11th July 2013
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How the post-Soviet states are shaping up
As the Soviet Union crumbled at the end of 1991, and Communism fell apart, it was obvious that there would be plenty of fallout in the coming years. Countries were created almost overnight and with them a wealth of opportunities. Some of these new states coped slightly better than others it has to be said, while some are still in absolute confusion and uproar. As yet another former soviet country hits the headlines and Russia's political reach in the region is, once again, questioned, maybe now is a good time to reflect on the things that might have been and where it might all go.
There are fifteen post-soviet states, all told, and they can be split into the following groupings: the Baltic States of Estonia, Latvia and Lithuania; Kazakhstan, Kyrgyzstan. Tajikistan, Turkmenistan and Uzbekistan in Central Asia; Armenia, Azerbaijan and Georgia in the Caucasus; the Eastern European States of Belarus, Moldova and Ukraine; Russia.
In the first part of this series we'll look at the Baltic States as these are, by far, the countries that have dealt with the break-up of the Soviet Union with the most confidence. As with much of the former Soviet Union the rest represent a game of two halves with some countries having reason to be hopeful while others struggle to attract inward investment and a new property market. All of these will be looked at in more depth in the coming months.
A little bit of history
First of all though, let's have a very brief history lesson. The Soviet Union's collapse into independent nations began early in 1985. After years of Soviet military build up at the expense of domestic development, economic growth was at a standstill. Failed attempts at reform, a stagnant economy and war in Afghanistan led to a general feeling of discontent, especially in the Baltic republics and Eastern Europe. Greater political and social freedoms, instituted by the last Soviet leader, Mikhail Gorbachev, created an atmosphere of open criticism of the Moscow regime. Several Soviet Socialist Republics began resisting central control, and increasing democratization led to a weakening of the central government. The USSR's trade gap progressively emptied the union coffers, leading to eventual bankruptcy. The Soviet Union finally collapsed in 1991 when Boris Yeltsin seized power in the aftermath of a failed coup that had attempted to topple reform-minded Gorbachev.
All of which left several brand new countries that were singularly unprepared for independence. There were few clearly defined national policies, almost no concept of the challenges that faced them and, as such, they found themselves in major difficulties when foreign investors came knocking. At least this was true of the smaller countries, and some are still coming to terms with the upheaval of 1991, but it was less true for the Baltic States. Estonia, Latvia and Lithuania have adapted well to their newly-found independence and have been thriving.
How are they doing now?
The states joined the EU in 2004 and have seen their tourism industries take off as wealthy Westerners have discovered their impressive Baroque capital cities of Tallinn, Riga and Vilnius respectively, and several attractive resorts on the warm in summer (very cold in winter) Baltic coast.
Little known to most Westerners prior to the fall of Communism, the Baltic States each have a proud history dating back several centuries. Their capital cities are listed as UNESCO World Heritage sites: Vilnius is a maze of Gothic, Renaissance and Baroque architecture, and Riga has sublime Art Nouveau buildings all of which escaped the worst of the Soviet era's ravages and philistinism.
Today, the cities' attractive medieval centres are the main tourism drivers that are helping to boost their respective economies, making them amongst Europe's fastest growing. In the last 12 months year-on-year, each nation's GDP per capita increased by the greatest margin amongst the EU 25 member nations, recording an average of almost 10% growth- the EU25 increase was only 1.6% by comparison.
A chief factor behind the countries' growing prosperity has been the opening up of their property markets to foreign buyers. The increased demand since EU accession has seen house prices rocket.
The large scale re-development plans for Riga has provided a great boost to the city as a whole, with increased foreign business and trade, as well as property investment. Since major plans for the re-development of Riga were launched last winter, certain areas are attracting more interest from investors looking for solid, long-term growth. A new bridge is being built across the river in Riga, and the old port area is being completely re-developed, similar to parts of Liverpool or the London docklands.
Tallinn, in Estonia, is arguably the most attractive of the three capital cities thanks to its beautiful medieval quarter that has seen it heralded as "the new Prague" and property prices are a little cheaper than in Riga per square metre. A renovated and modernised one-bedroom apartment in Tallinn's old town will cost in the region of £60,000 and a modern apartment on the city outskirts can be picked up for around only £35,000, up from £26,000 in just over 12 months.
As EU member states there are no restrictions on foreigners owning property in Estonia, Latvia and Lithuania.
The Baltics' buying process
The buying process is a relatively straightforward one but you should ensure that you engage the services of an independent English-speaking solicitor who will look after your interests and not the seller's. Do not think that the notary will look after your interests, he will not. He is a government employee and his role is to register the sale transaction, not to offer advice or adjudicate on legal matters between the buyer and seller.
When you have found a property that you are interested in buying, as you would in the UK, you should make an offer to purchase through an agent. Depending upon whether the property is new or a resale you may be asked to pay a reservation fee of £1,000 that forms part of the agent's commission. The differences between new-build and re-sale properties are slightly surprising to the Western property buyer and they are well worth pointing out. New-build property in the Baltic States is not delivered as it is in the UK - it is normally sold in what is called a 'grey finished state'. This means that you simply inherit an empty shell, with bare concrete floors and walls that haven't even been plastered.
Occasionally you may purchase a property that's in a 'white finished state', and while this will have plastered walls, flooring and doors, you will still need to install both a bathroom and a kitchen as well as decorate the property. Although labour is much cheaper in the Baltics, as a rule of thumb you will need to budget around €10,000 (approx. £8,800) to get your property into a habitable state.
Re-sale homes are likely to be more expensive than their new-build counterparts. This is because they tend to be situated nearer the old city centres which command the premium prices. They also don't come with the two-year guarantee that you receive when you purchase a new-build.
According to the Royal Institute of Chartered Surveyors, Estonia enjoyed the largest gains in property prices anywhere in Europe in the mid-2000s. It is regarded as the country at the very head of the charge of the Baltic Tigers and unemployment has been falling, GDP has increased and the Estonians have become much more affluent compared to when they were under a Communist regime. The nation has adopted a flat tax rate, welcomed strong inward foreign direct investment, established strong trading ties with the likes of Sweden and Finland and grown rapidly as a result. Their access to mortgages and loans has matured so that according to the European Mortgage Federation, the mortgage market in Estonia has grown by an impressive 80% and more Estonians own their own home than ever before. Another positive angle to examine is that travel and tourism traffic in Estonia is on the increase; the World Travel and Tourism Council estimate that GDP contributions from this side of the nation's economy could top 16% next year and that the travel and tourism sector could grow by 6.7% per year for the next nine years. All in all the WTTC expect Estonia to reach position 14 in the world in terms of its long term growth potential.
Notes of caution are being sounded about Estonia, however. The Bank of Estonia reports that the economic growth rate has peaked and is likely to slow. This goes hand-in-hand with a banking sector that has suddenly become nervous about its real estate loan activity and record levels of personal debt amongst the population. There are likely to be problems brought about by higher interest rates and these may be exasperated by the fact that few Estonians have any experience with long term loans. In any case the domestic property market is starting to cool somewhat and this is starting to have an impact on the construction industry. Land is more expensive than it was, as is labour and the cost of materials. Amberlamb reckon that What all this means is that the entire investment property landscape in Estonia has changed and a great deal of short term property market potential for speculators seeking instant returns has gone from the real estate marketplace in Estonia - but because the nation continues to be an affluent and economically successful country attracting foreign direct investment in abundance and which has a balanced state budget and a flourishing modern market economy, there is continued and sustainable local and expatriate demand for housing - both to buy and to rent - and it is this demand that underpins the fact that there are property investment opportunities still to be had in Estonia.
Estonia's near neighbour Latvia has been described as "the small, flat and largely boggy meat in the sandwich between its Baltic neighbours." This fails to do justice to this small but attraction-packed little nation. Riga, the capital, is a vibrant coastal capital and the countryside has many photogenic castles, music festivals and scenic river valleys. In 2005 Latvia found itself at the centre of a property frenzy, prices had increased some 31% in the space of a couple of years and foreign direct investment was being attracted. Companies such as Microsoft, Sony, Procter & Gamble had offices in the capital and massive EU funding was being pumped into the country. Tourists have also been lured by the beauty of Riga and Latvia can proudly call itself one of the Baltic success stories.
Having joined the EU back in 2004, and now well on track to join the Euro zone in the near future, Latvia has started to transform its economy from the one paying the lowest wages in Europe to a country on track for one of the top five largest wage increases in the world. The Latvian government were sufficiently savvy when the Soviet Union broke up that they have established a sustainable and steady template for long term economic development and success. Even this, however, is being undermined by the effects of inflation that all of these new economies are running up against. For a start, construction costs in Latvia rose by a startling 30% in just the first quarter of 2007 alone. Wages shot up by almost 53%, materials went up by over 18% and the cost of building residential real estate in Latvia rose by 29.7% year-on-year to March 2007.
For an economy like Latvia's these rises make the construction industry very vulnerable indeed. Despite this there were still rumours that the government was about to give the go ahead for three huge local building projects with the potential result of further stress on an already stressed market with a likely result of higher prices. Even with all of this in mind, Amberlamb can still see some positives; The demand for commercial and residential property is growing as more foreign businesses are establishing new bases in Latvia and international and local employees flock mainly to the commercial hub of Latvia, namely Riga. Property investment opportunity in the capital city exists in abundance and those looking for the emerging market within the emerging market are now examining real estate investment opportunities along the coast and inland. Latvia has massive room for growth and the country is doing everything it can to achieve its long term, sustainable economic goals thus creating a healthy long term opportunity for overseas property buyers and investors. Be warned though, property prices can't keep going up.
As Riga is the capital of Latvia it comes as no surprise to learn that there are plenty of properties for sale in the city. Not all of them are a bargain though, even in these tough times.
Completing the trio of Baltic State success stories is Lithuania. Lithuania became one of Europe's fastest growing economies after an economic recession in 1999. Average annual GDP growth from 2000 to 2006 was 7.3%, including an impressive 10.3% economic expansion in 2003. After growing by more than 7% from 2004 to 2006, GDP growth reached 8.8% in 2007.
Developments in the mortgage market added fuel to the house price boom. Although relatively small, the mortgage market has rapidly expanded. Mortgage debt rose from a mere 1.1% of GDP in 2000 to 12.6% in 2006. As a response to the increase in demand, the pace of housing construction has accelerated. Between 1998 and 2003, less than 5,000 dwellings were completed annually. Completions rose to 6,700 yearly from 2004 to 2006. In 2007, 9,286 dwellings were completed. A massive house price boom in Lithuania occurred between 2003 and 2006. The average price of old apartments in Central Vilnius skyrocketed, with a 28% increase year-on-year in 2003, 29% in 2004, 45% in 2005 and a 56% rise in 2006. Average prices rose from LTL3,200 (approx. £820) in 2002 to LTL12,000 (approx. £3,000) at end-2006, a massive 275% increase. The average price of newly-constructed one-bedroom apartments in central Vilnius rose 162% from 2002 to end-2006. This increase was also seen, to a lesser extent, in other parts of the country but we're still not really talking about spending a fortune to buy a property in this beautiful country.
Despite all of this increase in activity, Lithuania is still viewed by many as a distant outpost; tourism is still not a huge part of the economy but this will almost certainly change in the coming years as the profile of the country increases. In 2009 for example Vilnius, Lithuania's capital, is due to be the European Capital of Culture. This amazing profile-raising event is likely to ensure that house prices soar and keen investors would do well to beat the rush, thus profiting from this likely boom. In 2011, Lithuania will also be hosting the European Men's Basketball Championship which is likely to raise the profile of this country further still. Culturally, Lithuania is an interesting mix of western and eastern cultures, with the populated cities shifting more towards western cultures and the more remote parts of Lithuania retaining the eastern European rural charm.
After the enormous increases from 2003 to 2006, Lithuania's residential property prices peaked in early 2007. Since then, prices have been stagnant, though adjusted for inflation prices are down by 10% from their peak. Doubtless this stagnation will be reversed with a higher profile.
As with the other Baltic States, inflation is an increasing problem. Annual inflation has been accelerating since 2004, reaching 8.2% in 2007, the highest level in a decade. From 1999 to 2003, prices barely increased, with average annual inflation of only 0.38%. An economic slowdown is being felt and this is not being helped by the worldwide situation. It is feared that inflation may reach 10% by the end of 2008. The level of inflation is well above the Maastricht Treaty's criteria for countries applying to adopt the euro.
A quick search of the internet doesn't throw up an enormous amount of property available in Lithuania and certainly none of it is architecturally interesting or old. However, there are plenty of off-plan properties to be had.
Foreigners are able to purchase property freely in Lithuania, which should ensure that the property market remains buoyant for years to come. However, investors should be aware that land cannot be purchased in Lithuania without the prior approval of the local municipality.
There is no denying the potential for investing in property in Lithuania. It is a good idea for anyone looking for impressive capital growth and strong long-term rental yields. Many experts were predicting that Lithuania was likely to become one of the next big property hotspots in Europe and the advice was get in there quick, before the crowds beat you to it! but that advice might not be quite so useful now.
In November of this year Reuters were warning that the Baltic republics of Latvia, Lithuania and Estonia also saw a huge foreign-financed real estate explosion. The most widely-quoted property prices there have dived 30 to 40 percent. The housing collapse is the front end of what economists say could be a long, deep recession across the region that could spark a wave of bank and currency crises. In Riga the slump in house prices was reported on BBC Radio 4 House prices have been falling 6% each month having soared over the past few years. Investors had to knock 35% off the price of these flats in order to sell them. Estonia is equally in the doldrums, with a 14.5% fall in prices over the course of the year. Lithuania has fared slightly better, and the rate of growth remains positive, albeit barely, at 0.9%.
So, maybe the advice is proceed with the utmost caution in the Baltic States. Prices are still pretty high in the capital cities but are bound to decline. The big question might be whether these relatively new economies can cope with a sudden crash.