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EfTEN Capital investment outlook – 10 topics to follow in economy and Baltic property market in 2026
BUSINESS CLIMATE
Business cycle.
Growth in major economies provided little surprises in 2025 – it slowed in the US and stabilised at low level in Europe. The instability around the US tariff policy caused volatility in global equity markets and had some negative impact on European manufacturing sentiment but had a surprisingly small effect on global growth. At least so far.
A significant part of the Baltic export sector is dependent on providing sub-contraction to the European industrial sector, whereas the third of value adding in global industrial sector is done nowadays in China Going into 2026 the main new development to watch from the Baltics perspective is whether the German manufacturing sector which has struggled for years from high energy prices, competition from China and increasing US tariffs has found the bottom and will show the first pick-up signs. The new German initiative of launching the 500 billion euros defence and infrastructure program needs close monitoring. It has a substance to significantly increase euro zone domestic demand and potentially followed by higher inflation expectations in mid-term outlook.
Private equity markets have underperformed the listed markets for the past 4 years. The number of new funds and dry powder have been deteriorating for past 4 years. Questions everyone is asking that will the AI bubble burst in 2026 or not? Noone knows the answer. Once it will, it will most certainly make private equity markets more appealing, and more funds will be allocated to private equity once again. Kind of flight to safety from listed markets turmoil.
Interest rates and inflation.
Disinflation in Europe which started in 2024 continued also in 2025. Instability around global tariffs and sticky services’ prices were balanced by stronger euro and lower oil prices. As a result, inflation fell in the euro area from 2,4% in 2024 to slightly above 2% in 2025. This allowed the ECB to cut interest rates only four times and as a result the 3 months EURIBOR fell from 2,9% at the start to 2025 to almost 2% by December. In the beginning of year 2025 markets expected 6 rate cuts.
Stronger euro will continue to pass into prices also during 2026 and no short-term robust growth pick-up is expected in the euro area, dollar weakness is set to be continued. Thus, inflation will remain around 2% also next year. As markets price in almost no change for the EURIBOR during 2026, bank deposits will not offer a meaningful savings alternative for investments. It can be expected that the widely monitored 6m EURIBOR will stay in a range of 2,1 – 2,5% as the real interest rate needs to be positive in 2% inflation environment.
Property market in the Nordics.
In Scandinavia business cycle did not pick up as expected – GDP growth remained below 2% in Sweden and even below 1% in Finland. The Finnish below bar economic performance in year 2025 has been the main obstacle to Estonian GDP growth. On a positive side, consumer confidence improved but construction sector and housing market remained still weak. Swedish economic growth has turned the corner and the same expected in Finnish macro economy whares the Bank of Finland suggest 1,5% – 1,8% economy growth in year 2026. Commercial real estate sector transaction activity improved for the second year in a row – transaction volume will likely hit 30 bn EUR. This is ca 10bn EUR more than at the bottom of 2023 but at the same time 10bn EUR less as compared to the past 10-year average annual transaction volumes.
Despite sharing a long border with Russia, foreign investors perception towards Finland is in a stark contrast to the Baltic states. In Finland foreign investors were net-buyers on a commercial property market in 2025, making 50% of the total transactions, while they are still seeking exit possibilities from the Baltics. The Finnish property market is far more liquid than Baltics, history with confronting Russia is completely different than ours, plus highly trained army all play some factor in foreign investor confidence. We should not forget that Swedish investments are accounted in Finland as foreign investments.
BALTIC PROPERTY MARKET
Bank financing.
For the second year in a row bank financing conditions remained historically favourable in the Baltics. We can state that the bank lending conditions have never been as good as those are today in 18-years of EfTEN Capital history. Deposits in the banking sector are exceeding the loan book and there are no signs that tax on banks has pushed lending rates higher in Latvia and Lithuania. In addition to favourable lending rates, there are also signs that banks are willing to increase the leverage on selected commercial properties above the levels seen during the past decade. Historically the norm in the Baltics has been that banks offer ca 60% leverage of the property value in commercial sector. More recently stronger properties have received leverage offers even 70% of the value.
With EURIBOR at ca 2% and due to relatively low demand for business loans in the Baltics, bank financing will remain very favourable also in 2026. The gap between financing terms of strong and stable properties vs weaker and speculative ones is increasing.
Bond financing.
Real estate sector bond issues for retail investors have been a new and growing trend in the Baltics in 2025. An increasing number of residential and commercial property developers have tapped the retail bond market for additional leverage. The volume of the individual issues is small, generally below 10mio EUR. Also bond market is far from replacing the banking sector in real estate financing. Thus, this new trend is due to its limited size unlikely to pose a systematic risk for Baltic economies or for the property market. However, it is a matter of time when first bond issues for retail investors will need a restructuring as the risks in some cases are much higher than other lenders are ready to take. Individual real estate project specific bonds are with highest risk. We argue that in most of the Baltic bond emission the retail investors take an equity level risk, with a capped upside – fixed coupon rate, while the downside risk is not covered. There has not been any bigger blow-up / restructuring need in Baltic bond markets yet. Once it happens, and it will, bond investors will become far more cautious. The Baltic property market has witnessed one widely known case where initial bond emission was rolled over at 2,5x higher interest rate than the initial emission. High and expensive leverage is a big troublemaker in real estate business.
Availability of equity capital.
Availability of new equity capital has almost dried out in the Baltic real estate market. Foreign investors continue to be on a sell side for very different reasons, mainly internal reasons which are not connected to security concerns. Local pension funds are decreasing their property exposure due to II pillar reforms in Estonia in 2021 and in Lithuania in 2026. At the same time there are number of Baltic property funds which approach their end term in 2026-2027. This amplifies the lack of equity in the sector even further. Main equity providers are local family offices and private high net worth investors whose investment capacity is however significantly smaller. The situation is unlikely to change in 2026 and thus finding buyers for bigger properties remains a high mountain to climb. Larger transactions can only be executed with multiple different equity investors uniting to a single club like in Kristiine shopping centre transaction demonstrated.
Transactions and property yields.
For the third year in a row the Baltic transaction market in commercial real estate is almost frozen for properties with value above 50mio EUR. Most of the transactions are executed at a deal level below 10mio EUR value. As a result, also property yields for larger transactions tend to be higher – properties with strong tenants found buyers at ca 8,5% net yield in 2024 and 2025. The lack of new equity will keep the yield level high at the same time when in CEE region the yield compression is taking place.
Due to the lack of new equity capital, the pressure on yields will remain very low also in 2026. At the same time financing costs are very favourable, which gives a strong boost for real estate investments’ return on equity. In short – 2026 is a full buyer’s market once again where high-teens of ROE is a new norm.
Tenant behaviour and rents.
Demand for new leases remain very diverse between different property market segments. Situation continues to be the weakest in office segment. New office supply, especially in Vilnius, is putting a pressure on rent prices and is increasing vacancy levels. B-class segment is under the strongest pressure, where in some instances vacancy rates are approaching already 50% and rent levels are more than 30% below the ones seen before the Covid. Competition for tenants is intensifying, prompting landlords to modernize older buildings or consider repurposing them. Converting old offices to residential use is a new trend where local municipalities need to play their role to allow it to happen. To keep the price of residential in affordable level, city municipalities need to bend their strict policies to allow older offices to be converted and sold as residential units.
On the other hand, the situation in the retail segment remains the strongest. The long-held forecasts that large shopping malls will become redundant have proved fully incorrect. In fact, many large shopping centres in the Baltics showed historically strongest financial performances in 2025. We can state based on EfTEN’s retail portfolio of 14 properties in total value of 500 million euros, that year 2025 was the best year in retail sector. Growth in retail sector is expected to continue also in 2026. In Estonia personal non-taxable income will increase and in Lithuania people will be allowed to withdraw their pension 2nd pillar savings which will give a huge, but very short term lived boost to retail sector. On the other hand personal income tax for higher earners in Lithuania will increase.
Retail parks near the new residential developments around capital cities are becoming a new trend. These are multiple tenant properties with good parking facilities and a separate access to every tenant. Several such retail parks is expected to be built also in 2026.
The Baltic logistics and industrial market remain active but is showing early signs of softening, with Estonia facing rising stock‑office vacancies and Lithuania shifting strongly toward occupier‑led, energy‑efficient developments. In Latvia, new supply is growing while speculative development for 2026 – 2027 accelerates, raising questions about future demand absorption as current activity mainly comes from expansions and relocations. Across the region, increasing vacancy pressure is likely to push rents downward, particularly for older or less efficient assets.
Residential market.
In 2025 the residential property market activity surprised positively in all Baltic countries. In Tallinn transactions with new developments were up by ca 20%, while even more in Riga and Vilnius. In per capita terms Vilnius is by far the most active among the Baltic capitals, where on average over 450 transactions per month with new developments were done in 2025. The respective figures for Tallinn and Riga and slightly above 100.
In 2026 residential market is expected to remain around the levels seen in 2025. Interest rates remain stable and household income increases – both are a tailwind for residential market. In Lithuania the market will get an extra support from the reduced own financing requirement. The level of private mortgage rates to GDP is the highest in Estonia among the Baltic countries. That paves a way of good potential in Latvia and Lithuania especially as most of the mortgage lenders are the same in all of Baltics.
Demographics and affordability.
Demographics and deteriorating housing affordability are both having a visible effect on residential market in Baltic countries. In all three countries the cohort of 30-40 years old is the biggest while the 20-30 year old is almost 1/3 smaller. For example, in Estonia this has already decreased the demand for smaller apartments while the demand for larger apartments and terraced houses is increasing.
The decreasing affordability in capital cities is pushing more residents to the surrounding counties. In all Baltic countries the new residential developments around the capitals are becoming increasingly popular
Latvia is becoming more a one city economy. Riga and surrounding area produce approximately 70% of Latvian GDP. The same trend is witnessed in Estonia where Tallinn and surrounding municipalities give 65% of Estonian GDP. In Vilnius in contrast 45% of Lithuanian GDP is made. Lithuania has 5 bigger regional centres. The real estate activity will concentrate even more on capitals.
SUMMARY
Real estate market in the Baltic countries is unlikely to provide big surprises in 2026. Sideways movement is expected in all sectors. Macroeconomic sentiment will get a boost, at least in Estonia, where the economy expected to grow 3%. This will lift the economic sentiment across the board. Residential market will remain strong as low interest rates and increasing income levels are supporting the demand for new developments. In Lithuania extra tailwind will be provided by pension reform and reduced own financing requirements. There is a risk that already a very strong Lithuanian market will start to show overheating signs if unproportionally large part of pension assets are being channelled to the residential market. This is however topical for 2027 and 2028, rather than next year. Lithuanian retail sector will enjoy “double Christmas” effect as Estonia witnessed the same in year 2021 after the second pillar pension withdrawals were allowed.
In commercial real estate market transaction activity will remain very subdued. Larger transactions should not be expected as there is just not enough equity capital for this. Thus, activity will concentrate mainly on smaller transactions – below 20mio EUR. Larger transactions can only be executed with multiple different equity investors uniting to a single club. The market will remain completely buyer’s market. The only sellers, or more forced sellers for various different reasons, are foreign investors.
EfTEN Capital investment team