Having travelled from Prague to Warsaw and then on to Vilnius, Riga and Tallinn it was interesting to compare and contrast each country.
The capitals in all three countries are far from shabby and looking around you wouldn't guess they've just been through an economic crisis.
Vilnius is quite pretty but lacks real economic power - even Ryanair lands in the country's second city Kaunas. Riga is the largest and most dynamic city of the three and is a business hub for the region. Tallinn is the most developed, with strong trade links and Scandinavian efficiency. Perhaps with the exception of Riga the major towns and cities have a very sleepy backwater feel to them compared to those in the Czech Republic or Poland.
There is a huge Russian portion of the population in each country, which helps to increase trade but also increase tensions (partly due to historical reasons) especially in Estonia where the languages are so different.
Economically I struggled to see what drives these countries. Sure there are well established industries such as agriculture, fishing, timber and some IT but you certainly couldn't compare them to countries such as Norway (oil and gas) or Switzerland (finance, pharmaceuticals etc) and the like. What will transform these countries into world leaders? I don't know. Yet at the same time due to their relative small size, if positive change were to occur then it would probably not take much for them to boom once again.
Despite the lack of great long term economic and demographic drivers it doesn't not mean these are terrible countries in which to buy property.
From 2001 to 2006 property prices across the region boomed anywhere from an incredible 20 to 50% per annum. A classic boom fueled by low taxes, foreign investment, low interest rates and lots of debt with little consideration of how it would be paid back.
During this time of rising prices rents stayed approximately stable meaning yields fell dramatically (2-4%). After 2006 when interest rates started to rise it left many property owners unable to pay their mortgages. Both the economy and property prices crashed dramatically.
Property prices dropped over 50% to lows of 500 to 1,000 EUR/sqm (area dependent) but have recently started to creep up again. There are certainly signs the market has bottomed out and is beginning to turn around.
There is simply too big a disconnect between buying in Prague at a typical price of 2,000 EUR/sqm and in Riga of 700 EUR/sqm. From such lows I don't see why prices could not increase substantially in the coming years.
The question is it worth the risk and hassle?
This is something you only can answer yourself. Though it's probably not worth it unless you can really buy at prices well below the 1,000 EUR/sqm mark and thus have the chance of a large upside. Otherwise the costs, hassle and low rental yields just won't make the investment add up. Furthermore, mortgages, whilst possible, are still difficult to obtain in the Baltic's.
Whilst all three countries have made strides to rein in spending and cut deficits, it has only really been Estonia that took quick and deep enough action. They succeeded in maintaining their peg with the Euro (and will join the Euro on 1st Jan 2011). I predict that Estonia will outperform its two neighbours over the coming years and this is likely to have a positive impact on the property market there.
In my view property prices across the Baltic's will increase substantially from their current low levels over the next 3 years, though by how much will be is anyone?s guess. If you plan to invest there don't forget to take into account the other factors mentioned in previous newsletter such costs, rental yields, taxes and so on.
Simon Tweddle
