Baltic Property Outlook 2020-2021

BALTIC PROPERTY OUTLOOK, 2020 BALTIC PROPERTY OUTLOOK 2020-2021 Business centre “Uptown Park” 1 in Vilnius

BALTIC PROPERTY MARKET BALTIC PROPERTY OUTLOOK, 2020 2

BALTIC PROPERTY OUTLOOK, 2020 5 CONTENTS 6 8 Baltic Economic Outlook 10 LITHUANIA The Lithuanian Economic Outlook 12 The Lithuanian Property Market 14 Lithuania. Legal. Real Estate Investments at a Glance. 16 LATVIA The Latvian Economic Outlook 18 The Latvian Property Market 20 Latvia. Legal. Real Estate Investments at a Glance. 22 ESTONIA 24 The Estonian Economic Outlook The Estonian Property Market Estonia. Legal. Real Estate Investments at a Glance. Contact and addresses 3

BALTIC PROPERTY MARKET BALTIC PROPERTY OUTLOOK, 2020 Moody office in Vilnius 4Credit: Leonas Garbačauskas

BALTIC PROPERTY OUTLOOK, 2020 BALTIC ECONOMIC OUTLOOK BALTIC ECONOMIC OUTLOOK THE BALTIC ECONOMIES HAVE JOINED THE NORDIC LEAGUE The United Nations classified the Baltic GDP forecast table (annual change, %) Source: Luminor States as Northern European countries back in 2017. Three years later, the Baltic Estonia 2018 2019 2020 2021 2022 States have proved their right to the title Latvia 4.8 by demonstrating Nordic-style resilience Lithuania 4.8 4.3 -4.0 3.7 5.3 to the Covid-19 recession. Indeed, the 4.3 2.2 -4.3 3.2 4.5 Baltic economies, like the other Nordic 3.6 3.9 -1.7 2.7 economies, were among the least affected in the EU. The European Commission strengthen their focus on Scandinavian economic growth to accelerate to 3.2% in forecasts that the EU economy will shrink and Western European markets. Finally, 2021 and 4.9% in 2022. by 7.4% in 2020, but the Nordic and Baltic rigorous macro-prudential policies have Open and small, the Baltic economies economies will contract by a mere 3.8% helped avoid real estate price bubbles remain exposed to the risks which could and 3.3%, respectively. Hence, unlike the and thus increased resilience against the negatively affect the EU recovery. The 2008-2009 economic crisis when Baltic Covid-19 recession. biggest risk by far is an uneven multi- economies were among the hardest hit in speed “K-shaped” recovery, which may the EU, this time the economic contraction “V-SHAPED” RECOVERY IN THE increase the European North-South will be among the lowest in the EU and BALTICS economic and political divide. The similar to that in the Nordic countries. Retail trade and manufacturing existing threat of the Covid-19 pandemic The Baltic economies underwent severe production data indicate a “V-shaped” should not be disregarded either as it adjustments of external and internal economic recovery in all three Baltic will take some time for mass vaccination balances in the aftermath of the 2008- States, i.e. a sharp but short drop followed to be implemented. Hence, the activity 2009 global economic crisis, which by a robust and balanced recovery. The of some sectors, such as international increased their resilience to any external second wave of the Covid-19 pandemic will travel and leisure activities, will remain or internal adverse shocks. Moreover, temporarily slow economic activity at the depressed for some time to come. the economies’ structure has changed, end of 2020 and possibly the beginning Domestic challenges still include elevated with rapid expansion of high value-added of 2021, but will have a smaller negative unemployment levels and uneven sectoral service and high-tech manufacturing effect on economic activity compared to recovery, which could take years to (machinery, electronics, chemicals and the first wave due to less strict lockdowns resolve. Yet, at the same time, there pharma) constituting an increasingly and fading Covid-19 pandemic fears. are great opportunities coming with a larger share of exports. At the same time, Moreover, the Baltic economies will get record-high influx of EU money, which, if dependency on Russia and other CIS a boost from ongoing economic stimulus invested wisely, could facilitate economic countries significantly decreased after and a record-high influx of EU funds. In transformation towards more digital and the Russian economic crisis of 2014-2015, other words, pandemics come and go, but greener economies. which motivated Baltic companies to economic stimulus stays, hence we expect Retail trade dynamics in 2020 Source: Luminor Manufacturing production dynamics Source: Luminor in 2020 Per cent, annual change 10 Per cent, annual change 10 5 0 0 -5 -10 -10 -20 -15 -30 -20 January February March April May June July August September January February March April May June July August September Estonia Latvia Lithuania EU average Estonia Latvia Lithuania EU average 5

THE LITHUANIAN ECONOMIC OUTLOOK BALTIC PROPERTY OUTLOOK, 2020 THE LITHUANIAN ECONOMIC OUTLOOK SPECTACULAR RESILIENCE TO Pandemics come and go, but economic COVID-19 CRISIS stimulus remains. Hence, there is an The Lithuanian economy has increasing risk of the economy overheating in demonstrated spectacular resilience to 2021 and 2022. in some cases even building the Covid-19 crisis. During the first three concepts, and if possible, to reconsider new quarters of the year GDP declined by a office development plans outside the central mere 0.8% and is forecast to drop by as part of the city. little as 1.7% in 2020 as a whole, which is likely to be the lowest GDP drop in the EU. service exports (ICT, financial, insurance, surrounding municipality) increased by Lithuania’s post-crisis recovery has been intellectual property and other business 10,700, which makes it among the fastest not only fast, but also balanced, with services) have more than tripled during growing cities in the EU. Other major both domestic consumption and exports in last five years, going from EUR 800 Lithuanian cities have also experienced contributing positively. Retail trade and million to EUR 2.5 billion euros annually. population growth, with Kaunas, Klaipeda manufacturing production data indicate Exports of high-tech services have also and Siauliai increasing by 5,400, 2,500 that economic recovery in Lithuania been fuelled by the emergence of Kaunas and 1,000, respectively, in 2020. is “V-shaped”, i.e. a sharp but short as a regional centre for high-tech services. drop followed by robust and balanced LITHUANIAN CONSUMER recovery. LITHUANIA IS EXPERIENCING CONFIDENCE RECORD-HIGH IMMIGRATION Lithuanian consumer confidence remains Retail trade figures have been Unlike in the 2008-2009 financial crisis, among the highest in the EU, which particularly strong, running well (6-7%) Lithuania has avoided an emigration wave supports domestic consumption and the above last year’s levels throughout the and instead is experiencing record-high housing market recovery. Lithuanian summer and well into the autumn. Indeed, immigration, fuelled both by returning consumer confidence in October 2020 it could be said to be a “C-shaped” Lithuanian nationals and continued was the third-highest in the EU (just recover, for “Christmas”, since retail immigration from third countries behind Sweden and Denmark and ahead activity in the summer was reminiscent (primarily Ukraine and Belarus). The of Finland and Germany), which is a big of the pre-Christmas peak period. majority of immigrants settle in the contrast to the 2009 crisis. Consumer Manufacturing output is somewhat largest cities of Lithuania, resulting in confidence is supported by continued lagging but is also gradually recovering rapid population growth. The population wage growth, a stabilizing labour market and has almost reached pre-crisis of Vilnius in 2020 (mid-year, incl. and generous government support. levels. Given that major export partners (Scandinavian countries, Germany and Business centre “Uptown Park” in Vilnius Poland) are doing relatively well, one Credit: Vilbra could expect manufacturing production to reach pre-crisis levels in the first half of 2021. Interesting trends in Lithuanian economy in 2020: LITHUANIA BECAME THE LEADING EXPORTER OF ICT SERVICES IN THE BALTICS Lithuanian exports of ICT services increased by an impressive 50% in the first half of 2020, making it the number one ICT service exporter in the Baltics. Lithuania also became the leading exporter of financial services thanks to its fast-growing Fintech service industry. More generally, Lithuanian high-tech 6

BALTIC PROPERTY OUTLOOK, 2020 THE LITHUANIAN ECONOMIC OUTLOOK SEB Bank HQ in Vilnius Credid: SEB Bank LITHUANIA’S BUDGET DEFICIT IS Exports of ICT Services Source: Luminor EXPECTED TO BE THE HIGHEST AMONG THE BALTIC STATES mEUR, quarterly Lithuania is forecast to have a budget deficit of 8.8% in 2020 and 6.0% in 2021. 250 That would increase the public debt level to 51% of GDP by 2022, which would 200 still, however, be among the lowest in the EU. The budget deficit has increased 150 faster in Lithuania than in the other Baltic countries due to generous handouts by 100 the government in 2020 and increased public investment expenditure expected 50 in 2021. 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Estonia Latvia Lithuania 7

THE LITHUANIAN PROPERTY MARKET BALTIC PROPERTY OUTLOOK, 2020 THE LITHUANIAN PROPERTY MARKET RESULTS SHATTER PESSIMISTIC ECONOMIC FORECASTS Despite the circumstances, there has 7,000 sqm and Devbridge for 5,000 sqm Baltic transaction volume, at just over been no slowdown on the Lithuanian real of office space. These were the biggest EUR 115 million. This is only 9% less than estate market. Developers have continued office signings in Vilnius and in all the in the same period of 2019. Another EUR to complete planned projects and proceed Baltic countries in 2020, consisting of 43 million of investment volume was with new construction. The rental market active expansion of service centres and IT added in Q3 2020. The office segment was also more active than expected in the companies that are already operating on was the most active, accounting for first half of the year. The most notable the market. Transaction volume remained nearly 85% of total volume in Lithuania. office lease transactions were signed by quite high in H1 2020. Total investment in The total annual volume of investment Western Union for 15,000 sqm, Telia for Lithuania made up one-third of the total transactions in the Baltic region, including Lithuania, will decrease in Total investment in Lithuania in three 2020. As most investment transactions quarters of 2020, at just over EUR 160 tend to be concluded in the second half of million, accounted for one-third of the total the year, the reduced activity may reduce Baltic transaction volume. total investments to a level below EUR 700 million in the Baltic region, and close to EUR 200 million in Lithuania. Moody office in Vilnius Credit: Leonas Garbačauskas 8

BALTIC PROPERTY OUTLOOK, 2020 THE LITHUANIAN PROPERTY MARKET VINTED office in Vilnius Credit: VINTED Interesting trends on the Lithuanian investment market in 2020: TWO LARGE OFFICE INVESTMENT -1.7% LITHUANIA REMAINS A STABLE TRANSACTIONS INVESTMENT LOCATION GDP growth expected in At the beginning of 2020, Lithuania- 2020 Internationally, Lithuania is based Lords LB Asset Management considered a reliable country. purchased the IBC Business Centre EUR 260 MILLION With many countries downgraded in Vilnius, with a total area of 22,700 in the face of the pandemic, the sqm, from INVL Real Estate for EUR Total investment volume international credit rating agency 33 million. Meanwhile, following the expected in 2020 Fitch Ratings affirmed Lithuania’s lifting of the lockdown restrictions, A long-term debt rating in January Zenith AM acquired the second phase 115,300 sqm 2020 and kept a stable outlook. of the Park Town business centre Government debt had been relatively from the Lithuanian developer Darnu office space to come to stable until the economic downturn Group. The first stage was acquired in the Vilnius office market caused by Covid-19. Now it is likely 2018 and the second was closed after to reach 50% of GDP shortly. the completion of construction and in 2020 Nevertheless, Lithuania continues to achievement of full occupancy. High- borrow on both domestic and foreign quality prime offices are on investors’ OFFICE SEGMENT YIELDS REMAIN markets at the lowest pricing levels wish lists and the sale of the Park UNAFFECTED in history. Town is one of the first post-lockdown transactions on the Baltic real estate So far, sale prices in the most OFFICE CONSTRUCTION AT RECORD investment market. attractive office segment have not LEVELS been significantly affected. Yields have NEWLY CONSTRUCTED OFFICES remained just below 6% for prime Upon the completion of all planned AND LOGISTICS CENTRES REMAIN office properties and stand at 7.25% 2020 projects, space in the Vilnius ATTRACTIVE TO INVESTORS for the retail and industrial segment. office market will increase by 115,300 sqm or 16%, and the vacancy rate As a result of the pandemic, banks may grow to 7-10%. 2020 will are hesitant and financing volumes set a record year for new office have fallen sharply. Therefore, equity space supply in a single year – by investors are in the most favourable comparison, over the last five years, position. Such investors typically buy an average of 65,000 sqm of new so-called core or prime products, that space was completed per year. In any is, new construction or very good case, increased supply on the office offices in a city’s central business market will create new opportunities district or old town. The logistics for both tenants and investors. segment is attractive as well and is seen as second on the list of assets most in demand. 9

LITHUANIA. LEGAL. BALTIC PROPERTY OUTLOOK, 2020 LITHUANIA. LEGAL. REAL ESTATE INVESTMENTS AT A GLANCE MAIN RESTRICTIONS will be due to the securities intermediary Investing in such projects streamlines Generally there are no restrictions (except for share accounting services. Notary processes in acquiring rights to land, for some special purpose territories and costs for certification of a mortgage zoning and planning, migration, and limitation on agricultural and forest land) bond and for real estate registration are administrative procedures. Subject to EU to acquire land in Lithuania if a foreign insignificant. state aid regulation. investor is established in countries which are (i) not part of a political, military, MAIN TAXES NEW LAW: MUNICIPALITY economic or other unions or alliances No real estate transaction taxes or stamp INFRASTRUCTURE DEVELOPMENT of states established on the basis of the duties (except for notary fees and title LAW WAS ADOPTED former Union of Soviet Socialist Republics registration which are insignificant). The zones in municipalities shall be and (ii) members of at least one of the EU 15% corporate income tax with flexible designed as priority and non-priority / NATO / EEA or OECD countries. Reliable depreciation/amortisation rules. Generous infrastructure development zones. The title registration system ensures smooth participation exemption on share deals city shall invest in the development of tracking of title records. (for packages bigger than 10% held for infrastructure in the priority zones. at least 2 years). No withholding tax on And developers shall pay certain MAIN CLEARANCES share income of non-residents, applies infrastructure-development fees for Merger clearance may be required. for shares in real estate rich companies. using such infrastructure. Meanwhile, Investors (both foreign and local) are Flexible possibilities to settle input VAT in a in the non-priority zones infrastructure obliged to notify of and/or may be asked to cashless manner (transfer of VAT payment shall be constructed by developers. The pass particular screening procedures by the duty from the seller). first developer shall be compensated by Commission for Coordination of Security other developers that wish to use such of Objects Important to the National NEW LAW: CORPORATE TAX infrastructure in the zone. Specific rates to Security of Lithuania. Such screening is EXEMPTION FOR LARGE-SCALE be established by the municipalities. normally not needed in major cases of real PROJECTS estate cashflow investments. AML/KYC is Large-scale projects that meet the NEW LAW: UNDERWAY ENACTMENT necessary if a local bank is used. requirements of investing €20 million ON DEVELOPMENT ON STATE-OWNED CAPEX (in Vilnius €30 million) or €100 LAND MAIN ACQUISITION COSTS million and creating 150 new full-time For many years construction on state- Notary cost for certification of the sale- work-places (in Vilnius 200), where income owned land has been exposed to legal purchase agreement – up to €13,000 net of is generated mainly from manufacturing uncertainty. The legislature shall soon VAT. For a share deal, notary-certification or data centre operations, may enjoy 0% establish regulation on when the use can be avoided, though €3,000 net of VAT corporate income tax for up to 20 years. of state-land may be converted into a use suitable for development subject to The Government has ambitious agenda in payment of an extra “conversion” fee. modernizing the real estate development Also, construction on state-owned land will regulation and supporting the investments. become subject to a fee. On 11 November 2020 the fee estimate was 5-50% of the average land market value. This law is still a draft, yet very widely discussed. Vilnius, Lithuania 10

BALTIC PROPERTY OUTLOOK, 2020 LITHUANIA. LEGAL. VINTED office in Vilnius Credit: VINTED 11

THE LATVIAN ECONOMIC OUTLOOK BALTIC PROPERTY OUTLOOK, 2020 THE LATVIAN ECONOMIC OUTLOOK A LITTLE PATIENCE, PLEASE Latvia can be proud of how it has digital and greener economies. the possibly emergence of the housing overcome the challenges of 2020. The market from a long period of stagnation. decline of the Latvian economy has been For several months now, assessments True, we expected the latter more than less than the European average, and the of the possible trajectory of economic once before, but the timing for a housing performance of some industries, given development in the near future have market recovery could not be better than the circumstances, is truly spectacular. been relatively stable, and it is hoped 2021-2022. At the same time, however, it must be that this stability will continue. We acknowledged that the other Baltic states forecast that the Latvian economy will Interesting trends in the have developed faster. There is a risk shrink by 4.3% in 2020 followed by Latvian economy in 2020: that Latvia will continue to lag behind, moderate growth of 3.2% in 2021 and but that is possible to avoid. Hence, it quite impressive growth of 5.3% in THE HOUSING LOAN TO GDP RATIO is of the utmost importance for Latvia 2022. Our forecast for 2022 is relatively IN LATVIA IS THE LOWEST IN THE to effectively use the EU Recovery and optimistic, though we consider it justified EUROZONE Sustainability Plan and Latvia’s own in view of the unique opportunities of As a result of ongoing deleveraging, the public funding as well as the money for the Next Generation EU fund, RailBaltica housing loan to GDP ratio in Latvia fell the next EU financial period to facilitate funding, the global economic recovery from 40% to 15% during the last decade economic transformation towards more from the Covid-19 pandemic crisis, and and is now the lowest in the eurozone. The main reason for the drop is very low Efforts must be made to keep up with Estonia activity in the housing market, which, and Lithuania. The two big opportunities unlike in neighbouring Estonia and for Latvia are a public sector investment Lithuania, has failed to recover in recent boom and improvement in the governance of years. However, it is expected that a municipalities. post-crisis boom in economic activity will eventually reinvigorate it. LATVIAN EXPORTS OF GOODS REMAIN SURPRISINGLY STRONG Latvian exports of goods have Akropole Business Centre in Riga Credit: Akropole 12

BALTIC PROPERTY OUTLOOK, 2020 THE LATVIAN ECONOMIC OUTLOOK Shopping centre “Galerija Centrs” in Riga Credit: Galerija Centrs demonstrated great resilience to the the transport sector dragged the overall Source: Luminor Covid-19 pandemic crisis and managed to figures down. Latvia is still feeling the recover fast. In January-September 2020, effects of the diversion of Russian transit exports of goods were already higher than cargo away from Latvian ports. in the same period of 2019. Specifically, the Latvian food industry benefited from Exports Dynamics in Latvia 2020 increased demand for non-perishable food products, the wood industry benefited Per cent, annual change from increased demand for furniture and 20 other household items, and the chemical 10 and electronics industries also achieved 0 double-digit growth. Metalworking was a weak spot, with producers of car parts suffering the most. -10 LATVIAN EXPORTS OF SERVICES -20 STRUGGLE TO RECOVER Exports of ITC and other high value -30 added services continue remarkably well during the pandemic, but tourism and -40 January February March April May June July August September Export of goods Export of services 13

THE LATVIAN PROPERTY MARKET BALTIC PROPERTY OUTLOOK, 2020 THE LATVIAN PROPERTY MARKET LATVIA’S PROPERTY MARKET MOVES FULL STEAM AHEAD In terms of commercial real estate, the quarter. The second half of the year has volume in 2020 may be close to the Latvian property development market been more active, as expected, with close previous year’s level, with a volume of remains active. New properties across the to EUR 70 million total volume in Q3 2020. over EUR 230 million expected. office and retail segments will create new Interest is expected to grow in the retail supply for tenants and potential investors. and logistics sectors. Total investment Investment market volume in H1 has been relatively slow, however. The transaction Interest is expected to grow in the retail and market saw limited activity in Q2, and logistics segments, with investment volume the lion’s share of investment in the first seen exceeding EUR 230 million this year. half-year was completed at the beginning of 2020, with a total invested amount of just over EUR 40 million. Among others, EfTEN Capital acquired one office building and two logistics centres in the first Multifunctional project “Z-Towers” in Riga Credit: Z-Towers 14

BALTIC PROPERTY OUTLOOK, 2020 THE LATVIAN PROPERTY MARKET Shopping centre “Galerija Centrs” in Riga Credit: Galerija Centrs Interesting trends on the Latvian investment market in 2020: INSTITUTIONAL INVESTORS’ TRUST IN -4.3% business centre and expansion of the THE LATVIAN REAL ESTATE MARKET retail area, Linstow is adhering to its RETURNS GDP growth expected in mixed urban use development strategy. 2020 Two more new shopping centres with In early 2020, AirBaltic’s HQ, with formats not yet seen on the market a total area of 6,560 sqm, was EUR 230 MILLION are set to open in 2020: recently purchased by EfTEN Capital. In late opened Via Jurmala Outlet Village 2019, the Vienna Insurance Group’s Total investment volume and the Saga family-focused shopping VIG Fund acquired three office expected in 2020 and entertainment centre, which is in buildings with a total leasable area development next to the Riga IKEA. of 20,000 sqm in Riga from the 14 % Riga’s retail market is continuing to Baltic RE Group. That company’s grow, with strong availability of quality entry onto the market was the first growth in office supply is investment projects. purchase in the Riga office sector by forecast until the end of 2022 a Western European investor and one YIELD CORRECTIONS TO COME? of the biggest investments in Latvian year and by nearly 11% in 2019. The commercial property in several years. biggest office projects of the first half After years of compression, the prime One of the latest largest deals in of 2020 included the Z-Towers and Riga office yield stands at 6.10%, with 2020 was Lords LB‘s acquisition of Origo One business centres, offering retail and logistics yields at 7.25%. Citadele’s HQ, with a leasable area of tenants 25,000 sqm and 11,500 sqm Whether yield corrections will be over 17,000 sqm, from Citadele Bank. of class A office space, respectively. seen in the market will depend on At the end of Q3 2020, EfTEN Capital It is forecasted that new projects will forthcoming transactions. The office signed an agreement to acquire the be put on pause next year, since the segment remains the least impacted 50,000-sqm size Bergi Logistics office space that is on offer will need by the Covid-19 pandemic, and as the Centre from Lords LB. Interest to be absorbed, and completion of new supply of modern office space grows, remains strong and more such deals projects is set for 2022. the market will remain attractive to both could be completed in the next year. local investment funds and international RETAIL MARKET DEVELOPMENT IN RIGA players seeking new opportunities. NEW PROJECTS ON THE LATVIAN REMAINS ACTIVE OFFICE MARKET SMALL SCALE RETAIL PROPERTIES The new retail part of the Origo REMAIN ATTRACTIVE IN TURBULENT Experienced Baltic property shopping centre was opened in the city TIMES developers are continuing with centre and total reconstruction of the project development and construction old part is scheduled at the end of 2020. A shopping centre in Liepaja, Latvia, works. A 14% growth in supply is With the opening of the new Origo One was sold by Lords LB to a private forecast by the end of 2022. Over investor. The shopping centre has 115,000 sqm of space is being brought 25 tenants, the largest of which is to market as at least seven new office the Rimi retail chain and the Jysk projects are set to be completed household goods store, with a total one after another. The Riga office leasable area of approximately 6,300 market is seeing changes it has not sqm. The transaction was completed seen in the last decade, a time when despite Covid-19, which serves as proof new office projects have been rare of high motivation among all parties and the new office space market and the resilience of the retail sector. has stagnated. Intense development A transaction of such a scale in a of new projects boosted leasable secondary city underlines the continued space by 6% in the first half of this liquidity of high-quality, well-located assets. 15

LATVIA. LEGAL. BALTIC PROPERTY OUTLOOK, 2020 LATVIA. LEGAL. REAL ESTATE INVESTMENTS AT A GLANCE MAIN RESTRICTIONS companies. No participation exemptions significantly shorter time than foreseen Generally no restrictions (except for some for shares of investment funds or by regulatory enactments. special purpose territories and limitation alternative investment funds or for shares on agricultural land) to acquire land in more than 50% of the asset value of which NEW LAW: DIGITAL REGISTRATION OF Latvia if a foreign investor is established consists of real estate located in Latvia. COMPLETED CONSTRUCTION. in the EU, the EEA or Switzerland. Other Recently initiated changes (subject cases should be checked case by case, NEW LAW: “GREEN CORRIDOR” to adoption by the parliament) will yet regulation is liberal. A reliable title INTRODUCED IN RIGA simplify the process of registration of registration system ensures smooth Very recently a “green corridor” was a commissioned building or a newly tracking of roots of title. introduced by the Riga city construction constructed building in the Land Registry. authority in order to develop a more It will be possible to transfer the data MAIN CLEARANCES attractive environment for investments necessary for such registration digitally Merger clearance may be required. The and real estate development in the from the Construction Information local municipality has the right of first capital city of Latvia and allow for faster System to the Land Registry without any refusal if the real estate under sale is coordination of construction initiatives. certification by a notary public (which is located in its administrative territory. The construction authority has significantly currently needed). Such right is rarely used. Yet this facilitated the coordination procedure for influences the transaction timeline. AML/ the construction of new Group 3 buildings NEW LAW: RENT OF RESIDENTIAL KYC is necessary if a local bank is used. (the largest and most complicated types PREMISES of buildings, e.g. buildings with at least An entirely new law regarding rent of MAIN ACQUISITION COSTS five floors; a public building designated residential premises is currently in the Registration of mortgage: 0.1% of loan for at least 100 visitors; a storage building final stage of adoption in the parliament. value. Real estate title registration cost: with total area exceeding 2000m2) and The new law will foresee broader 2% of the value of the property. No Group 2 apartment buildings with more protection of landlords’ interests. This significant registration cost in case of than 100 apartments. Developers will be legislation is important for resi-for-lease share deals. able to obtain a construction permit in and mixed-use projects. MAIN TAXES Riga city construction authority introduces No real estate transaction taxes (except green corridor as a measure for facilitating for a 2% title registration fee and 1% fee coordination of construction processes to for contribution in kind of real estate to support real estate developers. share capital). 20% corporate income tax (except for withholding). 3% withholding tax for non-residents on alienation of real estate in Latvia / real estate rich Riga, Latvia 16

BALTIC PROPERTY OUTLOOK, 2020 LATVIA. LEGAL. Multifunctional project “Z-Towers” in Riga Credit: Z-Towers 17

THE ESTONIAN ECONOMIC OUTLOOK BALTIC PROPERTY OUTLOOK, 2020 THE ESTONIAN ECONOMIC OUTLOOK STRONG ECONOMIC RECOVERY Interesting trends iin the UNPRECEDENTED BOOM IN ESTONIAN DRIVEN BY CONSUMERS Estonian economy in 2020: E‑COMMERCE AT THE HEIGHT OF THE Like in the period of the euro debt crisis CRISIS in 2012-2013, the Estonian economy ESTONIAN ECONOMIC RECOVERY Turnover increased by more than 40% and other northern EU economies HAS BEEN DRIVEN BY DOMESTIC (y/y) on average in March and April, again showed greater stability and CONSUMPTION compared to the EU average of 32%. The flexibility at the height of the Covid‑19 Retail sales already exceeded last year’s surge in e‑commerce activity reflects an pandemic. The impact of the coronavirus level in May, with continued robust acceleration of the digitalisation trend, on Estonia’s open economy was growth during the summer as well as in which allows people to shop without not as strong as feared – economic September and October. During the first leaving their homes. E‑commerce is decline in Estonia is forecast to be three quarters of the year, retail sales just the tip of the iceberg for what new roughly half the EU average. The quick increased as much as 2.6% y/y despite technology has to offer potentially as recovery of the Estonian economy has the free-fall of foreign tourism. Retail we merge 5G with the power of AI, big been primarily driven by extremely trade experienced a V‑shaped growth data analysis and quantum computing. strong consumption this time. It is an bounce, which cannot be said for the Estonian e‑solutions allowed the economy outstanding achievement that retail sales whole economy. to function as much as possible during in Estonia as of May this year already the quarantine period (even real‑estate exceeded last year’s level. Export and transactions were digitally signed, though investment growth remain in negative in limited number). territory, but strong support measures for the economy, fading fear of the As in the period of the euro debt crisis, Covid‑19 pandemic and newly emerging Estonia, like other northern EU economies, foreign demand mean recovery of the demonstrated higher stability and flexibility economy, now driven by export and at the height of the Covid-19 pandemic. industry, will become more broad‑based when bouncing back next year and in the Noblessner district, future. Tallinn Estonia will see a turnaround from this year’s contraction of 4.0% to strong growth of 3.7% in 2021. The speed of the economic recovery will be fast in the first stage but remain uneven across economic sectors for the time being. Some economic sectors are facing “a new normal”, which means a permanent change in the number of jobs at least during the forecast period. The distancing requirements established to restrict the spread of Covid‑19 have boosted digitalisation of the economy and technological transformations, the impact of which on business models and the labour market will last for years. The best examples of this are the e‑commerce boom and the rapid growth of the data communication traffic in the digital economy. Estonia has the opportunity to steer smart development by investing such large sums in the smart economy. 18

BALTIC PROPERTY OUTLOOK, 2020 THE ESTONIAN ECONOMIC OUTLOOK Business centre SKYON in Tallinn Credit: SKYON RECOVERY OF EXPORTS WILL TAKE Retail Trade and Manufacturing Production Growth in Estonia Source: Luminor TIME AS THE GLOBAL ECONOMY AND INVESTMENT APPETITE SUFFERS Per cent, annual change FROM UNCERTAINTY AND SPARE 10 CAPACITY Estonian exports have dropped relatively 5 more than those of the other Baltic countries due to higher reliance on 0 exports of travel services and capital goods. Hence, it will take more time for -5 exports to recover to pre-crisis levels. That is expected to take place in mid-2021. -10 -15 -20 January February March April May June July August September Retail trade Manufacturing production 19

THE ESTONIAN PROPERTY MARKET BALTIC PROPERTY OUTLOOK, 2020 THE ESTONIAN PROPERTY MARKET ESTONIA REMAINS ATTRACTIVE TO INVESTORS EVEN IN TIMES OF UNCERTAINTY The commercial real estate market two record-breaking deals on the Tallinn and investment volume is expected to remains very strong in Estonia. Total market, one of which was the largest more than double in 2020 compared to office supply increased by 21,300 sqm, investment transaction in the market’s 2019, reaching EUR 220 million. or almost 3%, to 827,300 sqm in 2019. history. In H1, more than 55% of the total Further modern office space is under Baltic volume was transacted in Estonia, development, although vacancy rates are slowly increasing. At least 100,000 sqm The first half of the year saw a volume of of new supply may arrive in 2020 and the nearly EUR 200 million, including two record- coming year. The office segment in Tallinn breaking deals on the Tallinn market, one of remains the largest and most balanced which was the largest investment transaction among the Baltic capitals. Prime office in the country’s history. yields feel pressure from the market uncertainty and remain compressed at 6.0%, while retail and industrial yields are at 7.25% in both segments. The first half of the year saw a transaction volume of nearly EUR 200 million, including Maakri-Kvartal complex in Tallinn 20

BALTIC PROPERTY OUTLOOK, 2020 THE ESTONIAN PROPERTY MARKET “Tallink” office building in Tallinn Credit: Tallink Interesting trends on the Estonian investment property market in 2020: RESIDENTIAL PORTFOLIO IN TALLINN -4 % the total assets of pension funds. FINDS NEW OWNERS Among Estonian pension funds, the GDP growth expected in LHV funds are the most active in At the beginning of 2020, Estonia’s 2020 terms of investing in Estonia. LHV capital of Tallinn witnessed the have been continually increasing largest investment transaction in the EUR 220 MILLION their investments in the Estonian country’s history. US private equity real estate market, and especially firm LCN Capital Partners sold a Total investment volume in residential real estate. As of portfolio of about 1,200 apartments expected in 2020 July 2020, Estonia stopped state for EUR 144 million to ICG, which is payments into the second pillar of listed in the United Kingdom. The 100,000 sqm the pension system until September apartments, which are rented to 2021, primarily as a result of the the municipality of Tallinn, were of new office space seen on economic impact of the Covid-19 purchased by LCN in 2015. They the Tallinn office market in pandemic. Some EUR 350 million is to comprise 108,000 sqm across nine be reimbursed in 2023-2024. blocks and were completed in three 2020 and 2021 stages, starting in 2006. RETAIL STRUGGLES PENSION FUNDS SLOWED DOWN THE LARGEST OFFICE INVESTMENT Retail sales in the first half-year TRANSACTION ON RECORD A few years ago, the state eased and especially the second quarter investment restrictions for pension of 2020 in Estonia were affected by At the end of May 2020, Sweden- funds. As a result, investments the pandemic. As the Covid-19 virus based East Capital acquired the SEB in Estonia have almost doubled. spread, shopping centres were closed HQ office building from the Laurus Altogether more than EUR 600 million for a period of almost two months. fund, which is managed by Partners has been placed in the Estonian All shopping centres saw a significant Group and Northern Horizon. The economy, accounting for 15% of decrease in footfall and turnover, but transaction’s value was EUR 45.75 thiat was expected to be temporary, million. The building has a total with a gradual recovery already leasable area of approx. 16,000 sqm. underway. The delicate situation on The property is the first acquisition Tallinn’s shopping centre market of the East Capital Real Estate IV accelerated the reorganization plans fund, which has a target size of EUR of the T1 Mall owner company. Despite 400-500 million of assets under uncertainty on the market, Tallinn is management. expecting a further increase in retail supply. The Porto Franco shopping centre is under development as part of a mixed-use project. Completion, expected in 2021, will add 32,000 sqm of retail space. 21

ESTONIA. LEGAL. BALTIC PROPERTY OUTLOOK, 2020 ESTONIA. LEGAL. REAL ESTATE INVESTMENTS AT A GLANCE MAIN RESTRICTIONS companies on distribution of profits. With the help of digital signatures, this Generally no restrictions, except that the Capital gains of non-resident companies means that all real estate transactions acquisition of certain immovables may from the sale of Estonian real estate can be made without the need for physical be restricted or forbidden for foreign property, rental income, etc., is subject contact of the other party or a public persons (natural or legal) on grounds of to a 20% income tax. No participation notary. the public interest (concerns immovables exemption on share deals by resident used as profit yielding land, mostly companies. Non-residents’ capital gains NEW LAW: OK TO PLAN LESS agricultural/forestry) or for reasons from share deals are taxable if the PARKING SPACES IN TALLINN CITY of national security/defence (concerns target is real estate in Estonia and the CENTER certain strategic areas). Reliable title non-resident owns at least a 10% stake In mid-September 2020, the Tallinn registration system ensures smooth in the target entity at the time of the City Council adopted new rules on the tracking of roots of title. transaction. required number of parking spaces to be planned for residential projects in the MAIN CLEARANCES NEW LAW: REMOTE AUTHENTICATION city. The new rules are driven by a need Merger clearance may be required. AML/ The law amendments enabling the remote to reduce traffic in and through the city KYC, if a local bank is used (especially authentication of notarial transactions centre. Accordingly, the new rules would relevant in share deals where the shares were adopted already in 2019 and by reduce the required number of parking mostly are held with intermediaries and a lucky coincidence entered into force spaces per apartment in the centre. At the depository is located in Estonia, thus just before the pandemic in February the same time, the rules would require a local bank and security account may be 2020. That enables performing notarial more parking spaces to be planned for the required). acts and authenticating agreements intermediate zone between the city centre remotely. Remote performance of notarial and suburbs. This is explained by the MAIN ACQUISITION COSTS (NET OF acts requires a video connection to be need to reduce parking on the city streets VAT) established, which a person can do from in that zone, which has been common Notary cost for the certification of real anywhere, including their homes. Remote around some new residential areas. The estate transactions depends on the value notarial authentication has the same new rules also push for more underground of the transaction, may be up to 0.7% of legal force as in-person authentication. or closed parking spaces. the value. Real estate title registration cost is insignificant. Digital signatures and remote authentication enable to execute Estonian real estate MAIN TAXES transactions from anywhere in the world. No real estate transaction tax (except for insignificant stamp duties and notary fees based on the value of transaction). 20% corporate income tax for resident Tallinn, Estonia 22

BALTIC PROPERTY OUTLOOK, 2020 ESTONIA. LEGAL. Business centre SKYON in Tallinn Credit: SKYON 23

● CONTACT AND ADDRESSES BALTIC PROPERTY OUTLOOK, 2020 CONTACT AND ADDRESSES Real estate advisory firm Newsec Law firm Walless Luminor Bank LITHUANIA LITHUANIA LITHUANIA Konstitucijos pr. 21C Partner Indrė Jonaitytė-Gricė Konstitucijos ave. 21A Quadrum North, 8th floor +370 614 95783 LT-03601, Vilnius LT-08130 Vilnius [email protected] +370 5 252 6444 Upės str. 23 LATVIA [email protected] LT – 08128, Vilnius Skanstes str. 12 www.newsec.lt www.walless.com LV-1013, Rīga LATVIA LATVIA ESTONIA Vesetas iela 7 Partner Kristīne Gaigule-Šāvēja Liivalaia str. 45 LV-1013 Riga +371 29 232 988 EE-10145, Tallinn +371 6750 84 00 [email protected] [email protected] Sporta str. 11 www.newsec.lv LV-1013, Riga www.walless.com ESTONIA Pärnu mnt 12 ESTONIA EE-10146 Tallinn Managing partner Piret Blankin +372 533 05313 +372 514 1979 +372 534 68308 [email protected] [email protected] Liivalaia str. 45 www.newsec.lt/en EE – 10145, Tallinn www.walless.com 24