Why Lithuania?

A series of economic reforms implemented by successive Lithuanian governments has seen the country emerge from the Russian financial crisis of 1998 to become one of Europe’s fastest growing economies. GDP growth has averaged 7.6% since 2001 and accompanying wage growth and increasing access to credit has helped instigate unprecedented local demand for housing.

Despite increased construction activity, the number of dwellings completed per one thousand inhabitants in 2006, at just 2.1, remains very low in relative terms (see graph). In fact, the average amount of interior living space per person in Lithuania is just 23.8 m², compared to an EU-25 average of 40 m². Moreover, dwelling stock per capita is only c. 80% of the EU-15 average and, if the current rates of change in population numbers and stocks of dwellings prevails, analysts predict that it may take Lithuania 40 years to reach parity with its western neighbours. In Vilnius, where the rate of construction is highest, this period could still be 17-19 years.

Source: European Mortgage Federation; Statistics Departments of Lithuania, Latvia and Estonia

The present relative immaturity of the Lithuanian real estate market is further demonstrated by the fact that mortgage debt constitutes just 11% of Lithuanian GDP, compared with an EU average of 48%.

In this climate of strong demand and under-supply, real estate prices have increased significantly year on year. Following annualised first quarter price growth of 8% in 2006, the comparative rate of increase for 2007 was 21.7% in Vilnius and, at 20% growth, Knight Frank anticipate that Lithuania will be this year’s top performing European residential market.

Key Factors Driving the Lithuanian Property Market:

• Stable political and business environment: Lithuania is a member of the World Trade Organisation and acceded to the European Union on 1 May 2004. Part of European Exchange Rate Mechanism II, in preparation for full currency conversion, the country is now considered a sound business environment, ranking 14th in the World Bank’s 2007 Ease of Doing Business report and 22nd in the Heritage Foundation’s Index of Economic Freedom (2007);

• Economic growth: The Lithuanian economy has grown at an average rate of 7.6% since 2001. Annualised first quarter growth totalled 6.7% in 2007 and year end growth is expected to reach 8% versus an EU-27 average of 2.9%;
• Foreign Direct Investment: Lithuania occupies a key strategic at the geographical centre of Europe, with key Scandinavian, Baltic, Russian and West European markets all within a 500 km radius. Higher education rates are now two times the EU-15 average and the low tax, liberal economic environment is receptive to investors. FDI inflow increased by 72.6% in 2006, reaching 6% of GDP. As of 1 April 2007, the cumulative FDI in Lithuania amounted to EUR 9.2 billion. The country has been allocated EU Structural and Cohesion Funds amounting to 6.9 billion EUR for the period 2007-2013;
• Tourism: Indicative of the country’s rising prominence, airport passenger numbers at Vilnius International Airport have increased by over 178% since 2000;
• Low tax burden: Lithuania enjoys a flat tax system and the overall tax burden is one of the lowest of all EU member states. The standard corporate tax rate is 15% and the current personal income tax rate of 27% will fall to 24% from January 2008;
• Falling unemployment and rising wages: Unemployment stood at just 4.7% in June 2007 (seasonally adjusted), whilst annualised second quarter growth in average monthly gross wages reached an impressive 20.2% in 2007;
• Overcrowding and under-supply: The average amount of interior living space per person in Lithuania is just 23.8 m², compared to an EU-25 average of 40 m². Moreover, dwelling stock per capita is only c. 80% of the EU-15 average;
• Poor quality housing: 61.3% of Lithuania’s housing stock was built pre-1970 and most of the big Soviet-era apartment buildings constructed thereafter are of extremely poor quality. Despite increases in construction rates in recent years, there remains a massive undersupply of new-build accommodation suitable to meet increasingly high local expectations;
• Cheap mortgages and increasing demand: Lithuanian’s can obtain 100% loan to value (LTV) Euro mortgages at low margins over periods up to 40 years. However, whilst mortgage lending continues to increase significantly year-on-year, mortgage debt constitutes just 11% of Lithuanian GDP, compared with an EU average of 48%;
• Real estate price trends: Lithuania’s capital Vilnius recorded 21.7% annualised first quarter growth in 2007 and ranks first in Knight Frank’s European real estate capital appreciation projections for 2007.

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