Housing in Vilnius has thousands of options to choose from, but many of them are not attracting buyers

The European Central Bank (ECB) announces a 0.25 percentage point cut in interest rates for the first time since 2019. This is a significant move, marking a shift in the ECB's financial policy and allowing real estate developers to breathe a little easier. Optimistic property developers expect the market to recover already this year. Still, even the most optimistic company representatives say that the property market will move next year as it has.

Construction work in Vilnius.<br>Photo: V.Ščiavinskas.
Construction work in Vilnius.<br>Photo: V.Ščiavinskas.
Construction work in Vilnius.<br>Photo: V.Ščiavinskas.
Construction work in Vilnius.<br>Photo: V.Ščiavinskas.
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Lrytas.lt

2024-07-08 16:52

The ECB's cutting interest rates by 0.25 percentage points is a strategic move to kick-start a slowing economy. This has been on the table for quite some time, but many were worried about a possible return of inflation.

„This news is essential for property developers, for whom lower borrowing costs can mean more affordable project financing options, which can accelerate the pace of development and investment,“ explained Deividas Žukas, Head of Corporate Lending at Bigbank.

It is said that property developers are already preparing for the recovery of the property market in Lithuania. Submitting projects to the primary market often depends on developers' investments and plans and on obtaining building permits.

According to Kęstutis Faktorovičius, the Head of the real estate development company Kenova, some developers have postponed the construction of some projects due to sluggish sales. Therefore, it is likely that the reduced interest rates will encourage a slight increase in these rates.

Ugnius Latvys, CEO of property development company Kaita Group, says that for some time, due to the slowdown of the property market in Vilnius, there were rumours of projects being put on hold, but this is no longer the case. „Of course, the challenge of offering projects to the primary market in Vilnius is directly related to the more extended deadlines for obtaining building permits, but the significant developers are exaggerating their project cycles to minimise the impact of this aspect.

We have more than EUR 40 million in investments planned for Lithuania this year. The number of housing units we have offered to the primary real estate market in Vilnius alone amounts to almost 650“, – said the specialist.

Eglė Savostė, Head of Analysis at CITUS, also discusses the uncertainty surrounding issuing construction permits: „Unfortunately, the reduced interest rates have minimal impact on the development process.

On the other hand, supply in Vilnius is currently very balanced. It comprises about 5,500 new dwellings, although about 20% of this is an illiquid supply that has not found buyers for more than 24 months. However, there is certainly a sufficient supply in terms of market dynamics. If it increases, further supply growth is certainly expected after some time.“

The effect will not be visible immediately

Property developers welcomed the ECB's rate cut with optimism but with caution. Many see it as an opportunity to secure more favourable financing for new projects and to refinance existing debts at lower costs.

Developers know that lower interest rates can increase profitability by lowering the cost of money, making previously marginal projects more financially viable.

However, Žukas notes that the market is still cautious, with developers taking their time: „They realise that while lower interest rates are good in the short term, the market is watching the behaviour of inventories.“

Latvys argues that the money has not disappeared from buyers' accounts and is immobile. Those buying a home for investment have now put their plans on hold, as higher interest rates no longer allow them to secure the returns that were calculated in the past. However, to get the market moving correctly, the expert believes waiting for bolder interest rate cuts will be necessary.

The property market will certainly not overbuy

Since the 2008 crisis, economists and the public have always expected a new property crisis. At first glance, the fall in interest rates could cause the property market to heat up again.

However, developers should avoid overheating the market. This is primarily because the effect of the interest rate cut will be visible after some time. According to Savostė, the current significant increase in demand will, at least for some time, cushion the growing demand.

Other developers expect less demand growth this year and predict more realistic changes only next year when interest rates have already been reduced to a greater extent. Currently, the declining Euribor only has a psychological effect, while the affordability index is only improving due to rising salaries.

However, even the most pessimistic developers do not see the likelihood of overheating, as developers have created enough supply. According to them, it will stay at the same level, leading to a sudden sharp price increase in the next few years, although a healthy rise of a few per cent next year is already expected.

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