Startups and big FinTech companies have sprung up in the region at a remarkable rate – Monese, Transferwise and Skype were all founded in Estonia, and it doesn't end there. Many businesses are expanding to the region, and if you’re a real estate investor, here’s why you should consider investing.
Rapidly developing economies
For the fifth year in a row since 2015, the total volume of commercial real estate investment in the Baltics exceeded €1 billion. This illustrates the capacity which the region has for growth, in spite of the difficulties brought by the Covid-19 pandemic.
After a strong year in 2019, all Baltic economies contracted due to the pandemic. In Latvia, GDP decreased by 3.6% last year, in Estonia by 2.9%, and in Lithuania by 1.3%. However, the three Baltic states are all much better-positioned to deal with the economic downturn than they were during the global financial crisis of 2009.
Naturally, as smaller open economies, they are vulnerable to less industrial production and lack of tourism from Covid-19, but sizable stimulus packages from the EU and a quick easing of quarantine measures have somewhat negated the impact of their shrinking GDPs.
While retail was the sector most affected by the pandemic in 2020, it allowed the acceleration of the growing market share of e-commerce, which is another thriving industry in the region.
Burgeoning capital cities
In Tallinn, Estonia, the average salary has almost tripled in the past 12 years, which is a great indicator of the purchasing power of the local population and consequently the demand for quality real estate.
Both Tallinn and cities like Vilnius are seeing mass urbanisation waves – their population has risen in the past five years by 6% and 3%, respectively, indicating an increasing number of potential homebuyers in the coming years.
Another notable aspect is the construction of a high-speed rail link between the Estonian capital Tallinn and Lithuania’s border with Poland, ‘Rail Baltica’, which could lift GDP in each of the three Baltic states by 0.2-0.6%. This will introduce greater freedom of movement between these countries and skyrocket the accessibility of the region for foreign businesses in Central and Western Europe.
Despite large diasporas in each of the Baltic states, they have all adopted approaches to encourage return migration – Estonia has implemented an e-residency program which has kickstarted digital innovation, Lithuania has been using a dedicated program to return diaspora members, and Latvia started a program in 2018 to assist families returning from abroad to settle once more. These policies all help towards maintaining the momentum for the capital cities of the Baltics.
Broad investment offerings
There are many options in terms of property types to choose from in the Baltic states, and even rewards for investment in some cases – Latvia, for example, offers European residence when you invest at least €250,000 in the country’s real estate.
The development in the multi-apartment segment in Vilnius and Tallinn was enormous in 2020, with the highest volumes of construction since 2007. Between 2019-2020, in the cities of Tallinn and Vilnius, developers built 17 and 14 apartments per 1,000 inhabitants respectively. For two-room apartments in Vilnius and Tallinn in 2020, the gross rental yield was 5.2% and 5.6%.
Aside from apartment developments, there is also a healthy amount of office space available in the major cities of the Baltics. In 2019, a total of 290,000 sqm office space was built in Tallinn, Riga and Vilnius, and construction is showing no signs of stopping. A new workforce coming into cities, together with the region's budding startup infrastructure, creates the perfect mix for a diverse real estate market.
Crowdfunding gaining traction
For those looking for an enticing alternative form of investment, the Baltic states are home to some of the biggest crowdfunding platforms in Europe – Profitus, Estateguru, Reinvest24 and Crowdestate.
In terms of the amount of funded projects, Estateguru surpasses any of the platforms in France, Spain, and the UK with 1,861. And to add to their acclaim, their average rental yield is a whopping 11.28%.
There are also other innovative projects earning the spotlight. For example, Lendsecured from Latvia's Riga is a company that allows investment in loans that are backed up by real estate assets, securing a passive income stream as a result.
An old Lithuanian proverb says: ‘it’s difficult to teach the cow how to climb the tree’, and it perfectly fits the approach of the three Baltic countries. Rather than trying to compete with Germany, France, or Spain, they have chosen their own path towards growth, and it has been paying off.
Having suffered from Soviet occupation, they have reversed the past and become impressive economies with global success. Their capital cities, in particular, have become innovative tech hubs with real estate startups and positive legislation to enjoy.
*Jan Večerka is CEO of Brikkapp, a research and analysis platform for real estate crowdfunding