EfTEN Capital AS, an Estonian asset manager, plans to boost investments in Latvian property as its Baltic neighbor benefits from the European Union’s fastest economic growth, euro-entry prospects and low interest rates.
EfTEN, formed in 2008 and specializing in commercial property, aims to invest 30 million euros ($39 million) in Latvia this year after concluding its first deal last month in Jelgava, near the capital Riga, Chief Executive Officer Viljar Arakas said in an interview in Tallinn today.
“Unlike in Estonia, you can strongly feel the presence of Russian private capital there, which has kickstarted the housing market,” Arakas said. “But there are very few players representing institutional capital and we are trying to help fill a void which strangely hasn’t changed much since the economy started recovering.”
The former Soviet republic, with the highest share of Russian speakers among the three Baltic states, exited a 7.5 billion-euro ($9.7 billion) International Monetary Fund-led bailout last year when the economy expanded 5.6 percent. Latvia meets all conditions for the Jan. 1, 2014 currency switch, according to its central bank and government, which would make it the 18th euro member after Estonia joined in 2011.
The volume of Baltic property trade, which hit a trough in 2009, was less than 200 million euros last year, according to EfTEN, compared with more than 900 million euros at the market’s 2007 peak. This is mainly due to low interest from Nordic pension funds and other institutional investors that exited Baltic investments before the crisis and haven’t returned, Arakas said.
EfTEN today received an equity injection of 14.5 million euros, mainly from local pension funds, boosting its gross asset value to 120 million euros, Arakas said. The company, which competes in the Baltics with Stockholm-based asset manager East Capital and Copenhagen-based Baltic Property Trust, has no immediate plans to invest in Lithuania, he added.
“Latvia, which was hit most in the crisis, is clearly the most interesting target today,” Arakas said. “We will rather select more complex properties, where you have to rebuild, change tenants, or those that are in financial difficulties, in short, than ones that aren’t nice and shiny projects.”
Baltic capitals’ property yields, or the ratio of annual rent to purchase price, were just above 8 percent last year, according to EfTEN estimates. The yields, used to gauge returns on property investment, exceeded those of the neighboring Nordic capitals by 3 percent, compared with 6 percent three years ago when the three nations started to recover from the deepest economic contractions in the 27-member European Union.
“When we look at European Central Bank policies today, and look at the price of money in the context of Baltic economic outlook, it has to mean higher property prices in the region,” Arakas said.