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EfTEN Capital investment outlook – 10 topics to follow in economy and Baltic property market in 2023


Interest rates: For the second year in a row, major central banks hiked interest rates more than markets had priced at the start of a year.  In the euro area January 2023 expectation was that Euribor rates will peak at 3,5% in June. In reality they peaked at around 4% in September-October. In this context it is somewhat surprising that except for a small hick-up in US banking sector (bank run on Silicon Valley bank in March), increased debt service costs did not result in any larger financial stress.

In the euro area interest rate expectations started to turn in late November 2023. For 2024 markets price in more than 100bp of rate cuts by the ECB. From historical perspective this would be a fast turnaround by the ECB, but one should consider that the 2022-2023 hiking cycle was also the most aggressive ever seen.

Business cycle: Despite increasing interest rates, slowdown in global growth was less severe in 2023. However, the effect of monetary tightening comes with a lag, and it’s beginning to hit euro area economy in full force around the turn of the year. As a result, after a year of no growth next year does not seem much brighter and the euro area economy faces the risk of a prolonged period of standstill.

Baltic economies where in the middle of a “perfect storm” in 2023. The main trading partners in Scandinavia were the “weakest link” in Europe, while trade (especially in cheap commodities) came to halt with Russia. As a result, all 3 countries had a negative GDP growth over 9m 2023, from -3,5% in Estonia to -0,5% in Lithuania. No fast recovery is seen for 2024.

Inflation: Inflation has fallen much faster than expected in almost all parts of the World. In fact, it has been so fast, that some analysts have started to question whether the higher core inflation numbers were no more than second round effects which are phasing out with a short lag and had nothing to do with excess monetary stimulus from 2009-2021. In the Baltics the disinflation process now ends the erosion of real income, but the latter remains well underwater, relative to pre-2022 levels, for at least another 18-24 months.

Property market sentiment: Listed markets are always first to react to changing market sentiment. In the early phase of interest rate hikes in summer 2022, prices of European listed property market companies fell by nearly 50% (similar magnitude to the 2008 financial crisis) and their borrowing costs from bond market surged. With the turn on market interest rate expectations towards the end of 2023 the sentiment towards property sector has changed. Stock prices of listed European real estate companied posted a 30% return during the past two months of 2023 while borrowing costs from bond market decreased by nearly 100bp. Thus 2024 will be the first year since 2021 when markets start with positive sentiment towards property sector assets.




So far real estate sector in the Baltics has resisted the sharp increase in interest rates surprisingly well. There has been almost no forced sale of commercial property assets while Baltic countries have been among the very few in Europe where residential property prices have not fallen.

Leverage and financing: Main reason behind resilient Baltic property market is related to leverage. It’s level before the interest rate increase was very moderate and largely based on borrowing from banks. Thus, the temporary closure of real estate sector bond financing did not have any systematic effects to Baltic property markets. Financing conditions from Scandi-owned banks did deteriorate somewhat but not as much as feared, especially for stronger projects. Looking into 2024 no big changes in property market financing is expected: banks will maintain their existing lending standards while gap in access to bank financing between strong cash-flow projects vs riskier projects will remain (if not increase).

Property yields: 2023 bigger commercial property transactions were reported at yield levels around 7%. This is ca 150bp above the levels seen in 2021. Year-end transactions are an indication that (at least) temporary new market equilibrium has been found. Despite the expected fall in interest rates, it is unlikely that property yields will fall back to 2021 level and we expect that transactions in 2024 will be made with yields close to the levels seen in late 2023.

Tenant behavior and rents: With interest rate peak behind us, the focus in Baltic commercial property market will turn to the preservation of rental income. Continued weakness in business cycle does not create new “natural” demand for commercial leases. Weakest sector is office where vacancies have increased the most in all Baltic capitals, especially in Riga. Going into 2024 office demand will remain low and landlords have little chance to index rents. Offices with low and decreasing occupancy will remain the main sector in Baltic real estate market where forced sale of assets could be seen.

Foreign investors: Foreign investors were on a sell side in Baltic property market in 2023 – in top 3 largest commercial real estate transaction the seller was a foreign investor. In Europe and especially in Scandinavia it takes time to sort out the real estate sector problems related to excess leverage. Thus, these companies and funds are unlikely to seek to expand overseas soon. As a result, it is likely that foreign investors will be on a selling side in Baltic property market also in 2024 and no new long-term foreign capital is expected to enter.

Transaction activity: Except for three large transactions towards the year-end (Tecnopolis office complex in Vilnius, Viru shopping centre in Tallinn, Rimi central warehouse in Riga), 2023 was very quiet in the Baltic commercial property market. No strong pick-up in transaction activity is also expected for 2024. Regional property funds which were raised before the COVID depleted most of their free capital in 2023. For local pension funds and insurance companies bond yields still offer a meaningful alternative for real estate investments. Al-in-all, little new capital is likely to enter Baltic property market.

Housing affordability: The majority of mortgage agreements in the Baltic are with floating interest rates. Thus, rise in euro interest rates translated into fast increase in mortgage servicing costs. In spring 2022 average mortgage interest rate was ca 2% and increased close to 6% by the end of 2023. For 20-year mortgage this means 45% increase in servicing costs or alternatively (to keep servicing costs at spring 2022 levels) 30% lower mortgage amount. However, this did not result in falling housing prices. As a result, housing affordability deteriorated significantly in all Baltic capitals – in Tallinn and Vilnius even close to the levels seen before the 2008 financial crisis.

2024 will bring some relief for housing affordability through decrease in interest rates. However, some housing market price adjustment (at least vs salaries) should also be seen for the housing affordability to normalize again. As a result, we are likely to see little change in housing prices, no significant pick-up in transaction activity and low new residential construction starts as currently high inventory levels need to be sold down. Renting will continue to be increasingly feasible alternative, especially for families with budget constraints.



For the past three years property market in the Baltics has faced several headwinds. It started with covid, which mentally ended on February 24, 2022, with Russia’s full-scale invasion of Ukraine. This was followed by an energy price crisis, which resulted in hyperinflation in the Eurozone and led to the fastest ever interest rate hikes.

It can be assumed that these strong headwinds have subsided by now, and in 2024 the real estate market can find its rhythm again. Commercial real estate transaction activity will somewhat increase but remains considerably lower than in the pre-covid period. The main issue is the departure of foreign capital from the Baltic countries. This is not so much due to the security situation as to the fact that foreign investors continue to face problems in their home markets. Especially in Scandinavia. The demand for commercial leases will remain extremely poor, and the focus of property owners is on maintaining the existing tenant base. The new supply of commercial premises will be low, as new projects do not receive financing under suitable conditions. The yield level of the best commercial buildings remains at approx. 7%, which has the potential to decrease by approx. 50 basis points when the Euribor falls.


EfTEN Capital investment team

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