If the projected cadastral values are accepted, a substantial increase in the total cost of housing must be taken into account; It will also be a blow to homeowners and businesses, it is emphasized by the managers of real estate companies, members of the Latvian Real Estate Association LANIDA.
In July of this year, the project of new cadastral values of real estate developed by the Ministry of Justice and the State Land Service has been submitted for public discussion, which envisages an increase in many sectors of the real estate market, which means a higher real estate tax (RET). The new values must take effect on January 1, 2022.
The project, if approved, will mean fundamental changes in the tax system, which will affect not only the business, they will be felt by the owners of buildings, apartments, tenants. It is necessary to take into account a significant increase in the total cost of housing with all its consequences, emphasizes the chairman of the board of LANIDA and SIA “Latio” Edgars Šīns, asking – is the goal of politicians to make housing more expensive?
Unemployment is unsatisfactory in the current economic climate, and there is a risk that the situation may worsen, with many households, including young families with children, having difficulty servicing all housing-related payments. “In my opinion, first of all, politicians should discuss and implement housing development policy. In the absence of such, it is not the right time to make housing more expensive,” says E. Šīns.
Cadastral values have long been one of the horses of politicians, emphasizes Viktors Savins, head of the real estate fund “EfTEN Capital” in Latvia. Currently, the state wants to take more money from real estate owners with one hand, at the same time both public and state organizations complain that there is no housing development, the housing stock is rapidly becoming obsolete. In addition, Latvia lags behind not only neighboring countries in the development of housing, but also commercial objects.
“It has just been reported that a significant amount of the state budget is earmarked for the development of an economic house construction project. This is an uneconomic act. The state does not have to design cheap housing, it has to do it with developers, but the state has to promote it with taxes. knowing that the consequences of an emergency will be noticeable even after two years, there are completely opposite processes, “he says.
Līga Uzkalne, a member of the board of SIA “Vestabalt”, emphasizes: “RET must be related to the real market value of the property, but seeing the projected cadastral values, it can be said that they are twice, but in some cases even three times higher. taxes must be payable and a factor in the industry. Unfortunately, in this case, the REN will not be able to pay a large proportion of the population or businesses. “
She explains: already before the REN as an expenditure item in Riga for rental houses and office buildings increased, its share increased disproportionately to the rental income. “The current R & D & I policy does not stimulate and support the real estate industry, which is why there are so many unrenovated houses for sale in Riga, because after paying this tax the owners are not able to make the necessary savings to renovate buildings, often even cover all property costs. There are properties in Riga whose real estate tax expenses make up as much as 60% of the total annual rental income. “
“The moment is very inappropriate for such a step. In this not-so-brilliant economic situation, it is difficult for building owners not only to attract new tenants, but also to keep the existing ones,” E. Shin reminds. He is also aware of cases where the owners of individual objects will need three to four months to cover the planned RET payment with the existing rental income. “It would be solid if the state warned of significant changes in time. Then many would have been able to invest elsewhere than in real estate,” he adds.
The approach “bringing the cadastral value closer to the market value” is not viable, according to V. Savins, namely, with the rapid increase of the cadastral value, the market value of the property falls many times faster. Profitability of commercial property in the Baltic capitals ranges from 5-7%. Simply calculate that a 1.5% tax is 25-35% of the total cash flow. In extreme cases, the tax is expected to be up to 50-60% of the total cash flow, he says. Meanwhile, in Estonia, for example, property tax is calculated only on land. “This is the correct approach, because it envisages paying property tax accordingly from the value of land in a particular district – the more expensive the district, the higher the tax. Such an approach also motivates property development. In Latvia – better and more tidy property, lower cash flow, higher For example, the cadastral value of the famous Riga slum at 5 Marijas Street is projected to be about 10 times lower than that of a similar but tidy property 300 meters away. By the way, there is also about the same difference, “says V. Savins. For a clear comparison, he also mentions the Radisson BLU building in the center of Tallinn, where the cadastral value of the property is 1.9 million euros, and it is the most expensive area in Estonia. On the other hand, in Riga, the cadastral value of a building about 10 times less valuable on Blaumaņa Street is estimated at 12 million euros (now – about 4 million euros). Simplifying, the property tax in Latvia is estimated to be up to 100 times higher than in neighboring countries. Such an approach may undermine Latvia’s already weak image in attracting foreign investment.
Cadastral and market value curves can be compared with supply and demand curves – if one goes up sharply, the other downwards. “One of our properties, for which we have” torn “in the courts about the cadastral values, currently has a projected cadastral value of 12 million euros. If we look at the cash flow generated by this object, we will use 50-75% of all rental income after tax. new projected values. It can already be equated with the nationalization of property. And there are many similar cases! ” says V. Savins.
He also urges to look at private houses and apartments in this way. For example, in the new apartment project in Čiekurkrasti, Ādaži municipality, the increase in cadastral value is about 500%. The decline in market value for this reason could be as much as 30-40%.
If the market value of housing falls significantly, banks may require additional collateral for loans, repay the loan or raise rates. Many households are not expected to be able to provide additional collateral or repay loans early.
There is a risk that we will find ourselves in a situation similar to the one that began in 2008. V. Savins admits the sharp decline in the value of real estate, the increase in bank interest payments, additional tax payments, household bankruptcies and all the consequences thereof. “Proponents of the new tax are complaining – local governments will give discounts, there will be other support mechanisms, but all these methods are very questionable and with a high risk of corruption. This is probably the main reason for pushing such a bill.
Even if we assume that there will be the most generous discounts, the 500% increase is huge, “emphasizes the head of EfTEN Capital.
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