Capital attraction before the real estate market • IR.lv

There is an old truth in the investment world – there is always a shortage of capital or good projects. We are currently in a situation where there is no shortage of quality projects, but capital is needed to implement them. So, while the overall market sentiment may be cautious, this is a good time to raise capital, and future investment opportunities are better than ever.

Interest rates and their effects

When the European Central Bank started raising interest rates in July 2022, the move was still taken with some weight by most. Six months Euribor the rate was comfortably in the negative at the time, and few saw the eventual critical turn. A decade of low borrowing costs had created an illusion of security. When the interest rate reached 2% at the end of 2022, the effect began to be seen. However, the real impact on the Baltic real estate market was fully revealed only a year later, when the demand for new apartments decreased significantly and trading activity decreased significantly, while in which commercial real estate trading activity had declined significantly.

The current situation has changed – interest rates are falling faster than expected before this summer. Although the market will not change overnight, positive dynamics in the real estate sector are clearly visible and the trends are starting to move in a positive direction. Like a surfer, it is important for an investor to “catch the wave” before it peaks. Therefore, this is a great time to invest in the property market – there have not been better opportunities in the last five years.

Buyers’ market and price dynamics

With interest rates rising and expectations of growth in real estate yields, sellers became more cautious. Now, many owners are reluctant to trade at lower price levels as high yield expectations remain strong. Market participants have largely adapted to the new price levels: although properties are currently not as profitable as they were in 2022, buyers have more options to buy higher quality properties at a price suitable

In addition, several developers in the Baltic market have limited investment resources. Many older funds are already fully invested, and the difficult market conditions make it difficult to raise new funds.

Investors: institutional and private investors

Investors in the Baltic market fall into two groups: (i) institutional investors, such as pension funds, life insurance companies and family offices, and (ii) private investors. In general, Baltic institutional investors take a cautious position in the real estate market. Their investment in this asset class has already reached an all-time high, and other pension fund inflows are uncertain. For example, in Estonia Patria for pension reform led by the party restricted the possibilities of pension funds to invest in the local market, which is less liquid, and a similar trend can be seen in Lithuania. In the Lithuanian parliamentary elections, the partial disclosure of pension funds was one of the main issues, creating additional uncertainty and limiting the flow of new investment of pension funds.

At the same time, according to the data of the Bank of Latvia, in 2024 the total amount of deposits in the banking system of Latvia was 22.5 billion euros. Of this amount, the investments of Latvian residents accounted for 11.4 billion euros, which is about 50.7% of the total amount of investments, as well as savings in the second level of pensions in 2024 exceeding 7 billion euros.

At the moment, institutional investors in the Baltic region are choosing a risk mitigation strategy, thus creating more favorable conditions for private investors. Although institutional investors usually see faster market changes, the current situation also brings great benefits to individual investors. At the same time, foreign investors focus on local markets, so the Baltic region is not their main investment objective.

Bank interest and liquidity

The interest of commercial banks in new transactions in the Baltic countries is currently higher than forecasts. The liquidity of the banking sector is stable, current projects are progressing successfully and the number of overdue loans is very low. This is surprising given that Estonia’s economy has experienced nine quarters of recession. However, banks indicate a small number of new projects that would contribute to the growth of the loan portfolio.

In the last six months EFTEN Capital have seen that banks are offering loan terms that are even more favorable than previously requested. There is intense competition between banks, and each new loan project is fought hard, thus creating extremely favorable conditions for real estate financing.

Potential Investments

In the current buyer’s market conditions, the supply is extensive, providing many opportunities to invest in properties with sustainable and long-term growth potential. Although prices are not particularly low, better investment opportunities are available now with a lower level of risk than in the previous five years. EFTEN Capital focus on long-term commercial property investment rather than short-term speculation. Our recent transactions show that it is now possible to purchase new items with favorable leases and improved conditions compared to previous years.

Application for commercial properties

There is an opinion that it is Covid 19 the reduction in demand for commercial properties caused by the new economic crisis may continue. However, if people are doing most everything at home – living, working, ordering food and entertainment through streaming platforms – there is a real risk of a mental health crisis. Indeed, the growing trend of remote working has affected the demand for office space, but much less than initially expected. In the US, where market forces play an important role, companies such as Amazon has already returned to the five-day face-to-face work week. On the other hand, in Europe, where the hybrid working model is widespread, there is also a tendency to return to the face-to-face working model.

Living at the 57th parallel, the future of shopping centers also looks more promising than one might imagine. In smaller cities, modern shopping centers perform not only a shopping function, but also act as cultural centers and gathering places for the local community. In big cities, competition between shopping centers is fierce, but these centers are always visited – especially in the dark winter months, when people go there to spend time with family and friends. On the other hand, the logistics sector remains stable, demand is stable.

The geopolitical situation

Donald Trump’s victory in the US election surprised both bookmakers and market participants and created uncertainty in many industries. The Baltic region is particularly sensitive to such geopolitical upheaval. On the other hand, stock markets in Europe greeted DJT’s victory with moderate optimism: first-half gains STOXX Europe 600 the index rose 2.6%, showing confidence in Trump’s upcoming US policy.

Although the security issues of Europe and the Baltic states are still in the hands of politicians and experts, Trump’s actions have generally been positive for Europe. Under his leadership, defense spending by NATO member states increased, preventing an increase in large-scale military conflict. Also, Trump was one of the first to call on Germany to end its dependence on Russian natural gas and was heavily criticized North Stream project, encouraging Europe to strengthen energy independence.

Summary

Real estate investment trusts are like antiques – they can be both rewarding and challenging. During “seller’s market” periods, when capital is cheap and the market is full of optimism, investors feel pressured to invest faster and often riskier, similar to “bad years” autumn”. But in times of market uncertainty, capital is tight and investors are cautious, investments create a more valuable “good harvest” that yields higher long-term returns.

The current situation is particularly favorable for investment. Global geopolitical uncertainty, especially in the Baltic region, creates investment opportunities. Foreign capital has decreased, the high level is still felt Euribor the impact of rates, and demand for property has decreased, creating a favorable environment for investments that can thrive in volatile conditions.

The author is the company EfTEN capital of Latvia the chairman of the board

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