An increasing number of Estonian real estate developers are operating in the Latvian market, as land in Riga is considerably cheaper and the planning approval process takes less time.
Although real estate prices in Latvia have risen by around 51% over the past five years, the average price level remains significantly lower than in Estonia. An increasing number of Estonian real estate developers are also turning their attention to Riga.
Elar Ollik, head of partner relations at Luminor Bank, explained that Riga’s real estate market was more attractive in part because new developments still accounted for a smaller share of the overall housing stock, meaning developers saw greater potential there. “Especially compared with Tallinn, for example, where people sometimes say the market is oversaturated with apartments in new developments. Another reason is that the entire process is faster in Riga and, as we know, money has a cost and time affects that cost. From the bank’s perspective, we also see that people’s borrowing capacity in Latvia is growing, which is making new developments more affordable.”
According to Merko Ehitus CEO Ivo Volkov, Latvia’s real estate market does not differ greatly from Estonia’s as the same market principles apply everywhere. “The real estate market does exactly as well as people feel at any given time – in other words, it depends on consumer confidence and how the economy is doing. It is true that consumer confidence in Latvia has been higher than in Estonia over the past couple of years, which has had a positive effect on the market.”
Despite this, real estate prices in Riga are lower than in Tallinn. According to Ollik, this is mainly because Riga has considerably more Soviet-era housing stock. “Tallinn, of course, also has Soviet-era prefabricated apartment buildings, but many of them have been renovated, which has increased their value. In Latvia, meanwhile, the share that has been renovated is very small.”
Estonian real estate developers Invego and Reterra are jointly developing a new residential neighborhood in central Riga at a cost of nearly EUR 40 million. One important reason real estate developers are increasingly looking to Estonia’s southern neighbor is the lower level of bureaucracy.
Invego CEO Kristjan-Thor Vahi said that in Latvia, the time required to process both detailed plans and building permits was effectively three times shorter than in Estonia. “Somehow, we in Estonia have created a major bureaucratic barrier to the market ourselves. When I’ve met both Riga’s current mayor and advisers to the prime minister, they’ve all said that their only chance of catching up with Estonia and Lithuania is to get things done quickly. They’ve made that a priority.”
Reterra CEO Reigo Randmets added that permitting processes took months in Latvia, compared with years in Estonia. “At Hipodroomi, it took us six years to get a building permit, while in Latvia we got our most recent building permit in seven months. Those are somewhat extreme examples, but that’s essentially how it is. Riga’s appeal to developers comes mainly from the low input cost – land is cheap. You buy the property and then get started. Purchasing power isn’t as high in Latvia, though, and selling in Riga isn’t as easy.”
Estonia’s lengthy permitting process ultimately affects buyers. Randmets gave the example that if it took five years to obtain a detailed plan for an apartment building, the result for the buyer was the price per square meter going up by EUR 1,000. (ERR)