The Baltic countries have high property investment potential

YIT has over 100 years of history, whereas the Baltic countries are young, becoming independent approximately 30 years ago. YIT has operated in the Baltic countries since the mid-1990s and has accumulated experience in the property development of housing and business premises as well as building and infrastructure construction contracting.

Changed rental housing markets open up new possibilities

 So far, the Baltic rental housing markets have consisted mainly of individual rental apartments owned by consumers and small investors, but there are no rental buildings fully owned by institutional investors with the exception of a couple of individual pilot projects.

Economic growth in the Baltic countries has been rapid: the annual GDP in 2017–2019 increased in Estonia by 4.6%, in Latvia by 3.4% and in Lithuania by 3.9%, whereas the average GDP growth during the same period in the EU countries has been only 2.1% (Eurostat). The income level in the Baltic countries has quickly reached the figures of the other EU countries, which has created a need for more spacious, high-quality homes. Renting often provides possibilities to live in a larger home with a good location when compared to the buying of an apartment.

Urbanisation, flow of foreign labour and the reduction of the size of the household increase the number of potential lessors as rental housing is a functional solution during changing and uncertain life situations. (Colliers, Global Property Guide, Oberhaus and CBRE). In 2019, the average size of a household in Estonia was 2.1 persons, in Latvia 2.3 persons and in Lithuania 2.2 persons, which equals to the average level in the EU. However, the size of a household has decreased in all the Baltic countries by 0.2–0.3% in the past 10 years (Eurostat). For example, the population in the capital cities of the Baltic countries, Tallinn and Vilnius, has increased annually by an average of 0.5–1% in the last ten years and the growth is expected to continue. Young people are also moving out their parents’ houses earlier than before, which also increases the demand for rental housing. (Colliers, Global Property Guide, Oberhaus and CBRE). The proportion of 18–34-year old people living at home in Finland has been approximately 20% for the last 10 years, whereas the proportion in Estonia was 33.5% still in 2019 although the figure had come down by more than 10% from the year 2009 (44.2%). A similar change has taken place in Latvia and Lithuania (Eurostat).

“It is obvious that many people also in the Baltic countries would prefer to live in rental housing if there only were good and reliable landlords,” says Tom Sandvik, Senior Vice President, Head of Housing the Baltic Countries and CEE, YIT.

YIT sees high potential for market development. According to Sandvik, YIT plans to develop diverse area development projects of different sizes in the capitals of the Baltic countries, Tallinn, Riga and Vilnius, as well as in Kaunas. For example, Vilnius has developed rapidly during the last 5–10 years.

“Lithuania has managed to attract a lot of IT and finance service centres of international companies as well as support functions and their employees, which creates natural demand for rental housing,” says Sandvik.

A local operator knows the market

 YIT’s partner in the first residential portfolio is Newsec, which is familiar from the business premises projects. Newsec operates as the apartment sales consultant and searches for potential investors to YIT.

According to Andrius Švolka, Head of Transactions in the Baltics at Newsec, investors feel that investing, for example, in shopping centres and hotels is too risky due to the COVID-19 pandemic, which means that the investors’ capital is currently targeted to different segments, such as housing.

“The property investment is currently taking its first steps in the Baltic countries, but I believe that it will evolve into an extremely interesting segment within the next decade,” says Švolka.

Affordable apartments and better rental income

In the Baltic countries, the institutional markets are emerging and the first institutional investments have already been made; for example, the fund published by EfTEN Capital and the rental building financed by it in Tallinn. Timing for international property investment is currently great, as the demand for rental housing is expected to increase and the institutional operators are entering the new market but the apartments are still reasonably priced.

“If the rental revenue in Finland is 3%, in the Baltic countries it is about 5%,” says Švolka.

According to Švolka, the return requirement in Tallinn is currently slightly below 5%, in Vilnius approximately 5% and in Riga 5.25%. Once the institutional rental housing market has been created and lessors are available, the return requirement will also be reduced. Therefore, investors looking for returns should act now.

What does the investment partnership mean to the investor?

Similarly as in Finland, property investments in the Baltic countries can be implemented with joint investment structures in which YIT remains as a minor shareholder in the project. Investors get a familiar and reliable partner for their investment from YIT which offers renting as well as maintenance and property management as a turnkey service.

YIT is a stable operator due to its size and has existing operations in the Baltic countries.

“The fact that we can offer a consistent product provided in one place in all three Baltic countries creates partnership opportunities,” says Pasi Huhtakangas, Vice President, Co-investments at YIT.

According to Huhtakangas, the good rental apartments, extensive portfolio and great service combined with the emerging demand for rental housing in the markets make the rental buildings constructed by YIT an excellent investment.

Unknown markets naturally require familiarisation and understanding of risks. Sandvik hopes that potential investors could see YIT’s preparedness to enter new markets, invest together and operate as a partner as a kind of guarantee.

“Open-mindedness and courage are needed – they will provide a good start,” reminds Sandvik.

YIT offers property investors diverse, attractive investment opportunities. Read more about property investments.