I’m referring to expectations here. Buyers make decisions and plan acquisitions based on their expectations of financial stability and opportunities in the coming period; businesses make decisions and plan investments, the level at which they will conduct their operations, and their staffing affairs and budgets. It all contributes to a spiral of cause and effect; whereby even economic cycles will be affected.
Based on expectations, the consumer confidence indicator for cities, the figures of which are calculated by the State Data Agency, rose to +2, the highest level since September 2021, when it stood at +3. In October 2022, it fell to -17, and it only rose back above the zero mark during September last year (reaching +1). Younger Lithuanian consumers are more positive (for those aged 30–49: +1; for those aged 50–64: -4), in particular in the case of those in employment (+3) and those in the highest income category. Younger consumers with jobs and higher incomes, for their capacity as potential homebuyers, are the foremost indicators of the situation for what it really is. So far, their expectations have been positive.
Economists are optimistic about the outlook for the Lithuanian economy this year, and this is encouraging. The Ministry of Finance, whose forecasts are more moderate than those of the Bank of Lithuania, foresees an annual GDP growth of 1.7%, a 7.6% increase in the average gross wage rate average wage rate (AWR) and a steady rise in unemployment. It is not particularly encouraging that most of the wage growth will be driven by increases in the minimum monthly wage (MMW) and the non-taxable income rate (NTR) – this will have little impact on those currently in a position to buy a home. Real AWR growth for potential homebuyers is likely lower as a result of the economic slowdown.
In this global uncertainty, we seem to be moving toward a soft economic slide, while our neighbours Latvia and Estonia are experiencing a hard slide.
Inflation will likely be contained as predicted, with wages rising not only because of the increase in the MMW and the increase in the NTR but also because of the Euribor decline. This would undoubtedly generate a good stimulus for a rebound in the economy.
The normality of the property market and prospects
For almost two years now, the real estate market has seen desert marathon conditions: yes, the road is smooth, and the inclines and declines are few and even, but the wheels are sinking in the sand. The primary housing markets in major cities have recorded a level of demand at about half of what it could be or even less, when one considers the demand for housing and the statistics of preceding normal years.
The secondary market has contracted, as has the primary market. Prices, supply, and demand are also drifting at similar levels. Rental prices are still rising as a result of a recent increase in new supply (of better quality) and high demand. This means that these two options are not a better option for home seekers.
Looking at the forest of cranes on the horizon, especially in Vilnius, the commercial real estate segment is experiencing good times. However, there are also challenges regarding lease deals and financing, and projects are more difficult to postpone due to the large sums contracted, meaning that construction work in individual projects continues. The secondary commercial real estate market is shrinking due to higher yields on bonds and other financial instruments and less attention from foreign investors.
While some argue that prices of construction elements have gone down – which would inevitably suggest that costs have gone down – the facts show the opposite. The official construction cost index with the State Data Agency has risen by 52.5% between the reference year 2015 and the end of 2023. With these figures, since the beginning of 2020, when the pandemic led to rapid increases in the cost of materials, the index has risen by 34.2%. Over the past year, the index has risen by a less dramatic 5.5% points, but it has increased rather than decreased. Labour has not been growing, wages have not been falling, and the minimum wage has increased.
As far as real estate development is concerned, we must cope with changes in legislation, higher barriers to entry, lower returns, and slower speeds in design and delivery processes. Unfortunately, real estate development is only one thing impacted by excessive regulation.
Overall, while there are various aspects worth taking note of (both good and bad), the property market's health remains good. Most developers have small, efficiently controlled reserves of assets, and this helps to maintain stability. Small pockets of risk exist only where reserves are large and turnover is low.
Suppose the forecasts for Lithuanian economic growth, a moderate decline in Euribor rates, a more stable geopolitical situation, etc. are confirmed. In such a case, we should see the housing market increase in the second half of the year.
Challenges and opportunities for home buyers
For those out to buy a home, the time is now. Since its peak in September, the 6-month Euribor base rate has fallen by almost a quarter of a point (from 4.143% to 3.912%, at the end of December). Commercial banks have already started to cut interest rates on home loans, which suggests that we have already rebounded from the bottom level of housing affordability. The market is also more crowded than ever, with more and more offers from housing developers.
Bank competition has increased, as the number of home loan customers has decreased. This is because the activity cycles of developers and banks overlap within the period of the development of a project. While buyers enter into preliminary deals with developers at the beginning of the construction work in a project, they turn to banks for a loan once the project has reached the required completion stage, before dealing with notarial transactions. As a result, banks are now starting to feel the drop in customer flow that developers felt as early as 2022, and this year we are already seeing a drop in bank mortgage margins to 1.5–1.6%.
It will be easier to buy in, but the question is: will you get what you want? There has been a wide yet stagnant range on offer which has now been out of stock for quite some time. At least 500–700 primary market dwellings in Vilnius (comprising 12–16% of the total supply) have been vacant for 12 months or more. In the cities, especially larger ones, the average apartment area is shrinking due to rising prices. During the financial crisis of 2008–2009, legislation was introduced to reduce the allowable floor area of flats and to allow the sale of flats smaller than 35m2. And history, unfortunately, tends to repeat itself. More and more developers are designing what customers can afford – smaller apartments.
Phasing will still be relevant this year, meaning that supply will fill up at similar rates as it did last year. But right now, construction companies are facing more significant challenges – contractors say that demand for work is down, while smaller players also lack enough working capital. As demand increases and the need to increase the filling process becomes apparent, the market may face staff shortages. However, the shift in the balance of bargaining power should keep costs under control, at least temporarily.
On the other hand, it is now possible for customers to negotiate the price of furnishing their homes. This is a classic feature in economics, whereby the best contractors are never without work to do, and it makes it possible to negotiate better prices with others. We recommend that customers assess contractors' financial stability and payment terms in their process of furnishing a home, and not pay disproportionately large advances.
According to the calculations of Citus analysts', unrealised demand in the capital is, for the most part, growing: as the city's population grows significantly and people postpone their housing purchase plans, the number of people waiting on the primary market could reach up to 10,000. This is more than double the capital's current supply.
Taken together, and assuming that Euribor is projected to fall steadily while affordability improves in 2024, demand growth will likely accelerate; this could halt a decline of bank interest rates and set off house price growth. Affordability would then deteriorate again, and as sales increase, the question is whether developers will continue to be willing to host the same variety of offers. The following six months could be a real window of opportunity for buyers.
Global Horizons
The vectors for the future of the Lithuanian economy are positive and upward-looking. If what is predicted actually takes place, it will be perfect, and in the second half of the year the whole real estate market – all segments of it – should be able to take a deeper breath of fresh air. However, there is another group of factors which, if they materialise, could have a negative impact.
Few businesses currently see a bright outlook, with many assessing the unstable economic and geopolitical situation. There are powers aiming to create as many hot spots as possible to divide the attention of Europe, the US or NATO as Russia pursues its objectives in Ukraine.
The war in Ukraine, with all its emotional consequences (consumer confidence index, investor optimism in Baltic countries, etc.), has not yet ended, and the outlook would seem to be more like one of grey skies of Lithuania.
And, as if all that were not enough, this year will see critical elections in the US, Lithuania, and other countries, which will determine global sentiment and expectations one way or the other... Things will not be calm and easy.
CITUS results
The year progressed in line with existing market trends – with the prevailing weakening of demand and the acceleration of the rise of Euribor, we have had to scale back our goals and ambitions, but we have still achieved a lot. On the one hand, in terms of sale transactions in all the cities where Citus develops projects, we are in the top 3 in the Lithuanian market. This is an excellent result, in that we have achieved a higher number of sales in the largest market, Vilnius, than those we had on our books in terms of supply (5% of market sales vs. 3% of market supply). We have maintained a high turnover rate (compared CITUS’ annual turnover rate of 7.24% with the average turnover rate in Vilnius, which is 4.85%).
Moreover, while the number of transactions last year was one-fifth lower than what it was in 2022 (211 vs. 265), the value of said transactions was only 0.6% lower (28.57 million EUR vs. 29.15 million EUR). This is a sign that we have found buyers for more expensive homes; something that is very important for the company's outlook during such a stressful period. In 2023, 124 transactions were concluded in Vilnius, with another 51 concluded in Kaunas, and 36 more in Druskininkai.
This year, we plan to work hard and grow further. We plan to invest around 47.2 million EUR (including the value of the assets to be acquired). Our ambitions for next year are considerable ones: we plan to launch five new projects, at least three new phases of projects under development, and we will also be striving to complete two projects, along with one particular phase of another project currently under development. Vilnius will account for the bulk of the investment – around 36.8 million EUR; while Kaunas will represent around 4.8 million EUR of it, and Druskininkai representing the remainder.
In Vilnius, Kareivių St., we will be launching Mūnai by CITUS, a unique project in CITUS' portfolio in terms of its size; in Žvėrynas, we are planning a boutique business centre unique in its concept; in Kaunas, we will also be continuing with the launch of one of the most significant projects in this city (in terms of the volume of the assets) i.e. Radio City by CITUS; this along with our project in Druskininkai, which will be exceptional in terms of both its concept and its size, namely, Nemunas by CITUS.
If the forecasts for Lithuanian economic growth, a moderate decline in Euribor rates, stabilisation of the geopolitical situation, etc. are confirmed, we should see a more active housing market in the second half of the year.
Have a good year, and make wise decisions!