“The Growing Trend of Investing in Commercial Real Estate in the Baltics”

Recently, a tendency can be observed in the commercial real estate market in the Baltics that entrepreneurs whose main activity is not related to real estate or investments in it, increasingly choose this investment segment instead of shares, bonds or other alternative investments.

This trend is more actively observed in Estonia, where many very successful start-ups operate, as well as in Lithuania, where several local groups of companies, as well as representatives of international companies, work confidently, but this trend can be considered growing in the Latvian market as well.

Why commercial real estate?

Commercial real estate has the potential to provide a stable return on investment, outperforming other types of investment, especially in the current uncertain economic situation, when the stock and bond markets are subject to frequent fluctuations that can bring significant losses even to an experienced investor. In the commercial real estate market, on the other hand, there is a predictable cash flow depending on the concluded lease agreements, which is often also indexed according to the level of inflation, ensuring against a decrease in the value of money. In addition, depending on the condition, location and quality of maintenance of the real estate, its value can increase significantly over the years, thus ensuring both a stable, long-term cash flow and also a profit, when the property is sold later at a higher price.

If earlier, when investing in real estate, people considered buying apartments more, now commercial property has become a more popular alternative. It is important that commercial property offers several segments such as: offices, logistics centers and other industrial buildings, larger and smaller commercial buildings, hotels, rental houses, etc., so everyone can find a sub-segment they like and understand. Buying an entire building rather than apartments in different locations will certainly be easier to manage, and commercial properties also have longer leases than apartment leases, providing predictable income and long-term stability.

People often think of commercial properties as big, expensive buildings, but that’s not always the case. The price range for commercial properties is very wide. In the Baltic market, we increasingly see affordable properties worth EUR 1-5 million, which is a suitable threshold for learning this investment segment, by purchasing a small office building, rental house or commercial building and understanding the principles of its management. It is important that credit institutions are usually ready to finance up to 60% of the property’s value, therefore the purchase of property may not be fully covered by own capital.

How to invest in commercial real estate?

There are several ways to invest in commercial real estate. The most common and understandable is to buy real estate or to buy a commercial company created for a special purpose, the purpose of which was to manage the specific property and its cash flow. In both scenarios, full control over a specific commercial property is obtained, which the new owner takes over with already concluded lease agreements and existing cash flow.

There are also various more complicated transaction structures such as a joint venture (joint venture) or a structure that allows you to become a shareholder and co-owner of a company, or club deal, which allows several companies or private individuals to buy real estate by joining forces, thereby dividing both potential risks and profits. These two property or capital company acquisition structures will work both on the purchase of existing properties and also on the purchase of new real estate development projects, where there is currently only a plot of land with or without a developed project.

Of course, you can also indirectly invest in commercial real estate by investing in a real estate fund, or buy bonds of such a fund. There are several specialized funds operating in the Baltics, in which it is possible to invest, but it should be noted that all of them will have a minimum investment threshold. This type of investment will be closer to traditional investment in securities or index funds in terms of process and nature.

Not to make it all sound too easy, it should be understood that any investment should be thoroughly researched beforehand, both superficially and in-depth with technical, legal and financial due diligence to identify any potential risks and understand whether the asset is in line with your investment return goals and strategy .