Real Estate Overview

Retail market profile

Key trends – 2009

Retailer performance

• According to official statistics the retail turnover (excl. motor vehicles) has declined by 21.6% in Lithuania during 2009. Unsurprisingly the major drop (over minus 25%) has been registered in the fields of electronics and household equipment as well as leisure services, IT and jewellery goods, while retailers in the segments of food and alcohol, clothing and footwear have suffered the least (in the range of minus 17-18%). The main contributors to the downward shift were pretty low consumer confidence, high unemployment, decreasing wages as well as tight borrowing conditions, in turn, negatively affecting domestic demand and consumption expenditure.

• When analyzing the performance of the specific shopping centres, operating in the major cities of Lithuania, it is important to note, that occupier turnovers have declined by ~30% in 2009. This result has been mainly caused by shrunk of the average shopping basket and declined frequency of consumer shopping. Sales, discounts and various other price cut campaigns have been driving retail performance the most effectively during the year.

• Despite declining retailer sales, footfall of the successful shopping centres has suffered considerably less. Number of visitors remained almost the same or declined by max 10% in the largest schemes of the major cities.

• Any noticeable improvement in household consumption is unlikely in 2010, taking into account double digit unemployment ratio, lack of upswing in earnings and continuation of tight credit conditions. Nonetheless, further contraction in household consumption is expected to be less dramatic, not exceeding 5-7% during the year.

Supply of the shopping centres

• The total lettable shopping centre area amounts to ~770 thous. sq.m or ~230 sq.m per 1 thousand inhabitants. The indicator of shopping centre space per capita exceeds EU27 average (~214 sq.m in Q3, 2009, source: Cushman&Wakefield) by ~16 sq.m or by ~7%.

• ~100 thous sq.m or 2 new shopping centres have been opened in Lithuania in 2009. Being very active in other CEE countries, German ECE has entered Baltic markets by opening of  ~62 thous. sq.m OZAS shopping centre in the capital city Vilnius. The project has been developed together with local partners Rubicon group. Additionally, the largest and the strongest local shopping centre developer Akropolis has opened 37 thous. sq.m shopping centre in the fourth Lithuanian city Siauliai.

• It is important to stress that quite a solid amount of new shopping centre and retail park projects, constituting of roughly ~300 thous. sq.m, has been cancelled or postponed in the whole country. For instance, Akropolis has delayed development of the giant shopping centre scheme (~100 thous. sq.m) in Vilnius, which was scheduled for 2010/11. The other part of the delayed projects mainly comprise of the specialized retail schemes in the suburban parts of the major cities.

• The realistic pipeline of new shopping centres in the horizon of 2 years is quite miserable. Out of the most realistic projects, 22 thous. sq.m Olinda (by Finnish Vicus  and Lithuanian partners InResco) and 13.6 thous. sq.m DomusPro (by Dannish TK Development), both being planned in the Northern outskirts of Vilnius, could be delivered during 2011/12.

• Due to intense competition with shopping centres and open markets, high street situation has become rather complicated not only in smaller cities, but in the capital city as well. High street retail and related shopping traditions have been rather inmature even during the booming period. Consequently, recent shock has forced most of local retailers to refuse flagship stores in the main highstreets and focus on activity in shopping centres. As a result, supply of retail premises in high streets of the major cities has become rather extensive. Most likely, owners of these properties will seek for long term solutions and will eagerly await for entry of new international department store operators.

Demand of the shopping centres

• Newly established companies by Chinese entrepreneurs seemed to be the main demand generators in 2009 in Lithuania. Newly created brand name, cheap Chinese clothes and footwear as well as pretty large store area (1 thous. sq.m and more) are the typical features of this new interesting concept. Pretty actively expanding Chinese entrepreneurs have successfully filled market niche of cheap products and created quite a solid competition to well known local retailers. Certainly, long term performance of such retailers is rather doubtful, but as a temporary decision to fill in vacant shopping centre areas, it was quite successful. The concept has been very enthusiastically met by local customers while shopping centre managers have been able to increase footfall and sustain rent flow.

• The Finnish supermarket chain Prisma and German department store operator Peek&Cloppenburg were the new international retailers introduced to the market during 2009. Both of them are planning further expansion, however presumably it will be less prompt when it was planned before entry.

• The largest both local and international retail chains have revised their expansion strategies and mainly decided to considerably decrease or cancel opening of the new retail stores in 2010. For example, the largest supermarket chain Maxima does not plan to open any new supermarkets in 2010, while the other chains has more moderate expansions plans, compared to announcements few years ago.

• Most of retailers are rather focusing on increasing effectiveness of the currently existing spots than planning expansion. The popular tools of increasing the effectiveness are change of store concept (i.e. outlet or discounter), closing of the least profitable spots (i.e. in the least attractive locations), renegotiating lease prices or decreasing number of employees.

• Setting up of discounter and outlet type clothing and footwear shops gained pace a lot during the last year. For some shopping centres this concept has been the only possible solution in order to keep functioning and compete with stronger position having schemes.

• As a consequence of poor occupier performance, shopping centre managers have been mainly concentrating on sustaining existing tenant mix by using various solutions mainly based on temporary rent discounts, rent free periods or just turnover based fees.  

Vacancies

• The most successful shopping centre schemes such as Akropolis experience quite low vacancy levels, not exceeding ~5%. Obviously, such results have been rather painful to the owners of the shopping centres, which in order to retain occupiers have had to provide solid rent discounts (up to 30-40%).

• Lower quality centres, which had problems even during the booming period, are now experiencing a real challenge with vacancies over 30-40%.

• High street vacancy has increased drastically during the recent year. More than 1/4 of available high street stock are vacant in the main Vilnius high street Gedimino avenue, while situation in the other main cities Kaunas, Klaipeda and Siauliai is even worse with vacancies of over 1/3 of available stock.

Rents and lease conditions

• Base rent level in Lithuanian shopping centres and high streets has declined by ~25-35% in 2009. Most often it was done through giving temporary (6, 12 months) rent discounts or providing possibility to pay only turnover based payments.

• It is also important to spotlight the more flexible lease termination possibilities in Lithuanian shopping centres. Most often both parties are seeking to have possibility to terminate lease agreements with reasonable notification period. Lessors aim to have flexibility to replace weak tenants and increase rent levels when market recovers, while tenants seek to be more secure if their business fail to undergo current recession.

Outlook – 2010/11

• According to economy forecasts and retailer moods, the continuous sales decline of ~5-10% is planned for 2010. Similar tendencies are foreseen in the development of rent curve.

• Vacancy level is expected to remain low in the most successful  shopping centres.

• 2011 is expected to be far more positive due to recovering economy, foreseen already in H2, 2010. Moreover, based on surveys (Oxford economics, Kingsturge “European retail property, 2010”), Baltic region is expected to undergo the most rapid retail sales growth in Europe during the next decade (2010-2020).

• According to the retailer survey made by Re&Solution in the end of 2009, the largest retailers plan to renew expansion in the H2, 2010/ H1, 2011 in the main cities and in the H2, 2011 or later in the smaller regions of the country.

• International department store retailers keep monitoring the market, but are hardly expected to step in earlier than in 2014/2015.

Retail rentals, Q4, 2009

Source: Re&Solution

Major shopping centre projects completed in 2009

Source: Re&Solution

Major lease transactions in 2009

Office market profile (Vilnius)

Key trends – 2009

Office supply

• The modern office stock in Vilnius city amounts to around 340 thous. sq.m. Compared to other European cities, Vilnius as well as other Baltic capitals, remain the least developed in terms of office space per capita. There is ~0.6 sq.m office space per 1 inhabitant in Vilnius, which is 10 times less compared to European average (6 sq.m per capita).

• As a result of highly stressful economy and property market atmosphere as well as stopped financing, hundreds of thousands (over 400 thous.) of office projects have been cancelled or suspended. Due to a fact, no new office projects have been started in 2009 and no new ones are scheduled to be commenced in 2010.

• Over 80 thous. sq.m of new office space has been delivered in Vilnius in 2009. Development and pre-lease of all of the newly delivered projects has been started in 2007/08.  The most significant projects – 23 thous. sq.m Swedbank head office situated in Vilnius CBD, Konstitucijos avenue, 10.5 thous. sq.m North Star developed by one of the largest office property managers in the country MG Valda as well as 8.7 thous. sq.m Alfa business centre by Rubicon group.

• The projects scheduled for 2010 are almost completed, while no other new projects are expected to be started during the year. Out of ~33,000 sq m of new office space which will be supplied this year, the largest ones are the 11,000 sq m Green Hall anchored by Barclay’s bank (IT division) and the 20,000 sq m Beta by the Rubicon group.

Office demand

• Though number of lease transactions has decreased dramatically, Vilnius office“take-up” has exceeded 50 thous. sq.m in 2009 (i.e. 20 thous. sq.m Swedbank head office, 5 thous. sq.m Lithuanian Tax Inspectorate in North Star). Moreover, projects, which are planned to be delivered in Vilnius in 2010 (i.e. Green hall, Beta) are more than 85% pre-leased.

• Most of market activity comprised of renegotiations of existing leases and implementation of various space efficiency solutions. Often existing occupiers are given temporary rent discounts, while new tenants are attracted by providing rent free periods and attractive office cost structure (i.e. fixed or capped common costs, „all inclusive“ rent, etc.).

• Office space efficiency solutions are rather diverse. The bulk of functioning small local enterprises are either (i) moving out from modern office centres in the prime locations to lower grade buildings in the suburban areas or (ii) reducing office space in the same buildings.

• On the other hand, large international enterprises are actively monitoring posibilities to move into new office now and secure the most favorable long term lease conditions. Some of the large enterprises are reallocating headquarters, centralizing back offices or simply taking an advantage of „occupiers“ market and moving out into new locations. Due to a fact, the 2010 “take-up” is expected to be generated by large enterprises – telecommunication companies (i.e. Lithuanian TEO – over 2 thous. sq.m), banks (i.e. Barclays bank – ~4 thous. sq.m in Green Hall) and other, mainly international companies.

Vacancies

• Overall vacancy level has reached approximately 20-25% in Vilnius, out of which the major share in subprime office sector.

• A class office projects located in CBD areas and other prime locations are mainly having 10 – 15% vacancies, while offices, situated in suburban areas, having poor concept and weak management or low technical quality are suffering from 25 -30% vacancies, in some cases – up to 50%.

Rent and lease conditions

• The overall rent level has decreased by 30-35% compared to the peak in 2007-2008 and the major drop occurred in late 2008 and early 2009.

• The market rent for prime office premises in Vilnius CBD is now in the range EUR 120-160/sq.m/year. Top rent for such premises is EUR 170/sq.m/ year. In other central areas the market rent lies in the range EUR 100-120/sq.m/ year, with top rents up to EUR 150/ sq.m/year.

• Average lease period has become shorter as well as lease termination easier (i.e. prior 6 months notification), in such way allowing landlords to readjust lease conditions as soon as market recovers.

Outlook – 2010/11

• New office supply in 2010/11 is mainly expected to be delivered through completion of office buildings, currently under development. No new projects are scheduled to be started in the course of the year.

• The major share of demand is expected to be generated by existing large international enterprises, tending to centralize their office areas or new corporations establishing new offices due to significantly decreased labor force costs in the Baltic area.

• Smaller local companies are not expected to start moving into larger offices earlier than in 2012/13.

• Due to limited new office supply, vacancy levels are expected to stabilize in 2010 and start decreasing in 2011.

• Rents are expected to remain stable in 2010 and increase somewhat in 2011. Instead of lower rents, occupiers are expected to be attracted by rent-free periods and lower service charges as well as common costs.

Office rentals, Q4, 2009

Source: Re&Solution

Major transactions in 2009

*built to suit type project, developed by Swedbank itself

** Barclays will move in 2010

Source: Re&Solution

Major office projects completed in 2009

Source: Re&Solution

Major office property projects in 2010 (projects under development)

Warehouse market profile

Key trends in 2009

• Nearly 650 thous. sq. m of contemporary warehouse and logistics space is calculated in Lithuania. As stated in our previous reports, the solid share of existing warehouse facilities still consist of soviet type unreconstructed or partially renovated warehouses and industrial buildings.

• The new supply in 2009 has been particularly mean, constituting of just around 26 thous. sq.m. The 2 buildings (1 extension of existing project and 1 new warehouse), both situated in Vilnius, have been developed by local developer Ogmios group.  

• No new projects have been started in 2009. All of the major projects, which have been scheduled for 2010/11 have been cancelled or postponed due to changed plans of their end users.

Demand

• During 3 quarters of 2009 freight carriage has declined by 25% in Lithuania. Freight carriage by railways decreased by 27.1%, by roads - 25.4% and even 42.4% - by air transportation. Nonetheless share of transportation sector remains an important component in Lithuanian GDP, making ~10.1% of it (H1, 2009).

• As a consequence of decline in most of related economy sectors, demand for warehouse and logistic facilities has been rather limited in 2009.

• Number of new lease transactions has been rather miserable. On a contrary, there have been many evidences of reduced warehousing areas or terminated lease agreements (i.e. Ermitazas in E67, Panevezys).

• The major last year‘s deals comprise of 5 thous. sq.m Avon lease transaction in Vilnius Airport business park and 21 thous. sq.m Eugesta lease transaction in Vilija business park (local wholesale, distribution and logistic service provider). Both projects belong to one of the largest local developers - Ogmios group.

• Cost reduction has been the main occupiers’ objective recently as they tend to adjust to tight economic conditions. The outcome of these cost cutting measures is further space consolidation as well as the renegotiations of existing leases in order to secure more favorable lease terms.

• In a longer term it is expected that the most solid demand accelerators will be local retail chains (supermarket chains in particularly). Some of them urgently need modernizing their logistic facilities in order to be cost effective.

Vacancies

• Overall vacancy level has reached approximately 20% in major cities of the country. Vacancy has mainly appeared due to reduced warehousing areas by major occupiers or bacruptcies of small logistic providers.

Rent and lease conditions

• Rent prices have decreased by ~20-30%. Current rent level for prime warehouses and logistic centres constitutes of ~38 – 50 EUR/sq.m/year and ~20 – 35 EUR/sq.m/year for lower grade facilities.

Outlook – 2010/11

• High vacancy rates and unfavorable economy situation continue to put strong downward pressure on rents, which are expected to continue decreasing during 2010.

• However, positive economic forecast, especially in the field of increasing exports, might accelerate the return of occupier demand, with take-up levels increasing from the end of the next year/ beginning of 2011. Recovery of export driven sectors allows expecting better times for logistic service providers already in 2010.

• Further development of warehousing market will strongly depend on recovery of local consumption and retail market as far as in a longer term local retail chains will be forced to upgrade their logistic facilities.

Warehouse and logistics property rentals, Q4, 2009

Source: Re&Solution

Major lease transactions in 2009

Source: Re&Solution

Major warehouse and logistic centre projects completed in 2009

Source: Re&Solution

Investment market profile

Key trends - 2009

• A complete silence in the field of property investments in 2009 in Lithuania. Institutional investors turned their back towards the Baltic region due to weak economies, vulnerable occupational market as well as unclear recovery.

• Negative economical news coming out from the Baltics are being judged highly adversely, therefore most of international investors are rather buying in less affected CEE markets or more secure Western European countries. The Baltic economies as well as property markets have been affected heavily, resulting into ~30-50% decreased real estate values. The main reasons for rapid value decline – rent reductions (up to 30%) and rise in yields (up to 300 - 400 bps).

• Institutional investors have been pretty inactive in the course of the year. Most of them are waiting for the first real signs of recovery. However it seems, that better than expected economy results, unfulfilled intensions to devaluate local currencies and positive recovery signals, coming out from Western and Scandinavian markets, have returned some investors into the region at the end of the year, in order to explore the existing opportunities. A good evidence is the announcement of possible sale and lease back of Vilnius Municipality building, which has captured attention of some institutional investors, claiming, that ”a good product with institutional lease and reliable tenant” might be bought already in 2010.

• Meanwhile distressed property buyers have been exploring the market pretty actively in 2009. Despite the fact, any notable transactions of distressed income producing properties have not been concluded. Most of distressed buyers have been expecting to acquire the prime properties, hardly matching criteria of distressed property. Meanwhile properties, having occupational problems or those, held by financially vulnerable owners, have not received proper distressed investors’ interest or proposed acquisition prices have been too aggressive. In most cases, distressed property buyers have been proposing prices, being considerably below amounts of loan exposure and the real current market values.

• As a consequence of the above, it is important to note the future role of credit providers, which are expected to become solid property owners in a short to middle term. Though in many cases, property owners have been strongly supported by banks (rescheduled loan repayment, prolonged term, etc.), however plenty of landlords have not been able to cope with recent economy and property market challenges. Most of the banks have already established specialized property management companies, which will be managing properties taken over from failed developers, producers, retailers, private people and various other real estate owners. Most likely, banks will not dispose the best properties immediately and will rather keep them till market recovers, at the same time putting major efforts to recover the lost value.

• Regardless the increasing institutional interest, owners of the prime properties are rather reluctant to enter into discussions with potential buyers due to belief that potential present price will strongly mismatch their expectations. In major cases there have been temporary rent discounts given to the tenants, thus if proposed acquisition price would be based on double digit yield and current cash flow, it would not reflect its fair value.

• Most of the prime property holders have already renegotiated financing terms with the banks and rent conditions with the occupiers, therefore are ready to wait. Due to the fact, it is hardly possible that the best assets will be sold based on double digit yields.

• Taking into consideration aforesaid issues, we strongly believe, that the best Baltic properties are strongly undervalued currently. Yield, being the single value indicator, does not allow taking into consideration plenty of other important factors, ensuring long term attractiveness of the properties and considerably higher return than in Western countries.  By saying this, we wish to draw one’s attention, that standing on the threshold of economy recovery, Baltic region possess plenty of secure opportunities, being locked in excessively down-graded economy and exaggerated fear of potential risks.

Yields

• It is hard to identify current yield levels due to lack of evidences. To our view, current yield figures are rather speculations, not having any transaction based arguments.

• Expected (asking) yields for prime properties vary from ~8.5% to 10% in office and shopping centre segments and ~11%-12.5% in the field of modern warehouses and logistic centres.

Outlook - 2010/11

• Mainly small acquisitions (up to EUR 10 MIO) are expected in 2010. Most of them will be done by local investors, which have become pretty active since the end of 2009.

• Institutional investors are expected to come back doing their homeworks in the Baltic region this year, but will hardly start buying actively. It is expected that large acquisitions will gain pace in 2011.

• Yields are expected to sustain significant premium (300 - 400 bps) compared to Western European level till the first large transactions are executed. The compression is overseen after the first “ice-breakers”. We believe that in the longer term yield difference between local and Western European level shall not exceed ~200-225 bps and ~100-150 bps upon entrance into the Eurozone (2014/15).

• The availabilities of new debt will remain limited, however banks are expected to be positive in terms of possible investment transactions and agree on transferring existing loans from local owners to international investors.

• It is hardly possible that acquisition of distressed properties will be a significant phenomena this year. Moreover, the best properties, which will be taken over by banks are planned to be passed through recovery process rather than disposed immediately.