

• Because Panevezys is situated at the mid-point between Vilnius and the Latvian capital of Riga,  companies seeking to serve the Baltic market (Latvia and Lithuania) are being founded there.

 

In the near future, strong retail companies should move their warehouse operations to new facilities, significantly increasing the supply of facilities in old warehouses.
Started and planed industrial projects expected to be completed in 2007
Rent rates in modern industrial facilities in CEE Europe and Baltics
Rent rates in modern industrial premises in Lithuania


Colliers International, CJSC
LT-04215 Vilnius, Lithuania
Tel. +370 5 249 1212
Fax +370 5 249 1211
colliers@colliers.lt
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