Recovered commercial real estate market is hampered by raw materials which are rising in price
July 22, 2021

In the first half of this year, investments in commercial real estate (RE) projects in the Baltic States amounted to EUR 640 million – almost twice as much as in the first half of 2020. Lithuania remains the most active region in the commercial real estate market – it employs almost half of the fixed investments in the Baltic States, followed by Latvia and Estonia.

“The COVID-19 pandemic that started in March last year suspended various commercial real estate projects for only a few months, and the recovery of the office market was recorded in May. This year, the recovery of business centres after the second quarantine is even faster. This was due not only to the general vaccination of the population against coronavirus, but also due to the improving financial situation of investors, the large amount of free money in the market, and the expected inflationary pressures,” says Andrius Barštys, Head of SBA Group investment company Capitalica Asset Management.

The improving financial situation in the real estate market is reflected not only in the growing investments in logistics and trade facilities, but also in the return on investment in hotel development. Investment in land plots is growing particularly fast, with investors expanding their investment strategies by choosing new sectors and levels of risk.

“The main challenge facing the commercial real estate market is the recent rise in construction prices due to the shortage of construction materials and the increase in their prices. The global economic stimulus also contributes to this. The injection of large sums into business by governments leads to faster development of new projects and, at the same time, shortage of raw materials and growth of labour costs,” says Barštys.

According to him, rising construction and labour prices should, in the long run, reflect the growing cost of commercial real estate, especially lease of offices.

Currently, the areas of new business centres under construction in the Baltic States are reaching the level of 2019 – more than 200 thousand sq. m of business office space is under development in Vilnius, 140 thousand sq. m in Tallinn, and about 90 thousand sq. m in Riga.

Half of the area of business centres being developed in Riga is occupied by the Verde office complex, which was started at the end of last year on the order of Capitalica Asset Management. The company is investing more than EUR 65 million in the new project.

“Starting the construction of Verde at a time when there were doubts in the real estate market in regards to how we are going to live and work in the face of a pandemic was a difficult but also the right decision. We estimated that real estate projects developed by other companies may face delays, so without postponing the implementation of a large project in Riga, we gained an advantage in the business office market,” says Barštys.

Verde, which is going to be given the highest energy efficiency rating, will be one of the first “green” buildings in Latvia and will use almost no energy. The complex is planned to be certified according to the international BREEAM system.

“Sustainable business centres that meet the highest environmental, social and governance standards (ESG) are the norm today. Not only office lessees but also investors want sustainability – this trend will only intensify in the future,” says the Head of Capitalica Asset Management.

The Capitalica Baltic Real Estate Fund I invests in the Baltic real estate market with a focus on commercial real estate, although the Fund’s articles of association also allow to invest in residential real estate. The Fund is also interested in the early stages of development – real estate objects that are still under construction and those that have already been completed.

Capitalica Asset Management, which manages the Capitalica Baltic Real Estate Fund I, is engaged in the management of commercial real estate in the Baltic States. The investment management company was established in 2016. Its controlling block of shares (70%) belongs to one of the largest Lithuanian capital business groups, SBA, while the remaining 30% of the shares belong to the A. Barštys company Fox Holdings.

For more information:
Andrius Barštys,
CEO of Capitalica Asset Management
Andrius.Barstys@capitalica.lt
+370 612 30260