Economics

(1)

LATVIAN COMMERCIAL REAL ESTATE

_{Q2 2011}

MARKET COMMENTARY

Source: Ober-Haus Data: Q2 2011

Source:Ober-Haus Dat: Q2 2011 Source: Ober-Haus Data: Q2 2011

Office rents in Riga without VAT (EUR/sq.m./month)

7,0

5,0

0,8 12,0

8,0

2,0

0 4 8 12 16

A Class B Class Service charges

Retail object rents in Riga without VAT (EUR/sq.m./month)

25 15

6 15

8

5 7 5 4

50

35

9 25

20 8

25

12 7 0

10 20 30 40 50 60

Up to 100 sq.m. 100 - 200 sq.m. Over 200 sq.m. Trade centres Active center Further from the center

Industrial space rents in Riga/Riga`s region without VAT (EUR/sq.m./month)

2,5

0,7

0,4 4,0

2,5

0,8

0 1 2 3 4 5

New/modern industrial objects

Secundary market Service charges Economics

According to the data, published by the Ministry of Finance (FM), on gross domestic product (GDP) in the 1st quarter of 2011, the moderate growth has continued in economics and, in comparison with the respective quarter of previous year, the GDP has increased by 3.5% in comparable prices. It is essential that the economics of Latvia has grew already for 6 quarters in a row and in the 1st quarter of 2011, in comparison with 4th quarter of 2010, according to seasonally adjusted data, the GDP has increased by 0.3%.

Finally, although the growth of GDP in the 1st quarter of this year was moderate, the large increase of investments, as well as rapid industrial growth in April and the decrease of registered unemployment during the last two months indicates on possibly more positive trends in economics in the 2st quarter of this year and provokes optimistic feelings on economic development in the second half of the year.

A total growth does not provide a complete picture on the ongoing in the economy, but the most important is the fact that the investments have increased by 28.4% within a year.

In June the average consumer price level, in comparison with May, increased by 0.3%. The prices for goods increased by 0.3%, but prices for services – by 0.2%, according to the information gathered by Central Statistical Bureau (CSB). In June 2011 in comparison with May 2011 the average consumer price level increased by 0.4%, which was mainly affected by rapid price decrease on vegetables – by 20.9%. One of the reasons may be decrease in demand for vegetables due to the wave of diseases caused by E.coli bacteria in Europe, reports the Ministry of Finance.

During the latest 12 months the average consumer price level, in comparison with previous 12 months, has increased by 2.6%. In June 2011, in comparison with respective period of the previous year, the consumer price increased by 4.8%, prices for goods increased by 6.4%, but prices for services – by 0.5 %. In June the price increase of products and services related to housing, spirit liquids, as well as price decrease of footwear and food left the biggest impact on changes of consumer prices. In the housing segment the increase of heating rate on average by 4.1% left an impact due to the natural gas price increase for large consumers. Solid fuel prices grew by 1.9%, but liquefied gas in cylinders became by 0.9% cheaper, effected by discounts.

In July consumer prices are expected to decrease mainly due to seasonal factors, with the decrease of prices on food and clothing.

(2)

LATVIAN COMMERCIAL REAL ESTATE

_{Q2 2011}

MARKET COMMENTARY

7,0

5,0

0,8 12,0

8,0

2,0

0 4 8 12 16

25 15

6 15

8

5 7 5 4

50

35

9 25

20 8

25

12 7 0

10 20 30 40 50 60

2,5

0,7

0,4 4,0

2,5

0,8

0 1 2 3 4 5

Secundary market Service charges Office space

In the 2nd quarter the office rental market is persistently active in comparison with previous quarters. In general the average price for office rent had remained stable, in the 2nd quarter of 2011 rents for A-class office segment ranged from EUR 7-12

EUR/m2

, the highest rent for A-class office was 16 EUR /m2

,

while prices for B-class office ranged from 5 to 8 EUR /m2

. Rental prices for C-class office segment ranged from 3 to 5

EUR/m2

. Also the average housing management costs remained stable. The average housing management costs for A-class

offices was from 0.85 to 2.0 EUR/m2

, for B-class offices - from

0.8 to 1.5 EUR/m2 and for C-class offices - for up to 0.7 EUR/m2.

With the beginning of summer season, more active interest in office rental market is noticed in office premises with total area

from 50 to 100 m2

in the center or quiet center of Riga. It is very important for clients to have a parking lot right to the office. There are still new international companies considering the possibility to enter the market of Latvia. The interest has been observed about both the rent of office premises, as well as acquisition of property. Mainly the interest on acquisition of the building is noticed for the need of the company, in the area from

400 up to 2000 m2

. There are several factors important for the choise of office, particularly the location of the office premises, infrastructure, the quality of decoration and communications, parking availability, public transportation, housing management costs and the level of service provided is taken into account. Companies are interested in both open space offices, as well as offices with the system of cabinets. It mostly depends on the corporate policies and specialization of the company.

New offers have appeared in office space segment – already now short-term office space solutions are available in several office buildings – fully equipped offices, as well as other services are provided, such as, virtual office rent, conference room rent, secretarial services etc. Before now such services were available only in Valdemāra Centrs, but currently they are available also in Duntes offices, as well as the biggest provider of office rental solutions Regus, with the office on Tērbatas street 14, offers such services. The development of services can be explained by interest from other international companies to enter the market of Latvia, using the short-term office premises solution for the development of business, or offering them as beneficial short-term solution for small companies until they have a need to rent an office space in long-term.

With the succesfull development of Duntes offices, the Duntes Business Lounge (on 2nd floor of Duntes offices) is opened, offering ergonomical and functional workplace for companies and office space rent both for short-term, as well as long-term solutions for the succesfull development of business, as well as provides premises for organizing conferences and negotiations, a virtual office rent is also possible. The main purpose of Duntes Business Lounge is to perform a representative functions of the company, realizing the development of status, individuality and competence, as well as demonstrating the taste, values and working style of the company. Quality service and individual

(3)

LATVIAN COMMERCIAL REAL ESTATE

_{Q2 2011}

MARKET COMMENTARY

7,0

5,0

0,8 12,0

8,0

2,0

0 4 8 12 16

25 15

6 15

8

5 7 5 4

50

35

9 25

20 8

25

12 7 0

10 20 30 40 50 60

2,5

0,7

0,4 4,0

2,5

0,8

0 1 2 3 4 5

Secundary market Service charges approach helps companies to find the most appropriate solution

for the succesfull development.

The recovery of economics encourage the company Regus to start its operations in Latvia. Regus is expanding its operational network up to 88 countries and helps companies to benefit from economical recovery in the Baltic region. The opening of the new Regus business center in Latvia will provide companies with possibility to use the optimism created by economical growth in this important place for business in the Baltic states. The new center in Riga is the first office of the company in Latvia. The global workplace provider Regus is now supporting companies in all three Baltic states: Lithuania, Estonia and now also Latvia. Generally Regus is currently operating in 88 countries all around the world. „Latvia is again a perfect place for companies looking for growth potential. Low salary costs make the Latvian export possibilities very competitive, and it is definitely an important component of Scandinavian/Baltic region sales, finance and transport,” explains Michael Bart, Regus Regional Vice President of Baltic States, Germany and Scandinavia. „We have observed the increasing demand from customers, who would like to use the flexible workplaces in Latvia in order to explore the market opportunities or expand the operations. The opening of business center in Riga is an answer to growing demand and interest showed.” Michael Bart from Regus added: „In globalized economy companies have to be mobile. They need skills to quickly detect new production or recovery possibilities and combine them with ever increasing cost effectiveness. Regus

provides such an opportunity with the biggest video

conferencing studio network and BusinesWorld – a special loyalty program, providing the access to Regus business lounge premises all around the world. Such customers as Google, GlaxoSmithKline and Nokia are joining thousands of growing small and medium-size businesses, which benefit by selecting the services offered by Regus, allowing companies to concentrate on their main business activities. More than 800,000 customers daily use services provided by Regus in more than 1200 centers, 750 cities and 88 countries. Regus was founded in 1989 in Brussels, Belgium. The main office of Regus is located in Luxembourg. The company counts among UK Stock Exchange.

Retail

In terms of commercial areas, in the 2nd quarter of 2011 a demand remains for smaller retail spaces in the active center, with intensive pedestrial flow, and in Old Town – on most favourite streets of tourists. The highest demand was observed

for areas from 50 to 80 m2

suitable for clothing, souvenir trade, as well as for food and beverage trade. While due to the fact that the catering companies are expanding their operations, the demand for cafe and restaurant premises in Old Town, City center of Riga, as well as quiet center has increased.

It would not be right to say that with the beginning of summer season the demand has increased, because most of businesmen search for premises started in the beginning of the year to be able to start operations right from the beginning of the season.

(4)

LATVIAN COMMERCIAL REAL ESTATE

_{Q2 2011}

MARKET COMMENTARY

7,0

5,0

0,8 12,0

8,0

2,0

0 4 8 12 16

25 15

6 15

8

5 7 5 4

50

35

9 25

20 8

25

12 7 0

10 20 30 40 50 60

2,5

0,7

0,4 4,0

2,5

0,8

0 1 2 3 4 5

Secundary market Service charges

The number of vacant retail space with area from 100 m2 has

increased.

In biggest housing estate centers of Riga (Purvciems, Pļavnieki, Ziepniekkalns, Āgenskalns, etc.) a demand for retail space

exists with area from 100 to 200 m2

, suitable mostly for sale of food and beverage.

The interest from investors for commercial areas in Latvia, mostly Riga, is increasing. Currently the more active interest from investors is observed about shopping centers, small premises for shops with stable tenants and provided cash flow. Mostly investors from East are interested in possibility to invest in Latvia, but also an interest from Central Europe and Western Europe exists. Investors are interested in cash flow objects in the center of Riga with a yield of at least 8% or 10% in suburbs of Riga or other towns.

In September the Canadian real estate developer Homburg Group is planning to finish the 1st stage of the project in Zolitūde, Priedaines street. In the 1st stage the Maxima XX shopping center and underground parking lot will be constructed, but in the 2nd stage – 12-floor residential building. Total investments of the project will consist of 14 million EUR (9.8 million LVL), but in the 1st stage about 7 million EUR (4,9 million LVL) will be invested. A shopping center in the area of

5000 m2

and underground parking lot in the area of 4500 m2

will be constructed during the 1st stage of the project. Homburg Group is planning to obtain a construction permit for the development of two more shopping centers in Riga – in Purvciems and Mežciems.

In September the real estate company Imanta Retail Park is planning to finish the 1st stage of the project in Imanta, in the territory of former factory „Radiotehnika”. Within the 1st stage of the project, the building will be renovated with Prisma

hypermarket in it, which will occupy slightly more than 7500 m2

. A parking lot will be built up, area will be landscaped, a pedestrian road and a park will be constructed. Until the end of the year it is planned to finish also the 2nd stage of the project and renovate the whole 1st floor of the building with total area

of 18.000 m2. In perspective it is planned to develop the

building of Radiotehnika and create a shopping and

entertainment center.

Rents for commercial areas in the 2nd quarter remained practically in the level of previous quarter. Rents for small commercial areas in Old Town as well as in the active center are

on average 15 – 35 EUR/m2

, in some areas reaching even 45

EUR/m2

, while rents for larger premises ranges from 5 to 20

EUR/m2

. Rents for commercial space situated further from the

center are 5 – 9 EUR/m2

for small areas and 4 – 7 EUR/m2

for larger premises.

At the end of lease agreements, rents usualy are increased, thus the owners often are looking for new, more solvent tenants.

(5)

LATVIAN COMMERCIAL REAL ESTATE

_{Q2 2011}

MARKET COMMENTARY

7,0

5,0

0,8 12,0

8,0

2,0

0 4 8 12 16

25 15

6 15

8

5 7 5 4

50

35

9 25

20 8

25

12 7 0

10 20 30 40 50 60

2,5

0,7

0,4 4,0

2,5

0,8

0 1 2 3 4 5

Secundary market Service charges The high proportion of the fill remains in the most popular

shopping centers. T/C Spice has completed all the retail space, the vacant space in T/P Alfa is 0.6%, in T/C Origo – 3.5%, T/C Mols – 3.6%, T/C Dole – 3.2%, Galerija Centrs – 5.2%, Olimpija – 10.5%, while in Riga Plaza – 10% of all retail space. In August the first Mohito clothing store will be opened in Latvia in the fashion and entertainment center Riga Plaza.

Rents for retail space in shopping centers remains in the level of previous quarter and the average rent ranges between 7 to 50

EUR/m2

, in some centers the rent reaches up to 65 EUR/m2

for smaller premises.

Warehouse/Industrial space

The 2nd quarter of 2011 as in all industries has been relatively more active and productive in comparison with the beginning of year. Looking at the small, but still the economical growth in the country and resumption of crediting by banks, an interest has been observed not only from foreign businessmen, but also from local producers, who are expanding and thus looking for bigger production and warehouse facilities. There is still an increased interest from businesmen from former CIS countries on production facilities and the purchase of investment properties. In the 2nd quarter the biggest demand were for warehouse and

production facilities with the area till 1000 m2 - both for lease as

well as for purchase. There are specific requirements for areas

bigger than 1000 m2

, especially production premises for lease, the requirements are very specific, and most of the owners of premises are not ready to adjust premises for the need of tenants, because currently the rents are still relatively low. Businessmen begin to evaluate the most beneficial options – whether to rent premises or allocate the amount of rent for a credit to cover. There have been cases when banks offer more favourable conditions for the purchase of the property, thus tenants refuse to lease and purchase properties and adjust them for their needs.

Many businessmen are ready to purchase commercial land plots and construct warehouses and production facilities on their own, because each of them is having individual requirements and buildings of Soviet times are difficult to addapt. The demand for Soviet time commercial premises has decreased, which contributes a little in price increase for properties built within the last five years.

A shortage of new type commercial properties has got moving the market of commercial land plots. oth the demand for purchase,as well as available offers of land plots for sales has increased. The biggest demand for commercial land plots remain in the areas close to Riga.

The average price level remained in the level of previous quarter. Rents for old commercial hangars without heating is in

average 0.7 EUR/m2

(6)

LATVIAN COMMERCIAL REAL ESTATE

_{Q2 2011}

MARKET COMMENTARY

7,0

5,0

0,8 12,0

8,0

2,0

0 4 8 12 16

25 15

6 15

8

5 7 5 4

50

35

9 25

20 8

25

12 7 0

10 20 30 40 50 60

2,5

0,7

0,4 4,0

2,5

0,8

0 1 2 3 4 5

Secundary market Service charges increased; prices for renewed shops in old industrial areas are in

average from 1 to 2.5 EUR/m2

, for recently launched A-Class complexes with adequate quality equipment in all locations

within Riga from 2.5 to 4 EUR/m2, for certain objects the rent

has increased by 0.5 EUR/m2

. The average management costs

ranges from 0.4 to 0.8 EUR/m2

.

The average selling prices have remained in the level of previous quarter, for certain new commercial properties the selling price has slightly increased. Price for small secondary warehouses, industrial and service constructions in the area till

500 m2

is in average 350 – 400 EUR/m2

. Prices for sheds with

the total area from 500 m2 ranges from 70 – 250 EUR/m2. Price

mostly depends on shed condition and specific features. Average prices for land plots suitable for commercial buildings are from

10 – 30 EUR/m2

.