Limited liquidity and variety of buying opportunities are the best description of the current environment in the Baltic property investment market. With the changed market conditions local property owners and developers were forced to acknowledge a significant contraction of their property values and offer their best assets for sale.
Unfortunately, many international funds are currently facing difficulties and even do not have a clear investment strategy for the nearest future. A number of previously active funds have recently either withdrawn from the market or temporally put further investments on hold. Others are choosing more conservative investment strategies and less challenging traditional locations. Thus the recovery of the banking sector is very much awaited as it seems to be one of the major stimulators bringing the market to life.
Nevertheless there are cash-rich investors that are continuously monitoring the Baltic market for attractive possibilities. Opportunity funds are taking a much closer look at the Baltic market waiting for any positive signs to appear and in order not to pass time when values have bottomed out. However all potential investors are very selectively weighing a number of issues.
As can be expected, those international investors that have acquired properties in the Baltics before the global financial crisis continue having more confidence about the further market development. However, those that are not present in the region prefer to keep a more cautious approach.
Similarly as in other European countries, the economic downturn and global credit crunch resulted in decreasing occupier demand and growing threat of increasing vacancies, as many enterprises started downsizing and cutting occupational costs. The further yield curve development as well as investor confidence will strongly depend on performance of the occupier market, directly influencing income of the owners. Thus, estimating the potential risk to sustainability of the cash flow, investors look for the most secure opportunities (for instance, single tenant or lease backs) or those with various rent or development "up-sides".
Fascinated by previously steep rising of property prices, developers used to initiate new projects thick and fast. However, due to the slowdown of the local economies as well as strict lending policy applied by banks, limiting financial possibilities, developers were forced to cancel some of the planned schemes. Nonetheless, a number of already commenced constructions are in their final stages thus increasing supply variety. As a fact, some of the potential investors keep monitoring upcoming changes in order to identify the most vulnerable properties/ segments.
Although the number of distressed properties is not noticeable or widespread, more forced sales at prices below the market value are expected to be initiated by mortgagees in a quite short term.
A lot of cash-flow properties and those intended for development, including almost all prime properties, owned by developers, are now for sale in the Baltics. The financial pressure and need to strengthen their short term financial liquidity position has forced property owners to offer many attractive investment opportunities. This trend indicates an opposite picture to that seen just 1-2 years ago, when majority of local developers where willing to keep their assets. Besides, many developers are looking for partners with an access to capital in order to finalize commenced constructions.
Heavy re-pricing, resulted from severe liquidity problems, was observed since the second half of 2008 in many investment markets not excluding the Baltics, where each of the commercial property market sectors suffered yield growth reaching 150-250 basis points in a year. The investment environment will continue to be challenging in 2009 and beyond implying that potential investors will keep following a very selective attitude towards any acquisitions and primarily will be focusing on prime properties. In order to attract investors property vendors wil