Currently almost everyone can feel that the prices are rising everywhere – in the shops, at the gas station and in the invoice for utility payments. But how does this affect the real estate market? If someone plans to buy an apartment, should they do it now or later? Is this the best time for making big investments? More about the topic explains CEO of The Alliance of Real Estate Developers (NIAA), Mārtiņš Vanags, and “Hepsor” SIA member of the Board Martti Krass.
The real estate segment is beneficial for investment
As told by NIAA CEO Mārtiņš Vanags, the situation in real estate market currently is very beneficial for investments. It is affected by various aspects and also the fact that the prices of real estate are continuing to grow. “The housing segment is very beneficial for investment because there is a big shortage of apartments. 72% of people in Riga live in apartment buildings from the Soviet times, which are not energy efficient. Therefore, taking into account the context of rising heating prices, these apartments will become less and less desirable. The difference between utility costs in serial apartments and new, energy efficient projects is big – you can spend two or even three times less money in the new project. That is why new projects, whether bought for living or renting, will be a better choice. It is also important to take notice of the fact that currently in Riga, because of the 40% rise in construction costs, building of many new projects has been stopped. This means that the apartments which are on the market currently are built with “old” construction costs, but the new ones will be with “new”, higher construction prices. This will also reflect in the price of apartment as well,” explains M. Vanags.
New law affects the situation
As told by Mārtiņš Vanags, another aspect which affects the desire to invest in real estate and then rent it further, is the Residental Tenancy law, approved last year. “The new changes in the law have radically changed the market. Meaning that previously arguments between the real estate owner and the tenant about, for example, missed rent payments could last for years. But now all arguments are processed on an expedited basis. Basically even if you are not lucky with the tenant because he does not pay the rent, you can get them evicted within three or four months. This is extremely important from a risk management point of view. The previous situation discouraged many from investing in apartments, but now the apartment owner can feel more protected. Both the adopted changes in the law and the current economic situation have expanded investment opportunities. So I would advise people to consider investment opportunities as the rental market has potential.” adds M. Krass.
It is known that ownership rights are becoming less and less important to people in the world. Experience and mobility are important to them, so housing is often rented instead of bought. Therefore, there is an opportunity to earn by investing - to buy an apartment and then offer it for rent.
Investment in real estate as a safety pillow
“Hepsor” member of the Board Martti Krass tells that you can look at the investment in real estate as a safety pillow. Meaning that it can protect your financial means from inflation.
“Real estate has shown to be great investments and provides security when money on the bank account is losing value. Also, real estate offers two types of income – passive income thorough the increase of value and active income through the rent.” adds M. Krass.
For both passive and active income city center is the safest investment option. But in the outside of city center some areas can develop very quickly and offer great opportunity to gain more profit.
Real estate suitable for investors
Taking into account the interest of investors in real estate, “Hepsor” their projects adapt to the investors and other buyers. “We have seen already many investors purchasing apartments in our projects and overall mindset is very similar – real estate offers great value in protection against inflation and at the same time enables to receive rental income. Investors like to invest mostly to 1-2 room apartments as they offer the best profitability and our investors have also appreciated that the buildings are new, modern and offer sustainable, energy-efficient solutions.
Our project in Quiet center, Strelnieku 4b we have specifically developed for rental apartments and are offering 1 and 2 room apartments. S4B offers central location in the heart of the city with everything in quick walk distance away. Also, it is a new building and has low utility expense for heating and therefore is well liked by the tenants. For investors it means that the client interest to rent apartment is very stable which offers good opportunity for secure rental income. When purchasing investment apartment in S4B project, Investor can expect fully furnished apartment with already existing tenant and cashflow. Therefore the investment can start to gain return from the beginning. Potential return of investment is 12-15% per year depending how much bank financing investor is interested to use,” explains M. Krass.
Need to evaluate financial possibilities
“Hepsor” representative Martti Krass mentions that before investing every potential investor needs to evaluate their financial situation to better understand the possibilities of investing and the benefits of it. “For every investment the investor needs to evaluate if it is financially sustainable for them to make the investment. You should always invest only your available resources.
Before making any investment decision it is wise to take into account following aspects:
What is your financial capability?
What is your risk tolerance to changes in the market?
How long you expect to hold the investment?
What is your plan to exit the investment?
Availability of good quality energy-efficient apartments is very limited. It is challenging for developers to start new projects as the construction prices have kept increasing for long time for now. This means that the apartments that are ready and available offer great value for investors. But at the same time every potential investor needs to evaluate if they are ready to use part of their income or savings for investing into something,” advises M. Krass.