Baltic property market report 2014

BalticProPertyMarketrePort2014L I T H UA N I A | L AT V I A | ESTO N I A

Baltic ProPerty Market rePort • Baltic StateS • 2014 2

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LITHUANIAEconoMIc outLooKrEtAIL MArKEtoFFIcE MArKEtInduStrIAL MArKEtHotEL MArKEtrESIdEntIAL MArKEtLEGAL & tAXES

LATVIAEconoMIc outLooKrEtAIL MArKEtoFFIcE MArKEtInduStrIAL MArKEtHotEL MArKEtrESIdEntIAL MArKEtLEGAL & tAXES

ESTONIAEconoMIc outLooKrEtAIL MArKEtoFFIcE MArKEtInduStrIAL MArKEtHotEL MArKEtrESIdEntIAL MArKEtLEGAL & tAXES

ABout nEWSEcABout LAWIn

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23-4

5-67-89-1011-1213-1415-1617-26

27-2829-3132-3334-3536-3738-3940-51

52-5354-5556-5758-5960-616263-71

72-7374

76

ricardas cepascEo of newsec [email protected]

dear reader, We are proud to present you the brand new issue of Baltic Property Market report 2014 including real es-tate overview of all commercial and residential real estate segments as well as essential issues of legal and taxation system in Lithuania, Latvia and Estonia.2013 was the year of market maturity and brought back interest of investors as well optimism and opportunities to the developing market. Market partic-ipants experienced more stability af-ter several volatile years. constantly growing prime office demand has en-couraged developers to start signifi-cant office projects, growth of retail turnovers has boosted development of retail chains and enabled renewing of several previously frozen projects. transaction volume has reached pre-

crisis level and is expected to beat the record in 2014 already.A new cycle in the property market has begun as professionals start in-vesting, demand is increasing for resi-dential properties and office space.However the year 2014 is expected to be challenging for all, property devel-opers, owners and potential investors in order to properly take the best out of situation and maintain develop-ment pace. the mid-term outlook of the region will remain strong and suc-cessful business solutions will help to unlock the potential.We expect that Baltic Property Market report 2014 including thorough over-view of the main real estate related legal issues and taxes is prepared by LAWIn will be a perfect tool and pro-vide a valuable information about the market and form an excellent basis for your further decisions and plans.

regards,ricardas cepascEo of newsec Baltics

Prepared by newsec:Mindaugas Kulbokas,Head of research and Analysis, Baltics,[email protected] andKristina Živatkauskaite,Senior Analyst,[email protected]

Legal and tax overview is prepared by LAWIn.

Copyright Newsec © 2014

this report is intended for general information and is based upon material in our posses-sion or supplied to us that we believe to be re-liable. Whilst every effort has been made to ensure its accuracy and completeness, we cannot offer any warranty that factual errors may not have occurred. newsec takes no responsibility for any damage or loss suffered by reason of the inac-curacy of this report.


BALtIc StAtES

All three Baltic countries have con-tinued demonstrating one of the best growth results and shape of govern-ment finance within the Eu, continu-ously rising private consumption as well as retail trade, stable consumer and business confidence.

2013 IN BRIEF

International investors who were pre-viously reluctant to enter the Baltic region because of relatively small mar-kets, currency risk and lack of liquid-ity, start investigating possibilities to include the region in their investment maps. First of all, the countries have shown impressive results in combatting the crisis as well as recovering from recession. Secondly, the currency risk is removed as Euro is already adopted in 2 of the Baltic countries – Estonia and Latvia (Lithuania expects Euro in 2015). thirdly, transaction volume has reached pre-crisis level (approx. 480 million Eur in 2013) and is expected to beat the record in 2014 already.

INVESTORS PROFILE

nordic, Baltic and russian investors are currently the key players in the Baltic market. All the existing Scandi-navian funds continue enlarging their portfolios at the same time success-fully implementing exits of their first funds. An important group of buyers is newly established local funds and asset management firms, which have grown significantly since their start 3-4 years ago. the success of the local players is ensured by solid group of private investors willing to invest into real es-tate as well as increasing appetite from local pension funds. At the same time the interest from Western European countries is continuously increasing and several transactions with inves-tors from core European countries are expected to go through in 2014.

YIELDS

though yields have decreased signifi-cantly during the recent years, there

transaction volume has reachedpre-crisis level and is expected to beat the record in 2014 already

newsec’s primary markets.

Transaction Volume | Baltic Countries

0

200

400

600

800

1,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E

mEUR

Lithuania Latvia Estonia

Transaction Volume | Baltic Capitals

Vilnius Riga Tallinn

0

200

400

600

800

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E

mEUR

Source: newsecSource: newsec

investmentmarket


BALtIc StAtES

is still an attractive gap compared to Western European levels. Average yields for prime retail and office as-sets remain around 7.25 to 7.75%, with the most attractive properties being closed at up to 50 basis points lower yields. Secondary properties stand between 8 and 8.75%. It is important to note, that rental rates are still in the recovery phase, thus property values are very reasonable, often at around their development costs. Along with prompt growth of retail and office rent rates as well as yield compression, capital values are expected to demon-strate impressive growth, thus giving a chance to get fantastic returns within the short term.

Pre crisis transaction volume achieved in 2013, yields still enjoy from reasonable gap compared to Western european levels, while capital values are expected to demonstrate fantastic growth during the short term

Prime W&L Yields | Baltic Capitals

Tallinn Prime Riga Prime Vilnius Prime

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent

Prime Office Yields | Baltic Capitals

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent


Prime Retail Yields | Baltic Capitals


0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent

Source: newsec

Source: newsec

Source: newsec


Lithuanian economic recovery is con-tinuously fuelled by still increasing exports and strengthening domes-tic demand. Although the growth of these sectors is slowing down, it re-tains Lithuania among the fastest growing economies in Europe.Favourable market development conditions influence recovery of the real estate market and increase at-tention of investors, developers and market end users as well. Activity in the transaction market is gradually approaching healthy and sustainable market levels, especially in commer-cial real estate investment and resi-dential segments.

STABLE GDP GROWTH

Lithuania’s economy is on the steady growth track. during 2011 the econo-my grew significantly (GdP increased by 5.9%). despite of more conserva-tive forecasts economic activity in-creased considerably in 2012, GdP grew by 3.6% and by 3.5% in 2013. Lithuania is still expected to be among the most rapidly growing economies in Europe with GdP increase of 3.9% in 2014 and 4.3% in 2015.In 2013 GdP grew in most of econom-ic activities. during the 1st quarter of the year the fastest growth in the value added was observed in produc-tion in manufacturing and industrial services, while in construction enter-prises a decline persisted. the 2nd quarter growth was mainly coused by a positive change in the manufactur-ing output and a growth in domestic consumption. However, already in the

LItHuAnIA

litHUaNiaeconomic outlook

3rd quarter the fastest growth was observed in construction enterprises (growth by 14.2% y-o-y), trade, hotels and restaurants, transportation and storage enterprises (growth by 4.1% y-o-y).Lithuania’s GdP at current prices was higher if compared to pre-crisis level in 2012 already. GdP per capita expressed in purchasing power stan-darts was the highest among the Bal-tic States and consisted 72% of the Eu28 average.

EXPORT INCREASE SLOWING

Although the economy growth was highly based on the continuously in-creasing export during recent years, the pace of growth was noticeably slower during HY2 2013. the expect-ed growth is below 9% in exports and less than 8% in imports during last year.Exports have been giving a way to do-mestic demand which was constantly increasing its importance during 2013. Annual growth of 2.9% in 2013 is expected to be followed by stable 3.9% increase in 2014.

UNEMPLOYMENT

Positive changes have been felt in the labour market as well. unemployment rate has dropped to the level of 11% in 2013. newsec forecasts that the trend will continue and the level of aver-age annual unemployment rate in the country will fall down to single digit in two years.

INFLATION

Average annual inflation stood at 1.2% in 2013 and should maintain the minimal level in 2014, at least until the adoption of the Euro. Introduction of Euro is one of key objectives of Lithu-ania’s economic policy and the plan to enter Euro zone is set for 2015.

FUTURE OUTLOOK

Balanced exports, low governmental debt and stable domestic demand will ensure future economic growth in Lithuania. Both figures GdP and domestic consumption brings more and more positivity and the growth of wages in 2014 are expected to be more significant compared to the pre-vious year.Lithuania is expected to become a full member of the European Economic and Monetary union in 2015, January 1st. In order to achieve the goal a year of 2014 will be active Maastricht crite-ria fulfilment time.


LItHuAnIA

lithuania retains among the fastestgrowing economies in europe

Economic Indicators | Lithuania

-20

-15

-10

-5

0

5

10

20

15

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent

GDP (% growth, fixed prices) Employment (yearly change %)

Unemployment (% of labour force)

Inflation and Private Consumption | Lithuania

Inflation (yearly average %) Private consumption (% growth)

-20

-15

-10

-5

0

5

10

15

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent

Retail Trade | Lithuania

Trade, excl. motor vehicles Food and beverages Clothing and footwear

-30

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013E

Yearly change, percent

Foreign Direct Investments | Lithuania

FDI, million EUR Growth, %

-15

-10

-5

0

5

10

15

20

25

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2007 2008 2009 2010 2011 2012 2013E

Percent mEUR

Exports and Imports | Lithuania

Exports Imports Exports growth, % yoy Imports growth, % yoy

-50

-40

-30

-20

-10

0

10

20

30

40

0

5,000

10,000

15,000

20,000

25,000

30,000

2007 2008 2009 2010 2011 2012 2013E

Percent mEUR

Wages and Salaries | Lithuania

Public sector Private sector Public sector growth %, yoy Private sector growth %, yoy

-10

-5

0

5

10

15

20

25

30

0

200

400

600

800

2007 2008 2009 2010 2011 2012 2013E

Percent Gross avg EUR/month

Source: Statistics Lithuania, newsec



Source: Statistics Lithuania, European commission, newsec




RETAIL MARKET

Private consumption has a more sig-nificant role in economic develop-ment and the retail trade in Lithuania continues accelerating the fourth year in a row. consumers are willing to increase their spending on non-food or even luxury goods while form-ing a strong base for international brands such as IKEA, H&M and LIdL to enter and expand in the market.2013 were marked by a growing re-tail segment and increasing domestic consumption. Grocery retailer’s growth was just in line with the growth of the national GdP. Meanwhile, the country’s total trade turnover was growing at around 5%. these figures confirm that con-sumers were more willing to spend in non-food segment. retail sale of textiles, clothing and footwear seg-ment grew by ~10%, sale of electronic goods increased by ~4.5%.

LItHuAnIA

New construction is limited to localsupermarkets, as retail chains are actively expanding in the market

Source: newsec

NEW DEVELOPMENTS

the total leasable shopping centre area in Lithuania amounts to approx. 780,000 sq. m or approx. 0.25 sq. m per capita. nearly half the total sup-ply is concentrated in the most devel-oped city and capital of the country, Vilnius, with 14 modern shopping cen-tres and a total leasable area of ap-prox. 310,000 sq. m or approx. 0.6 sq. m per capita.there have been no large new retail developments in Vilnius since 2010. new deliveries only comprise of retail chain stores actively expanding in the market. the most realistic projects in the next two to three years are sev-eral neighborhood shopping centres in the outskirts of Vilnius. one of the developments under construction is domus Pro retail Park (~11,000 sq. m) for 2014 and planned olinda shopping centre (~18,000) by Vicus.one of the biggest steps in the Lithu-

anian retail market was IKEA’s open-ing in Vilnius. Approx. 100 mEur will be invested in the entire project for the first IKEA store in the Baltics (25,000 sq. m) and additional retail stores, creating an attractive shop-ping destination of 15.5 ha in the area. It is expected that large dIY, electron-ics, gardening and other retailers will settle in the neighborhood.new construction is limited to local supermarkets, as retail chains are ac-tively expanding in the market. new medium to large scale projects in the market are expected only after the 2-3 year period.

IMPROVING RESULTS

Improved turnover/rent ratios in suc-cessfully operating shopping centres in all major cities have enabled an in-crease in rents. In 2013 the tendency of growing rent rates was noticeable as well in both shopping centres and

2007 2008 2009 2010 2011 2012 2013E Trend Ω≈¬

Rental rates, EUR/sq. m/month

up to 100/150 sq. m 30–50 25–45 20–30 20–30 25–45 25–45 25-45 Ω

100/150-350/500 sq. m 18–30 15–23 10–15 10–16 12–25 12–25 14-27 Ω

> 350/500 sq. m 12–18 10–15 8–12 8–12 10–15 10–15 12-18 Ω

Anchor tenants 6–11 5–10 5–7.5 6–7.5 6–9 6–9 7-12 ¬

Vacancy rates, %

Well performing Sc up to 5% up to 3% up to 5% up to 3% up to 3% up to 2% up to 2% ¬

other 5–9% 4–9% 18–20% 13–15% 5–12% 5–8% 5–8% ≈

RENTAL RATES AND VACANCIES | VILNIUS

retailmarket


LItHuAnIA

2014 will be challenging andstressful for retail market players inorder to maintain the position in themarket

Source: newsec Source: newsec

Supply of Shopping Centres | Vilnius

Existing stock New supply Sq. m/1,000 inh.

0

50

100

150

200

250

300

350

0

100

200

300

400

500

600

700

2005 2004 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Sq. mThs. sq. m

Prime Retail | Vilnius

Rental rates Vacancy

0

2

4

6

8

10

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013E 2014E

Percent EUR/sq. m/month

retail streets as the demand of quality retail premises is high. Average rents amount to 19-21 Eur/sq. m/month in the largest shopping centres in prime locations. rents in shopping centres are set according to the size of the tenant and vary from 12-45 Eur/sq. m/month, while anchor tenants pay approx. 7-12 Eur/sq. m/month. It is expected that the modest growth in rent rates will remain in the upcom-ing years. Major shopping centers in Vilnius retain strong positions after constant improvements in tenant mixes and minor redevelopments of the schemes. therefore, prime shop-ping centres had an average of 10% turnover increase. However, being in a small market each of existing shop-ping centres are facing difficulties in achieving exclusivity and its own niche.

RETURN OF DEMAND

demand in the retail market is in-creasing as the majority of retailers have expansion in their plans. All of the largest shopping centres are at-tracting new tenants and improving their tenant mix. recently introduced to the market were new retailers in Lithuania such as next, Aldo, Massi-mo dutti, coccinelle, Strellson, Karen Millen, Grupo cortefiel and require spaces in good locations in prime shopping centers. H&M was the larg-est new player in the Vilnius market during 2013 and it will open its stores in other major cities during 2014.

FUTURE OUTLOOK

continuous internal and external re-development of shopping centres, constant attention to the customers will be beneficial to shopping centres. the winner in the whole market will

be the consumers who will also help in beating the turnover and footfall records. Low vacancies in the prime shopping centers will remain at the same level, most likely resulting in rentals growth. 2014 will be challeng-ing and stressful for retail market players in order to maintain the posi-tion in the market.


OFFICE MARKET

Excellent economy growth and in-creasing rate of employment has also affected the demand in office market. developers’ attention is now targeted towards fast developing Vilnius mar-ket.

SUPPLY GROWTH

the total stock of modern offices in Vilnius exceeded 387,000 sq. m or 0.7 sq. m per capita at the end of 2013. new supply last year increased to ca. 14,700 sq. m (4% growth) compared to 18,200 sq. m (5% growth) in 2012. Al-most 19% decrease in new supply was mainly caused by low number of com-pleted new projects. only two busi-ness centres were delivered in Vilnius office market. It includes the specu-latively built business centre Gama, developed by realco and currently owned by technopolis Lietuva (11,400 sq. m of GLA) and Baltic Hearts 2nd stage (3,300 sq. m of GLA). Vilnius

LItHuAnIA

Vilnius market over the 2-3 years period will be offered to absorb~ 90,000 sq. m of office space

market over the 2-3 years period will be offered to absorb ~ 90,000 sq. m of office space. this will increase A class market share as large scale develop-ments (Quadrum Business city devel-opment of 40,000 sq. m GLA by nor-wegian company Schage real Estate, K29 development of 14,000 sq. m by Lithuanian investment fund Lords LB) are under construction in Vilnius cen-tral Business district. In 2014 the total gross leasable area should increase by up-to 29,000 sq. m or 7% of total ex-isting stock.

LOWER VACANCY

Average vacancy rate in A class de-creased from 5% to 2% level over 2013 and is at the critically low level. B class office segment vacancy has reached 10% in the summer of 2013 and has shrunk to 7.5% by the end of the year. tenants with requirements for small offices still have a number of options to choose from. However, ten-ants willing to move to bigger offices

need to plan 2-3 years ahead in order to relocate to A-class locations cur-rently under construction.

MARKET ACTIVITY

Letting activity in 2013 was relatively high at ca. 44,000 sq. m, reflecting ca. 15% growth compared to 2012. de-mand for the A class offices was and is expected to remain high pushing vacancy levels to record low levels. Low supply and qualitative new con-structions in the market brought back a trend of pre-lease agreements in the development stage projects. new de-velopments in the market set a more defined pattern in highly flexible, col-laboration friendly and open space office environment, however area dedicated for one employee was not decreasing significantly.Some of the biggest transactions in Vilnius concluded during 2013 were transactions by international compa-nies SEB, Barclays, danske Bank, cSc, Western union successfully operating

Office Stock | Vilnius

Stock Stock growth, % yoy

0

10

20

30

40

50

0

100

200

300

400

500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m

Office Market Indicators | Vilnius

Absorption New supply Total vacancy, %

0

5

10

15

20

25

0

20

40

60

80

100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m


officemarket


LItHuAnIA

Projects planned to be completed in 2015 will have influence on both rents and vacancy level in Vilnius office market

Office Vacancy | Vilnius

A class, % B class, % Total vacancy, %

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 0

5

10

15

20

25Percent

Office Rents I Vilnius

A class A class Max

2007 2008 2009 2010 2011 2012 2013E 2014E 5

10

15

20

25EUR/sq. m/month

B class B class Max


in the market and seeking to expand and/or relocate. continuously growing local companies (It, advertising, legal) were leasing offices in more modern projects as well.demand of office space expressed by net absorption was ca. 33,300 sq. m during 2013 compared to 14,100 sq. m during 2012.

INCREASE OF RENTAL RATES

Modern office rent rates have been increasing through 2011-2012. In 2013 rent rates kept increasing due to insuf-ficient supply of modern office prem-ises meeting the demanded require-ments. In the end of 2013 average market rent for prime office premises in Vilnius cBd were in the range of 13-15 Eur/sq. m/month, in other central areas the market rent rates were in the range of 8-12.5 Eur/sq. m/month, whereas B class offices further from city centre were leased for 7.5-9 Eur/sq. m/month.

MARKET OUTLOOK

new construction volume in 2014 is estimated to be around 29,000 sq. m. Average office market vacancy will remain at the lowest historical Vilnius market level and is not expected to in-crease, at least until 2015. Prime office rents are expected to increase by 3% during 2014. Projects planned to be completed in 2015 will have influence on both rents and vacancy level in Vil-nius office market.


INDUSTRIAL MARKET

the supply in warehousing market follows the improvement in consump-tion and increased export. differently from the office market, warehouse and logistics projects development is not concentrated only in Vilnius. new projects are spread and developed in Kaunas and Klaipeda, market activity in Panevezys and Siauliai is growing as well with increasing use of the ex-isting industrial building opportuni-ties.

EXISTING SUPPLY

there are approx. 753,000 sq. m of modern warehousing space in Lithu-ania including Vilnius, Kaunas and Klaipeda regions, however, a much greater part of warehousing space is covered by old, not renovated ware-houses and industrial units. current-ly, a major part (approx. 480,000 sq. m) of modern warehouses is situated in Vilnius and Vilnius district. Where-

LItHuAnIA

New developments in the market willreach more than 100,000 sq. m during 2014 with almost 10 new projects on built-to-suit base

as, there are approx. 160,000 sq. m of modern warehousing and logistics space in Kaunas and approx. 110,000 sq. m in Klaipeda.

NEW DELIVERIES

the year of 2013 did not bring any new large scale warehousing and logistics projects to the market, however a few new projects are under construction. these projects are expected to be de-livered to the market in 2014.new developments in the market will reach more than 100,000 sq. m dur-ing 2014 with almost 10 new projects on built-to-suit base, however nearly one half of the premises will be of-fered for speculative needs as well.new development outburst is mainly caused by well performing logistics, import/export and trade companies willing to develop the objects accord-ing their own requirements. Experi-enced companies such as transek-spedicija, Vlantana, Sanitex, Vinges Logistika, Ad rem and others expand

their logistics warehouses in order to improve their services.

PUBLIC LOGISTICS CENTRES

the Government of Lithuania aims to establish of new generation, serving as distribution centres, dry ports, and modern freight villages. construc-tions of Intermodal terminal in Vilnius and Kaunas public logistics centres were launched in 2013 which will be completed in the beginning of 2015.new terminals will be used to transfer goods and shipments from one type of transport to another, namely from trains to trucks and the other way back. the terminals will be used to store containers, transport vehicles, to rent containers to export goods or to carry out logistics to the nearby cities or customers. rhenus Svoris and Autoverslas have signed letters of intent for development of logistics centres in Vilnius PLc.In mid-term period, modern public lo-gistic centres in Klaipeda region will

W&LMarket | Lithuania


0

10

20

30

40

60

50

0

200

400

600

800

1,000

2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m

W&L Market | Lithuania

Absorption New supply Vacancy, %

-1

1

3

5

7

9

11

13

15

-50

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m


industrialmarket


LItHuAnIA

the supply for logistics and warehouse facilities will remain limited to build-to-suit or earlypre-lease projects

Warehouse Rents | Vilnius

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013E 2014E

EUR/sq. m/month

Rental rate Avg Rental rate Min Rental rate Max

Source: newsec

be established, and in long-term pe-riod – logistic centres are planned to be built in the regions of Panevezys and Siauliai.

DEVELOPING FEZ’S

there are two long-operated free economic zones (FEZ) in Lithuania – in Klaipeda and in Kaunas. However there are plans to attract experienced operators and establish five more FEZs in Siauliai, Panevezys, Marijam-pole, Kedainiai and Akmene. Existing and planned infrastructure on the ter-ritories will form favorable conditions for further manufacturing industry development and investments attrac-tion.

MARKET DEMAND

Market absorption ratio reached 52,000 sq. m in 2012 in the main Vilni-us, Kaunas and Klaipeda regions. Be-cause of the very low modern ware-housing space supply the overall take

up figures in 2013 were not high. Ma-jor share of lease transactions were made by tenants already existing in the market and no fresh tenants were attracted. the further tenant migra-tion should be seen due to expiring agreements, especially in the small scale tenants group. new projects in the market will be mostly occupied by the end users of built-to-suit projects and absorb-tion is expected to reach more than 65,000 sq. m in 2014.

DECREASING VACANCY

the vacancy rate in Vilnius region modern warehousing facilities de-creased below 5% in the end of 2013. Vacancy rate in modern warehouses in other cities was slightly higher and reached 7-8%. Low vacancy levels are expected to remain at ~5% in com-bined Vilnius, Kaunas and Klaipeda markets during 2014 as well. However in some particular cases the vacancy in certain objects is much

lower than the market average. only small scale premises could be leased at the moment and companies look-ing for premises size 5,000-8,000 sq. m face the lack of supply. It is expect-ed, that vacancy of warehousing and industrial premises will not increase before new speculative projects are presented to the market.

STABLE RENTAL RATES

the average rental rates now are 3.5-4.6 Eur/sq. m/month for A class buildings in Vilnius prime locations and up to 3.5-4.3 Eur/sq. m/month in Kaunas and Klaipeda. the rent rates also differ according to the size of the tenant. the highest rental rates are asked in Vilnius market.

FUTURE OUTLOOK

rental rates for warehouse and logis-tics facilities are expected to remain stable or a slight increase might be observed in 2014. Warehouse market will remain balanced, however con-stantly evolving segment. the supply for logistics and warehouse facilities will remain limited to build-to-suit or early pre-lease projects.


HOTEL MARKET

Hotel market is continuously improv-ing in terms of increasing turnover of accommodation establishments, growing number of guests and occu-pancy levels. the major part of regis-tered hotels is situated in Vilnius and Klaipeda regions which have the larg-est tourists’ flows within the country.

SUPPLY

56% of hotels registered in Statistics Lithuania are classified and star rated. According to Lithuanian Association of Hotels and restaurants there were 201 classified hotels in Lithuania in no-vember 2013. In 2011 Lithuania along with Estonia and Latvia has joined the Hotelstars union rating system, since then 26 out of 201 hotels were rated according HSu with 14 hotels located in Vilnius. nearly 50% of the hotels are rated as 3-star hotels. there are only 8 5 star hotels in Lithuania and they are all situated in Vilnius, Palanga

LItHuAnIA

in 2013 there were 2 hotels opened in Vilnius and increased the stock of rooms by 3%

and trakai.Year of 2012 was rather active in hotel development in Vilnius. 3-star com-fort Hotel Lt (200 rooms) was opened and 5-star hotel Kempinski Hotel ca-thedral Square (96 rooms) was finally finished after several years of con-struction. Both hotels were opened in September 2012 and increased hotels room supply by 8% (or 296 rooms) in Vilnius. In 2013 there were 2 hotels opened in Vilnius. Louvre Hotels Group opened business class campanile Vil-nius Airport hotel (92 rooms) which is the first campanile chain hotel in the Baltics. Louvre Hotels Group is operat-ing more than 1,000 hotels in 42 coun-tries across the world. Another hotel opened in 2013 – 4-star Moon Garden hotel (18 rooms) in Vilnius old town. Both of the hotels increased the stock of rooms in classified hotels in Vilnius by 3% (or 110 rooms).Klaipeda market had an opening of 3 star Europa city Aurora Klaipeda Ho-tel (144 rooms) in 2013.Lithuanian hotel market is dominated

by local companies owning 2-3-star hotels and limiting themselves to con-struction of mainly small and medium size facilities. In terms of hotel owner-ship the hotel market is divided into al-most equivalent parts – a bit less than a half of all rooms in classified hotels are run by local or international hotel operators, while 54% share of rooms are run by private owners.the presence of large international hotel operators is mainly focused on Vilnius market. However, some of the worldwide known brands are actively observing the market.

INCREASING OCCUPANCY

overall economic development affect-ed Lithuanian hotel market in a posi-tive way. Increase in tourists’ flows was noticeable, number of foreign citizens accommodated in Lithuania increased by 11% in 2013, local – by 6%. Although Lithuanian hotels are popular among local tourists, the majority of hotel guests are foreigners.

Hotels | Vilnius

5 Stars 4 Stars 3 Stars 2 Stars 1 Star

Demand and Occupancy of Hotels | Lithuania

0

10

20

30

40

50

0

400

800

1,200

1,600

2,000

2005 2006 2007 2008 2009 2010 2011 2012 2013E

Percent Ths. visitors

Local visitors Foreign visitors Occupancy, %

Source: Lithuanian Hotels and restaurants Association Source: Statistics Lithuania

Hotelmarket


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Number of visitors in lithuania’s hotels reached more than 1.6 millionduring 2013

Demand and Occupancy of Hotels | Vilnius

0

10

20

30

40

50

60

70

0

200

400

800

600

2005 2006 2007 2008 2009 2010 2011 2012 2013E



Source: Statistics Lithuania

the occupancy of hotels is highly sea-sonal, with Q2 and Q3 being the most active in the market. In 2013 the over-all hotel occupancy slightly increased and reached 46% in Lithuania and 62% in Vilnius.

INCREASING DEMAND

According to Statistics Lithuania ho-tels in Lithuania accommodated 1.55 million guests in 2012, which is 12% more than in 2011. In 2013 Q1-Q3 num-ber of local and foreign visitors in ho-tels increased by 7% if compared to the same period in 2012 and it is ex-pected that number of visitors in ho-tels in Lithuania will reach 1.67 million in 2013.In 2013 the most of foreign guests in Vilnius hotels according to the Lithu-anian department of statistics were Polish, russian, German and Belaru-sian.the largest increase in number of tourists accommodated in hotels in Vilnius was recorded for guests from

Belarus – 40% more Belarusians stayed in Vilnius in Q1-Q3 2013 if com-pared to the same period in 2012. the was also a noticeable increase in num-ber of tourists from united Kingdom, united States and russia – the number of accommodated tourists increased by 14%, 14% and 13% respectively.

ROOM RATES

According to Lithuanian Hotel and res-taurant Association single room prices started to increase since the middle of 2010, however prices are still lower by 10-15% than in the peak years.the average rack rate for a standard double room in Vilnius during 2013 was around 140 Eur in 5 star hotels, 100 Eur in 4 star and 75 Eur in 3 star hotels. Preferential VAt rates for accom-modation services in Lithuania have been cancelled in January 2012 and currently Lithuania has the second highest VAt rate for accommodation services in Europe. Statistically the

cancelled preferential VAt rate did not have destructive effect on the Lithu-anian hotel market however it has re-duced competitiveness of Lithuanian hotels. It is expected that preferential VAt rate of 9% for accommodation services will be again set in 2015.


RESIDENTIAL MARKET

A lot of optimism has returned to the residential market. 2012 year transac-tion volume was reached in less than 10 months of 2013. the overall Lithuanian market activity has increased by 20% in 2013. Annual result was more than 30% higher and reached ~7,700 transactions in Vilnius. the revival in the market is obvious, however there is still room for growth if compared to the peak of ac-tivity of more than 10,000 transactions per year.

HIGH MARKET ACTIVITY

the biggest change in number of trans-actions was recorded in Siauliai where market activity boosted by 35% during 2013. However it took only 9% of total major cities transactions. Market ac-tivity also increased in Vilnius (30%), Kaunas (23%), Klaipeda (30%) and Panevezys (19%). the number of trans-actions of newly build or reconstructed apartments was constantly increasing while number of transactions for apart-

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the overall lithuanian market activity has increased by 20% in 2013

ments built during 1991-2003 remained stable. the increase in demand for new construction apartments has been caused by long term low supply and lack of good quality projects. It may be noted that the main activity was seen in the economy class segment, therefore mid-range projects and prestigious seg-ment in most cases was in the construc-tion phase.

NEW SUPPLY

new and unfinished projects did not affect the statistical results of prices and their impact should be considered separately. At the end of 2013 Vilnius market had 32 new projects under de-velopment. during the whole last year 22 new projects were introduced to the market. total supply of new apartments was ~2,400 units in the end of 2013. It is obvious that the market is rather sus-tainable as total number of 900 apart-ments in the projects under construc-tion was pre-sold or reserved by the end of 2013. If developers keep introducing new projects to the market the supply

of new apartments might soon be high-er than demand.

AVERAGE APARTMENT PRICES SLIGHTLY INCTREASED

It is interesting to observe that such an increase in market activity only slightly influenced the average apartment pric-es which remained relatively stable.despite monthly variations average apartment prices have increased by 2% in Lithuania during 2013. only 0.2% in-crease was in Vilnius market, whereas the highest decrease was in Kaunas and Klaipeda by 3.6% and 3.0% respective-ly. the largest increase of apartment prices was seen in Siauliai by 3.4% dur-ing 2013.

FUTURE OUTLOOK

the market is considered to be at the sustainable level, where the amount of money invested into the residential properties and the average earnings strongly correlates. this was caused by responsible borrowing rules set by the

residentialmarket

Residential Market | Vilnius

Number of transactions Average price - new construction Average price - old construction

0

2,000

4,000

6,000

8,000

12,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013E

EUR/sq. mUnits

0

400

800

1,200

1,600

2,000

Souce: centre of registers


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Newsec forecasts more than 1,700 transactions in new construction segment for 2013 and similar activity in 2014

Bank of Lithuania, which obliged the banks not to lend more than 85% of the residential property value.While analyzing the market take-up opportunities newsec forecasts more than 1,700 transactions in new con-struction segment (apartments built in 2011 and later) for 2013. these market indicators and other key market data allow forecasting, that market activity is based on sustainable growth and will maintain the similar activity in 2014. It should be observed, that this is not en-tirely valid for the pricing of new con-struction apartments. Projected price increase of 5-7% will be related mostly to the macroeconomic indicators (i. e. growth of construction costs).developers keep introducing new idea to the market - apartments with full fin-ishing. this trend might become very popular as mortgage loans do not in-clude finishing of the apartment at the moment.


No major restrictions are imposed on foreigners to invest in real estate in lithuania.

legal and taxoverview

CORPORATE PRESENCE

What is the most common type of corporate presence?

the most common type of investment vehicle among both foreign and lo-cal investors is a private company or sometimes referred to as a private joint stock company (in Lithuanian uždaroji akcinė bendrovė or uAB), which is analogous to a Latvian SIA, German GmbH, French SArL or BV in the netherlands. the owners of the private company (shareholders) enjoy full limited liability.

Describe the management structure of the private company. Are there any participation restrictions appli-cable to the foreigners?

the private company (uAB) can have a four-tier governance structure, com-prising the following elements:

•General Meeting of Shareholders;•Supervisory council;•Board (of directors);•chief Executive officer (cEo).

It is not obligatory to form the Super-visory council and/or the Board in a company. the Supervisory councils are rarely established in private com-panies, but Boards are formed quite often, particularly in larger private companies.

contrary to the existing practise abroad, in Lithuania the Board does not have direct executive powers. the

Board is responsible for strategic man-agement of a company, election of the cEo and some other decisions related to the company (e.g. decisions to in-vest in other companies, etc.).

Lithuania’s corporate laws do not re-strict in any way the participation of foreigners in the management of Lith-uanian companies. Any foreign citizen, irrespective of his/her origin, may be freely elected either to the Superviso-ry council or the Board or to the posi-tion of the cEo.

What is the minimum authorised capital in a private company?

the minimum authorised capital in the private company amounts to LtL 10,000 (approx. Eur 2,896).

Are there any requirements for the number of shareholders in a private company?

the minimum number of shareholders is 1 and the maximum – 249.

Are there any specific requirements for transfer of the shares in a pri-vate company?

only fully paid-up shares may be transferred. other shareholders have a pre-emption right to buy the shares subject to sale. Shares transfer agree-ment must be made in a written form (notarisation is not required).

What are the major fees involved in the incorporation of a private

company?

the registration of a private company involves the following filing and notary fees:

•stamp duty for preliminary registra-tion of a company name (if any) is LtL 56 (approx. Eur 16);

•notary fees for examination and certification of incorporation docu-ments may vary from LtL 250 (ap-prox. Eur 75) to LtL 800 (approx. Eur 230);

•stamp duty for registration of the company with the register of Legal Persons – LtL 198 (approx. Eur 60).

ACqUIRING REAL ESTATE

Are there any legal restrictions on the ownership of real estate (inter-ests in entities which own real es-tate) by foreign investors?

A foreigner willing to acquire land into ownership must comply with the criteria of the European and trans-atlantic Integration. to meet the said criteria a legal person is required to be established in, or a natural person is required to hold the citizenship or a permanent residency of, one of the following states:

•a Member State of the European union (Eu) or a state that is a party to the European treaty (Association Agreement) with the European com-munities and their Member States;

•a Member State of the organisation for Economic co-operation and de-

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Sale and purchase agreement of structures should explicitly discuss the rights of the buyer in respect of the land under the structures subject to sale.

velopment (oEcd), a Member State of the north Atlantic treaty organ-isation (nAto) or a Member State of the Agreement on the European Economic Area (EEA).

Land may also be owned by non-Lithu-anian citizens having permanent resi-dency in Lithuania.

With certain minor exceptions, even when complying with the above-de-scribed criteria, foreigners are not allowed to acquire agricultural and forest land into their ownership until 1 May 2014.

there are no restrictions imposed on foreign investors (irrespective of their origin) to acquire interests in Lithua-nia-based entities which own real es-tate. Further, foreigners are free to own any kind of buildings and struc-tures in Lithuania provided they are able to secure respective rights to the land (e.g. lease) required for operation of relevant buildings or structures.

Are pre-acquisition agreements commonly used in your jurisdiction? What is their legal effect and en-forceability?

Pre-acquisition (preliminary) agree-ments are quite common in Lithuania. their content may vary from a very general (e.g. setting out the deadlines for due diligence and execution of the main sale and purchase agreement, etc.) to a very detailed (providing for the preconditions for closing, calcula-tion of a purchase price, reps & war-

ranties, elaborated termination and liability clauses, etc.).

However, preliminary agreements (let-ters of intent, heads of terms, memo-randums of understanding, etc.) may not be enforced in kind. If a seller refuses to sell property subject to a preliminary agreement (breaches the same), a buyer will only be entitled to claim damages caused as a result of such refusal as well as a contractual fine if such is set out in the agreement.

under certain circumstances, a pre-liminary agreement may be recog-nised by the court as the main sale and purchase agreement.

Describe formal requirements for real estate sale and purchase agree-ment

Any real estate which is subject to a sale and purchase agreement must be registered with the real Estate regis-ter (except for some simple structures which are not subject to mandatory registration).

Sale and purchase agreement for any kind of real estate must be concluded in a written form and certified by a no-tary public. notarised form is not man-datory for acquisition of the shares of the company that owns real estate (i.e. in case of a share deal), also when the company’s shares are paid up by non-pecuniary contribution, i.e. by way of transfer of a real estate into the autho-rised capital of the company.

Although the absence of registration of the real estate sale and purchase agreement does not affect its valid-ity in respect of the seller and the buyer, however, only legally registered agreement may be invoked (enforced) against third persons (for further de-tails please see Section 6 rEGIStrA-tIon).

An agreement on sale and purchase of structures should explicitly discuss the rights of the buyer in respect of the land under the structures subject to sale. Failure to comply with this rule makes the agreement null and void.

the plan of the land plot must be at-tached to the sale and purchase agreement of the land plot as its inte-gral part.

With certain exceptions, in case of sale of buildings or premises their en-ergy performance certificates must be submitted to the buyer on the date of entering into the sale and purchase agreement.

Can a sale and purchase agreement of real estate or shares of an entity owning real estate be made in a for-eign language?

Although the Law on State Language requires all transactions between Lithuanian legal and/or natural per-sons (irrespective of their origin) to be executed in the Lithuanian language, violation of this requirement does not make the agreement null and void.

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the Lithuanian text of the agreement may be accompanied by the transla-tion into any other language(s), i.e. the agreement may be signed in two or more languages where one of them is Lithuanian.

As a general rule, there are two types of agreements which must always con-tain the Lithuanian text, i.e. must be executed either in the Lithuanian lan-guage only or in any foreign language (or languages) and Lithuanian as pre-vailing language:

•agreements which require compul-sory notarisation (e.g. real estate sale and purchase agreements) – no-tary public will not certify an agree-ment executed solely in a foreign language, or where a foreign lan-guage prevails over Lithuanian; or

•agreements which are intended to be registered with the real Estate register (e.g. pre-acquisition agree-ment, lease agreements, etc.).

other agreements not mentioned above, including shares sale and pur-chase agreements, can and quite of-ten are executed in English (or other foreign language) only if the parties to such agreements are foreign entities or Lithuanians-based foreign inves-tors.

Does any third person (governmen-tal authority, etc.) have a pre-emp-tive right to acquire real estate sub-ject to sale?

A pre-emptive right is enjoyed by:

•co-owners in respect of the parts of real estate owned and intended to be sold by another co-owner. If such pre-emptive right is violated, the aggrieved co-owner has a right to demand, through the judicial pro-cedure, assignment of the buyer’s rights and obligations under the sale and purchase agreement concluded by the other co-owner and a third party;

• the State with respect to:(i) the land plots falling within cer-

tain protected areas (e.g. the ar-eas that have been granted the status of natura 2000, also cer-tain areas of national parks, etc.). the price to be paid by the State for such land cannot exceed its av-erage market value determined by mass valuation;

(ii) the land intended to be used for public needs, etc. (except when a co-owners sells its part to the oth-er co-owners);

•owners of buildings and structures with respect to the land thereunder;

•certain qualified farmers and users with respect to the neighbouring ag-ricultural land and agricultural land plots in use.

Describe the moment of acquisition of the ownership to real estate

the ownership to real estate passes over from the moment it is handed over to the buyer. unless the par-ties agree that the sale and purchase agreement itself constitutes a hando-ver deed of real estate and thus, the ownership to the real estate passes

over from the moment of entering into such agreement, the handover of real estate is to be documented by a sepa-rate handover deed.

Does the seller have a statutory dis-closure or warranty obligation?

the seller is bound by the statutory obligation to disclose to the buyer all third parties’ rights, mortgages, sei-zures, on-going litigation and other encumbrances with respect to the real estate subject to sale. If the seller fails to comply with such obligation and is not able to prove that the buyer was aware of the respective encumbrances at the moment of sale, the buyer shall become entitled to claim reduction of the purchase price or termination of the sale and purchase agreement.

the buyer cannot rely on the encum-brances over real estate and invoke remedy measures against the seller if the seller has notified the buyer of such encumbrances or the buyer could have learned of them from the public registers (such as the real Estate reg-ister, the register of Mortgages and the register of Property Seizure Acts).

What is the effect of transfer of real estate on contractual and other rights, obligations and warranties? Do these pass over along with the title to real estate?

As a general rule, only legally regis-tered agreements, restrictions and en-cumbrances remain effective upon the sale of real estate.

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the seller is obliged to disclose to the buyer all major encumbrances with respect to the real estate subject to sale.


transfer of the statutory warranties (e.g. construction guarantees) is nor-mally documented by an additional statement in the sale and purchase agreement or the handover deed de-claring the assignment of all seller’s rights under such warranties to the buyer. the guarantees issued to the seller by third persons (e.g. bank guar-antees, sureties of insurance compa-nies, etc.) are either reissued in the name of a new owner or assigned to the latter.

What are the conditions for termina-tion of real estate sale and purchase agreement?

As any other commercial agreement, the real estate sale and purchase agreement may be terminated:

•by mutual agreement of the parties;•by either party’s demand if the oth-

er party commits a material breach and fails to rectify the same in due course (the parties may agree on what is to be considered a material breach under the agreement; oth-erwise, the material breach is to be determined based on statutory pro-visions);

•on other grounds set out in the agreement (the parties are free to establish any grounds for unilateral termination of the agreement either through the judicial procedure or without applying to court).

What are the fees for notarisation of real estate sale and purchase agree-ment?

notary fee charged for certification of a real estate sale and purchase agree-ment amounts to 0.45% of the trans-action value and cannot exceed the es-tablished caps of LtL 20,000 (approx. Eur 5,792), if only one real estate unit is being sold, or LtL 50,000 (approx. Eur 14,481) if more than one real es-tate unit is subject to the same sale and purchase agreement.

COMMERCIAL LEASE

What are the formal requirements for the execution of a lease agree-ment?

Any real estate lease must be in a writ-ten form.

Lease of buildings, structures or land has to be registered with the real Es-tate register in order to be enforce-able against third parties.

With certain exceptions, in case of lease of buildings or premises a copy of their energy performance certifi-cates must be submitted to the tenant.

Are there any statutory restrictions on a lease term?

In general, the maximum term of any lease may not exceed 100 years. Spe-cial rules are applied to the lease term of the State-owned land – it cannot exceed 25 years for the State-owned agricultural land and 99 years for any other State-owned land.

Does a tenant have a statutory right

to extend or renew its lease?

A tenant having duly performed its ob-ligations during the validity of a lease, upon its expiry has a priority right against third parties to renew the lease for a new term (if further lease of the property is intended by the landlord). the landlord is obliged to inform the tenant of its right to renew the lease prior to its expiry.

Rent and its adjustment: are there any statutory restrictions on the amount of rent? What is the general market practice?

Generally, there are no such restric-tions. nevertheless, all transactions between the related parties should be effected based on the arm’s length principle, i.e. the transactions between the associated parties should be made under such (market) conditions (in-cluding rent) as if the parties to the transaction were not associated.

In commercial leases rent is usually established as a fixed fee payable on a monthly (rarely on a quarterly) basis in advance. turnover rent quite often is introduced in major retail leases in addition to the fixed (base) rent.

In case the rent is established in the national currency (Litas), it is quite of-ten pegged to Euro. normally, the rent is adjusted annually based on the local or Eu consumer price index.

Alienation: what are the rights of the tenant and the landlord with respect

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the maximum term of any lease may not exceed 100 years.


the landlord must disclose to its tenants the intended sale of the leased property.

to assignment, sub-lease or placing a charge over a lease?

typically, the following alienation rules are applied:

•a landlord is free to sell the leased property, also pledge receivables from the lease or assign the land-lord’s rights to them;

•a tenant has to obtain a prior written landlord’s consent for:(i) subleasing of the property to

third persons (in office sector exceptions from this rule are fre-quently applied for sublease to the related persons (parent or sister companies, etc.));

(ii) pledging or otherwise encumber-ing the lease right;

•except for the above-mentioned, neither party has a right to assign all or any part of its rights and/or obli-gations under the agreement to any third person without a prior written consent of the other party.

What is the common form and length of eviction?

Generally, the landlord seeking evic-tion of the tenant has to apply to the court. If the tenant fails or refuses to vacate premises after the adoption of the final decision in favour of the land-lord, the latter will need to apply to a bailiff for the enforcement of the court decision.

the length for eviction proceeding de-pends on a number of circumstances (availability of written evidence, ten-

ant’s objections, etc.). In the best case scenario the first instance court’s de-cision (which may still be appealed) could be expected approximately in 2-3 months after the application to the court.

Although there are no extensive case law as to the landlord’s rights to exer-cise self-defence, commercial leases usually contain the landlords’ rights to cut off the supply of electricity and other public utilities, lock the doors, in-ventory and remove tenants’ property and invoke other similar measures against the tenant refusing to vacate the leased premises.

What are the restrictions on the transfer of title on real estate sub-ject to lease?

the landlord is free to sell or otherwise transfer or encumber the leased prop-erty, unless otherwise set out in the lease agreement. the landlord must, nevertheless, disclose to the tenants the intended sale or other transfer of the leased property.

How does the transfer of real estate affect the tenant’s rights and obli-gations?

tenants have a statutory right to uni-laterally terminate any lease in case of change of the owner. Further, upon change of the owner of real estate, its lease agreement will remain valid pro-vided it has been registered with the real Estate register.

CONSTRUCTION

Describe the common stages of con-struction (development) process

Territorial planningusually new developments are enabled through the preparation of a detailed plan establishing specific develop-ment regimes (requirements) of a land plot. However, starting from 1 January 2014 the preparation of detailed plans for the construction of new buildings is not required if such development is intended to be carried out in:

•urbanised areas or areas being ur-banised where no detailed plans are in place; or

•areas, which are not (being) urban-ised if the planned constructions are in compliance with the applicable general plan.

Environmental impact assessment It is required to be carried out if the planned development falls within the list of activities established by the Law on Environmental Impact Assessment (the list of such activities is transposed from the directive 2011/92/Eu).

Design of the buildingIt is prepared in accordance with inter alia territorial planning documents, connection conditions obtained from owners and operators of engineer-ing and communication networks and special architectural requirements is-sued by local municipalities. Additional special requirements are applied to designing of buildings falling within

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only registered real estate may be sold or otherwise disposed of.

the protected areas (parks, nature re-serves, area of cultural heritage, etc.). For certain buildings an expertise of the technical design should be carried out.

Construction permitIt is issued within 10 to 45 business days of the submission of all required documents depending on the extent of construction works to be carried out. the construction permit is valid for unlimited period of time. In the major-ity of cases the construction permit is issued by the municipal authorities.

Construction worksIn the process of construction works, design, technical and State supervi-sions are carried out.

Completion of construction works completion of construction works must be documented either by the completion deed (in case major con-struction works have been carried out) to be issued by the State com-mission upon inspection of the works performed, or by the employer’s dec-laration in the approved form which in certain cases has to be certified by a competent State authority.

Describe the main requirements for construction licencing

As a general rule, any legal entity reg-istered in the republic of Lithuanian, also foreign legal entity having a li-cence (right) to carry out the construc-tion works in its home country as well as a construction engineer is entitled

to engage in construction business in Lithuania.

In all cases a legal person willing to carry out the construction works must employ a qualified construction man-ager.

Special licencing requirements are applied to the legal entities willing to engage in the construction of build-ings of exceptional significance, the characteristics of which are approved by the Ministry of Environment (e.g. all residential and non-residential build-ings of 30 metres and higher, etc.). to be eligible to act as the contractor of exceptional significance building an entity must obtain:

•a qualification certificate confirming inter alia compliance with respec-tive requirements, also listing the type of construction works (general, mechanical, electro-technical, etc.) permitted to be carried out, etc.; or

•a certificate of recognition of the foreign entity’s right to engage in similar type of the construction works in its home country (appli-cable only to the contractors estab-lished in a Member State of the Eu-ropean union or the EEA Agreement or the Swiss confederation).

Similar qualification requirements are applied in respect of designers and entities willing to engage in designing business in Lithuania.

the procedures of certification and recognition of the right to construct

and/or design are pursued by the State enterprise certification centre of Building Products.

What are the statutory guarantee terms for construction works?

the following statutory guarantee terms are applied for the defects of the designing, construction and tech-nical supervision works:

•5 years for structural part of con-struction works;

• 10 years for defects of hidden ele-ments;

•20 years for intentionally hidden de-fects.

REGISTRATION

Does all real estate require to be registered?

Except for certain simple and tempo-rary structures, all other kinds of real estate have to be registered with the real Estate register. only legally reg-istered real estate may be sold or oth-erwise disposed of.

What rights (if any) to real estate are subject to registration? What are the consequences of failure to register?

All in rem rights and personal rights to real estate, also encumbrances of and various legal facts related to real estate or restriction of rights thereto (such as seizures, lawsuits, decision of authorities affecting real estate, etc.),

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lithuania has a very modern, efficient and reliable real estate registration system.

may and, in the cases stipulated by the laws, must be registered with the real Estate register.

In most cases validity of rights and obligations to as well as encumbranc-es of real estate is not dependant on their registration, and they become effective from the moment agreed by the parties. the exception is ap-plied to some specific rights in rem, in particular, servitudes and usufructs, which create the rights and obliga-tions to their holders and property owners only upon their registration, unless such rights are determined by the laws.

However, both personal rights (e.g. lease, sublease, gratuitous lease, etc.) and in rem rights to the real estate, as a general rule, may be invoked against third person only if they have been registered with the real Estate regis-ter. A tenant cannot rely on the lease against new owner of a building, if its lease has not been registered with the real Estate register at the moment of change of the owner.

What is the procedure for registra-tion of the ownership to real estate?

two alternative ways for the registra-tion of the ownership to the acquired real estate are available:

• request the notary who has certified the relevant acquisition agreement (the notary will transmit necessary data to the real Estate register electronically); or

•apply to any branch of the State En-terprise centre of registers which administers the real Estate regis-ter.

What time and costs are involved in the registration of real estate (rights thereto)?

the major costs relate to the registra-tion of the title to real estate. Such costs mainly depend on the type of real estate (land or building/prem-ises), its average market value es-tablished by a competent authority by way of massive valuation and the acquirer of the real estate (natural or legal person). In any case the costs for the title registration cannot exceed the established cap-fees – LtL 5,000 (approx. Eur 1,448) for legal persons and LtL 1,000 (approx. Eur 290) for individuals.

Substantially lower fees are involved in the registration of other rights, en-cumbrances and legal facts pertaining to real estate.

the standard term for the title regis-tration is 10 business days, while any other registration procedures have to be completed within 5 business days. Accelerated registration within 1, 2 or 3 business days is available upon pay-ment of 30, 50 or 100% mark-up on the standard fee, respectively.

How reliable is the registration sys-tem?

By virtue of law, data recorded in the

public register is deemed accurate and true (prima facie evidence) unless re-butted.

the data of the real Estate register provides comprehensive information on real estate owner, leases, mortgag-es, seizures and other encumbrances registered in respect of real estate, also on-going lawsuits, decisions of authorities affecting the real estate (e.g. decisions regarding expropriation procedures), etc. thus, an investor is able to receive an up-to-date data on any real estate at any time.

Is the register publicly accessible?

data contained in the real Estate reg-ister, as a general rule, is considered to be public insofar disclosure thereof is not explicitly restricted (e.g. classi-fied information) and complies with the personal data protection require-ments.

normally any person, upon paying the set fee, may order an official record on any real estate registered with the real Estate register based on the ad-dress of real estate, its identification number, or name or identification number of the legal person.

Access to the data of the real Estate register based on the name, surname and/or personal number of a natural person is available only to certain qual-ified authorities, organisations and of-ficers (e.g. state authorities, notaries public, bailiffs, credit institutions, in-surance companies, attorneys-at-law).

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lithuanian thin capitalization rules apply in respect to the borrowings from or guaranteed by the related parties. the debt to equity ratio is 4:1.

TAXATION

Corporate InCome tax

Tax rate and basisthe standard rate of corporate income tax in Lithuania is 15%. A reduced rate of 5% is applied to small entities com-plying with the established criteria.

Lithuanian entities are taxed on their income sourced inside and outside Lithuania except for income sourced through permanent establishment in countries which are members of the Eu or which have effective double taxation treaty (dtt) with Lithuania and where such income were subject to tax.

Capital gainscapital gains of a Lithuanian entity or a foreign entity acting via its per-manent establishment on transfer of shares are exempt from tax if:

• the transferred shares are of an en-tity, which (i) is registered or other-wise organized in an EEA Member State or a state, which has an effec-tive dtt with Lithuania, and (ii) is a payer of a corporate income tax or an identical tax; and

• the transferor holds more than 25% of the total number of shares of that entity for at least 2 consecu-tive years (whereas in case of reor-ganisation – for not less than three years).

the aforementioned relief does not apply in respect of transfer of the

shares to their issuer.

capital gains of a foreign entity from the sale of real estate located in Lithu-ania received otherwise than through its Lithuanian permanent establish-ment, also income from the real estate lease received from the source in Lith-uania as a general rule are subject to a withholding tax at a rate of 15%. the withholding tax is imposed on gross in-come received from the sale of real es-tate. After the tax is paid, foreign taxed entity is entitled to apply to Lithuanian tax authorities for the re-calculation of the tax on a net basis (i.e. on the differ-ence between acquisition and sale val-ues (prices) of real estate) and refund of the overpaid amount.

capital gains generated by a foreign entity in Lithuania from the sale of shares otherwise than through its per-manent establishment are not subject to taxation in Lithuania.

Dividendsdividends paid by a Lithuanian entity to either a Lithuanian or foreign entity are subject to the withholding tax at a rate of 15%, unless the participation exemption can be applied. dividends paid to a legal entity are tax exempt if a legal entity holds continuously, at least for 12 months, including the date of distribution of dividends, shares carrying more than 10% of the total number of votes in the Lithuanian le-gal entity (the payer of dividends). the participation exemption cannot be ap-plied in case the recipient of dividends is established or otherwise organized

in a tax haven country.

InterestInterest paid by a Lithuanian entity to a foreign entity is not subject to the withholding tax provided such foreign entity is registered either in a Member State of the EEA or a state that has an effective dtt with Lithuania. In other cases interest paid to non-residents is subject to 10% withholding tax.

Thin capitalization rulesLithuanian thin capitalization rules ap-ply in respect to the borrowings from the related parties as well as the bor-rowings guaranteed by the related parties. the debt to equity ratio is 4:1. these provisions do not apply if a Lithuanian company can prove that the same loan under the same condi-tions would have been granted by a non-related entity.

Tax losses carried forwardLosses, except for the losses incurred as a result of disposals of securities and/or derivative financial instru-ments, may be carried forward for an unlimited period of time, however the deduction of such losses from the profits of the tax years commencing after 31 december 2013 shall be limit-ed to 70 % of a current year tax profit. carrying of losses except for the loss-es incurred as a result of disposals of securities and/or derivative financial instruments shall be terminated if the entity ceases its activities giving rise to the losses for reasons that are not beyond the entity’s control.

LItHuAnIA


Losses incurred as a result of disposal of securities and/or derivative finan-cial instruments (except for losses in-curred by financial institutions) may be carried forward not longer than for 5 consecutive tax periods, starting from the tax period following the tax period during which the losses were incurred. Losses incurred by financial institu-tions as a result of disposals of securi-ties and/or derivative financial instru-ments, may be carried forward for an unlimited period of time, however the deduction of such losses from the profits of the tax years commencing after 31 december 2013 shall be limit-ed to 70 % of a current year tax profit.

Intra-group consolidationsLithuanian entities are allowed to transfer their tax loss accrued for a tax period to another group company which would reduce its taxable income for the same tax period by the amount of the loss transferred to it.

A foreign entity is allowed to transfer its tax losses to Lithuanian entity if:

a foreign entity is treated as resident for the tax purposes in a Member State of the Eu, and a foreign entity is not allowed to carry forwards its losses in accordance with the legislation in the country of resi-dence; andthe tax losses of a foreign entity were calculated (recalculated) under the provisions of the Lithuanian Law on corporate Income tax.

lithuanian entities are allowed to transfer their tax loss accrued for a tax period to another group companies.

IndIvIdual taxes

Taxation of employment related in-comeEmployment-related income received by a Lithuanian tax resident from a Lithuanian employer is subject to the following taxes:

taxes withheld from the gross salary of employee:•personal income tax at a rate of

15%;•health insurance contributions at

a rate of 6%;•social security contributions at a

rate of 3%;

taxes payable by the employer on the top of the gross salary of employee:•social security contributions at a

rate of 30.98%•contributions to the guarantee

fund at a rate of 0.2 % (payable only by Lithuanian employers).

Sale and lease of real estatecapital gains from the sale of real es-tate are subject to a 15% personal in-come tax.

Full exemption from personal income tax is applied on income of either tax resident or non-tax resident of Lithu-ania when real estate is sold (i) at least 3 years after its acquisition if real es-tate was acquired prior to 1 January 2011 and it was not related to the sell-er’s individual activities or (ii) at least 5 year after its acquisition if real es-tate was acquired after 1 January 2011. Some further tax exemptions are ap-

plied in case of sale of real estate used for residency purpose.

Income received either by a tax resi-dent or non-tax resident of Lithuania from the lease of real estate located in Lithuania is subject to personal in-come tax at the standard rate of 15%.

Sale of sharescapital gains generated by a tax resi-dent of Lithuania from the sale of shares not exceeding LtL 10,000 dur-ing a calendar year are exempt from personal income tax. the part of capi-tal gains exceeding LtL 10,000 is sub-ject to 15% personal income tax.

capital gains of a non-tax resident from the sale of shares are not subject to taxation in Lithuania.

Taxation of self-employed individu-alsIncome generated by self-employed individual from his/her individual busi-ness activity (after deduction of allow-able expenses) is subject to personal income tax at a rate of 5 % or 15% de-pending on the nature of the activities.

Self-employed individual is entitled to apply one of the following methods for calculation of taxable base:

• to decrease amount of income re-ceived by 30% (without providing any evidence of the expenses in-curred and deducted);

• to deduct all allowable expenses from income received, provided that self-employed individual possesses

LItHuAnIA


Vat is applied to the sale of new buildings, land plots with new buildings or designated for construction.

documents proving expenses de-ducted (certain limits apply for some type of expenses).

Profit of self-employed individuals is subject to the health and social in-surance tax at a rate of 37.5%. the taxable base (profit) cannot exceed LtL 71,424 (approx. Eur 20,700) per year irrespective of the actual profit generated by a taxable person.

Sale and lease of real estate and shares is not considered to be individ-ual activity of self-employed individual under the Lithuanian law.

value added tax (vat)

A standard VAt rate of 21% is applied only to the sale of (i) new buildings (i.e. which are under construction or had been built or materially reno-vated within the last 24 months prior to their sale), (ii) the land plots (parts thereof) together with new buildings and (iii) the land plots developed for the construction of new buildings (re-gardless of whether or not the actual construction works are carried out on such land plot). Save for the above-mentioned, the sale of any other real estate is exempt from VAt.

Lease of real estate is VAt exempt except for the lease of (i) residential premises for a term not exceeding 2 months, and (ii) premises, parking sites/lots, garages for parking or keep-ing of any means of transport or other property with a similar function.

notably, a VAt taxable person has the right of option for calculation of VAt on the sale or lease of real estate that is exempt from VAt provided however that such real estate is sold or leased to a VAt payer. once chosen, the latter option should be applied for at least 2 years.

Individuals engaged in economic ac-tivities are obliged to register as VAt payers in Lithuania if:

• the total turnover from his/her economic activities exceeds LtL 155,000 (approx. Eur 44,900) per 12 calendar months; or

• the value of the goods acquired from the persons established in an Eu Member State exceeds LtL 35,000 (approx. Eur 10,000) per 12 calen-dar months.

real estate tax

real estate tax is imposed on the real estate owned by individuals and legal entities in Lithuania except (i) land, (ii) real estate which is not in use as a result of unfinished construction works and (iii) real estate created or used for private and public partner-ship.

the annual tax rate is set every year by local municipalities in the range of 0.3%-3% of the taxable value of real estate.

Among other cases, full exemption from real estate tax is applied in re-spect of properties designated for in-

ter alia residential and leisure purpos-es, owned by individuals, provided that the total value of the property falling under the same type of real estate tax exemption does not exceed LtL 1 mil-lion (approx. Eur 290,000).

land tax

Land tax is imposed on the land owned by individuals and legal entities in Lith-uania, except forest land.

the annual tax rate ranges from 0.01 to 4% of the land taxable value. the particular tax rate to be applied dur-ing the next taxable period (calendar year) is set by local municipalities be-fore 1 June of the current year.

state-owned land lease tax

State-owned land lease tax is charged for the State-owned land leased with-out holding an auction.

the annual tax rate varies from 0.1 to 4% of the land taxable value. the par-ticular annual tax rate and its payment terms are being established by local municipalities within the territory of which the taxable land is located.

LItHuAnIA


GDP CONTINUES TO GROW

Latvia has shown a strong recovery from the decline of recent years. the economic growth in Latvia continued throughout of 2013, mainly driven by growth in trade and commercial servic-es. From the industry point of view, the fastest annual growth showed opera-tions with the real estate industry; high growth rates had a public service sec-tors (public administration, medicine and education), construction, trade, as well as accommodation and food ser-vices sector. the annual GdP growth is expected to be lower in 2013, compar-ing to 2012 (5%) and will reach 4.1%.Latvia may show the most significant growth trends in the region during the following two years. Activity will in-crease in real estate, and recovery in the construction sector will continue, although at a more moderate speed, whereas financial and insurance sector will continue to adapt to the post-crisis circumstances. Gradually there is im-proving economic situation in the Euro area and the nordic countries, which are significant markets for Latvian companies. In 2014, shall take effect on the number of changes in tax laws that will increase household income. the forecasted GdP growth for 2014 is 4.5%.At the end of 2013 Standard & Poor’s raised its credit rating for Latvian out-look from stable to positive while main-taining the current rating of BBB+ level.

PRIVATE CONSUMPTION

In 2013 the private consumption con-

LAtVIA

tinued to increase and stimulated GdP growth by nearly 5.2%. the growth of the private consumption was mostly influenced by the increase of average salary rate and reduction of previous savings.during the 2013 consumers continued to buy more long-term use goods. the inflation factor is very important for the forecast of private consumption for the year of 2014. the domestic supply factors, e.g. higher excise tax on to-bacco, delayed rising of electricity tar-iffs for households, etc., will also affect inflation in 2014. Private consumption is expected to maintain stable at 4.1% annual growth during 2014.

DECLINE OF UNEMPLOYMENT

In 2013 the expansion of economic ac-tivity contributed to the recovery in the labor market – employment and wages increased, however the prices have been rising very slow.unemployment tended to decline from 15% in 2012 down to estimated 11.9% in 2013. However, unemployment is expected to remain a double-digit num-ber also in 2014. Average net monthly salary has improved slightly in 2013 comparing to 2012 and has grown in private sector by approx. 3.8%.

RETAIL TRADE

In 2013 retail trade, except of automo-tive fuel, continued to grow by estimat-ed 6%. the fastest growth by 25-35% was in retail sale of furniture, lightning equipment and other household. due to economic sentiments and rising infla-

tion, the increase in private consump-tion is expected to slow down its pace in the following years, however retail trade growth is still ahead of the growth in the earnings and the amount of the consumers’ savings is relatively low.

FDI

the rebound of investments in 2013 continued, although the amount of to-tal investment did decline due to over-all global financial instabilities. Sweden remained the main source of foreign direct investment in Latvia, providing total investment cumulative flow of 2.5 billion Eur (22% of total FdI).the significant growth of foreign direct investment during 2013 was observed in education sector as well as mining and quarrying. the most active inves-tors in 2013 were Hungary, Germany, Spain and offshore financial centers.

EURO ADOPTION

Latvia has met the Maastricht criteria in spring 2013, and joined the Euro area in January 2014.the adoption of Euro usually results in so called “Euro shock” with a relatively high inflation and economic growth caused by prices being rounded up; high expectations for increasing pri-vate consumption and growth of sala-ries.Latvia joining the Euro area in 2014 has several advantages, however the most important to real estate market is that there will be no currency exchange risk, and thus Latvia will become more at-tractive for international investors.

latViaeconomic outlook


LAtVIA

latvia has met the Maastricht criteria in spring 2013 and has joined the euro area in January 2014

Economic Indicators | Latvia



-20

-10

0

10

20

30

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent

Inflation and Private Consumption | Latvia


-30

-20

-10

0

10

20

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent

Retail Trade | Latvia


-40

-30

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013E


Foreign Direct Investments | Latvia


-5

0

5

10

15

20

25

30

35

0

2,000

4,000

6,000

8,000

10,000

12,000

2007 2008 2009 2010 2011 2012 2013E

Percent mEUR

Exports and Imports | Latvia


-50

-40

-30

-20

-10

0

10

20

30

40

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2007 2008 2009 2010 2011 2012 2013E

Percent mEUR

Wages and Salaries | Latvia


Gross avg EUR/month

-20

-10

0

10

20

30

40

0

200

400

600

800

1,000

2007 2008 2009 2010 2011 2012 2013E

Percent

Source: Statistics Latvia, newsec



Source: Statistics Latvia, European commission, newsec

Source: Bank of Latvia, newsec



the recovery of Latvian retail trade continued accelerating in 2013, but still remained below the pre-crisis level. A notable and relatively persistent im-provement in consumer purchasing power led to an increased activity in retail. due to this, the performance of shopping centres located in riga has improved significantly.retailing is expected to record a low, but stable and constant value growth over the next twelve months. Similarly to earlier periods, the key driving fac-tor for grocery retailers in the future will be the overall economic situation in Latvia. Grocery retailers returned to a relatively strong growth in 2013, and a further expansion is expected in the up-coming years, though at a slower pace. A higher disposable income is likely to enable consumers to spend more on discretionary items, such as fashion, beauty and healthy lifestyle items. non-grocery retailers are predicted to record a relatively stronger growth compared to the grocery format.

LAtVIA

a notable and relatively persistent improvement in consumer purchasing power led to an increased activity in retail segment

Source: newsec

SUPPLY OF SHOPPING CENTRES

total GLA of shopping centres in riga exceeded 422,000 sq. m in the end of 2013 (16 shopping centre projects in-cluded). only 5 projects consist of more than 30,000 sq. m (51% of GLA), while others are considered medium or small shopping centres.the leading grocery chains, in particu-lar rimi Latvia SIA and Maxima Latvija SIA, were increasing the number of hy-permarkets and supermarkets not only in riga, but also in the biggest cities of Latvia. Similar to 2012, only hyper-markets/supermarkets were delivered to the market in 2013: supermarket “draudziba” (“Firendship”) were deliv-ered into the market with the anchor tenant rIMI and two Maxima hypermar-kets: Maxima next to the Sc domina at dzelzavas street 6a and Maxima Bik-ernieku are expected to be completed.

IMPROVING PERFORMANCE

In 2013, further occupancy and perfor-mance improvement of shopping cen-tres continued in riga. Vacancy rate in the best-performing centres, such as Galactico centres run by Linstow center Management (Alfa, Galerija centrs, origo, Mols), domina Shopping and Spice rarely exceeded 2-3%, while secondary centres where consumers were attracted mainly by supermarket and catering services, demonstrated double-digit vacancy rates.Based on the results from the first three quarters, the most successful shopping centres have maintained a growth of turnover of approx. 8-9% during 2013. the highest growth in turnover is ob-served in such sectors as apparel, jew-ellery and watches, footwear and elec-tronics. the average purchase in the best-performing centres has increased in average by 4% in 2013 compared to 2012.In the first half of 2014 due to economic

2007 2008 2009 2010 2011 2012 2013E Trend Ω≈¬


up to 100/150 sq. m 25–60 20–50 15–45 20–50 20–50 20–50 25-60 Ω

100/150-350/500 sq. m 15–30 12–30 10–22 10–25 10–28 10–30 15-35 Ω

> 350/500 sq. m 9–17 8–15 6–13 7–15 7–15 8–16 10-20 Ω

Anchor tenants 6–12 5–10 3–8 3–8 3–11 5–11 6-11 Ω

Vacancy rates, %


other 10–20% 12–30% 15–35% 15–25% 15–25% 15–25% 5-10% ≈

RENTAL RATES AND VACANCIES | RIGA

retailmarket


LAtVIA

Further occupancy and performance improvement of shopping centres continued in 2013


Supply of Shopping Centres | Riga


0

100

200

300

400

500

0

100

200

300

400

500

600

700

2005 2004 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Sq. mThs. sq. m

Prime Retail | Riga


0

2

4

6

8

10

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013E 2014E


sentiments, a slow-down is expected in retail trade and tenants’ performance. As a result, the weakest shopping cen-tres might suffer, and the difference between the best shopping centres and other shopping centres will be more distinctive.

RENTAL RATES

rental rates in the best shopping cen-tres have increased in average for 25% in 2013. 2014 is expected to remain stable or even lower costs due to the higher estimated vacancy in shopping centres.

NEW FASHION BRANDS

In 2013 overall market take-up was mainly based on existing retailers’ ex-pansion. Anchor tenants and strong players with recognized store brands continued seeking the best locations in 2013, which resulted in strengthen-

ing the tenant mix in the core centres. opening of retail area of H&M stores in shopping centres required reloca-tion and even closing of several stores within the core shopping centres, which in the case of Galerija centre conse-quently raised the interest of retailers in opening street retail stores in the prime proximity to Galerija centre.Following the overall economic recov-ery and retail trade improvement, the market faced new brand entrances in 2012, such as next, Burberry, Massimo dutti, H&M. In 2013, the international fashion brands continue to demon-strate their interest in riga market, so H&M continued the expansion with the opening of the third store in Sc Mols. there are announcements of opening such brands as debenhams in 2014, as well as there are some other potential new brands interested in entering the market in 2014. continuously improv-ing consumption and joining Euro area may attract new international retailers

in medium term of 2014-2016.At the same time, some retailers are closing their operations - in 2014 Varn-er Baltija will exit Latvia’s retail market and will close all eight dressman, cubus and Bik Bok shops located in the best-performing riga Shopping centres.rimi and Maxima are two clear lead-ers in grocery retailing in Latvia, both accounting for market shares of ap-proximately 25% in grocery retailing. Among other noticeable players in 2013 are Palink, Prisma, Skai Baltija, Balt-stor (the network of Mego and Vesko stores), the chain of Beta stores and Elvi. Grocery retailers, Maxima Latvija, rimi Latvia, also continued expanding chains of their supermarkets and con-venience stores during 2013.

EXPANSION PROJECTS

the main retail market strength and threat to the new developments is the concentration of 5 shopping centres


in 2013 the rent rate in the best locations has increased in average by 10-15% compared to the year of 2012

(~33% of total GLA) operation under Linstow center Management. Linstow center Management has announced the expansion of Sc Alfa and Sc origo. Planned expansion projects of origo and Alfa shopping centres are based on the existing retailer’s expansion and tenant mix improvements. Expan-sion is planned to start in 2014 and to be delivered by the end of 2015. these projects will strengthen the position of mentioned shopping centres and might abandon other big scale developers’ plans due to relative market oversup-ply.Akropolis has announced the plans to start the development of a new shop-ping centre, thus the total stock will in-crease in 2015/2016.

HIGH STREET RETAIL

In 2013 has observed increased activ-ity in street retail market in the active center of riga, based primarily on the general improvement of economic situation, consumption and retail sales growth as well as change of owners for good retail properties in such areas as high retail streets in the old town, Qui-et centre and Active centre of riga city.In the 2H of 2012 and during 2013, the demand for street retail premises in the downtown riga increased significantly with several big international brands looking for premises in the city centre. It is worth noting that for tenants look-ing for the premises in excess of 800 sq. m there is no available space in the centre. the tenants have to monitor the existing leases for expiry in order to compete for the space to open a store

in active pedestrian flow locations.In 2013 the rent rate in the best loca-tions has increased in average by 10-15% compared to the year of 2012. It is worth noting that in 2013 rents rose faster than the turnovers of retailers, thus in spite of a low vacancy in this segment, further rent adjustment is limited due to retailers’ turnover and the ability to pay rent.


A slight slowdown of activity in riga office market was observed in 2013 due to a relative shortage of vacant good-quality office space and growing rent rate expectations by landlords. the office market in riga was driven mainly by the relocation of the existing players and the expansion of compa-nies within the current premises.unfortunately, riga still does not have a clearly established central business district. Skanstes Street region, which is adjacent to the posh Quiet centre, with its planned critical mass devel-opments concentrated under man-agement of a few solid developers, is expected to become a future cBd of riga. However, the development of the whole district is still a question of de-cades, especially taking into account the currently inactive developers and the banks’ attitude towards the com-mencement of new construction.

NO NEW SUPPLY

In the end of 2013, stock of modern

LAtVIA

During 2013, office market was driven mainly by relocation of existing players and expansion of companies within current premises

office premises in riga amounted to 539,000 sq. m. the absolute figure of business space is miserable for the biggest metropolis within the Baltic States with a major share of the coun-try’s GdP concentration. the total stock of modern offices per capita in riga is pretty limited comparing to other European capital cities.no new speculative office projects were constructed in 2013. the Lat-via’s office market future prospects are not encouraging. office stock next year will increase by the B class office building for the State revenue Service needs, as well as the long-awaited Z-towers project, despite the planned changes to the concept, will also pro-vide the office space into the market in 2015.theoretically, office market will be able to observe a sharp increase in the vacancy rate in 2015/2016 if during this or next year the projects as “new Hanza city” Stage 1 (16,500 sq. m) and Merks’office project Skanstes Biznesa centrs will be started to construct.

A class office space accounts for ap-prox. 20% of total riga’s modern of-fice supply. the majority of A class of-fices are build-to-suit and all of these are located in riga city centre. Banks, e.g. Swedbank, citadele, rietumu Ban-ka, dnB, are the key occupiers of A class office buildings.

RELOCATION-RELATED DEMAND

total office absorption in A and B class segment was around 12,000 sq. m dur-ing 2013 it is about 60% lower than it was observed during 2012. during the 2013, the office market in riga was driven mainly by the relocation of the existing players and the expansion of companies within the current prem-ises. there were no noticeable new-comers to the market. the further de-velopment of the office stock in riga is strongly related to the financial per-formance of office occupiers, their ex-pansion activities and the entrance of new companies. the key future trends on the market include an increasing

Office Stock | Riga


0

10

20

30

40

60

50

0

100

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m

Office Market Indicators | Riga

Absorption New supply Stock growth, % yoy

0

5

10

15

20

30

25

0

20

40

60

80

100

120

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m

Source: newsec Source: Statistics Latvia

officemarket


LAtVIA

it is forecasted that supply of B class offices will be provided to the market in mid-2014

Office Vacancy | Riga


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 0

5

10

15

20

30

25

Percent

Office Rents | Riga

A class A class Max B class B class Max

2007 2008 2009 2010 2011 2012 2013E 2014E 5

10

15

20

25EUR/sq. m/month


demand for green technology and en-ergy efficient solutions.

DESCENDING VACANCY

overall vacancy level in A and B class offices at the end of 2013 was 7.5%, which has decreased by 2.3 percent-age points since the end of 2012. dur-ing 2013, vacancy of A class offices re-duced to 2.5%, while vacancy level in B class office premises was decreased down to 8.5%.the vacant premises are defragment-ed between different buildings there-fore companies searching for more than 1,000 sq. m experience difficul-ties of finding the right premises for their business operations and switch to considering quality B class offices within a central business district. A class office vacancy is expected to re-main low until new projects are deliv-ered to the market.It is forecasted that a supply of B class office areas will be provided to the market in mid-2014 when State rev-

enue Service will move to Ezerparks in riga and will vacate ca 20-30 thous. sq. m (including 7,000 sq. m at SWH office complex at Skanstes, 7,000 sq. m at Jeruzalemes str. and 4,000 sq. m at 11.novembra krastmala).

RENTAL RATES

Modern office rent rates remained stable throughout the year although there has been an increase of up to 10% of the rent rate bottom limits. At the end of 2013, the average market rent rates for prime office premises in riga’s centre were in the range of 12-15 Eur/sq. m/month, while rent rates in B class offices varied between 8-11 Eur/sq. m/month, depending on the location. the average asking price in riga is the lowest among three Baltic countries. currently, riga also has the broadest offering of vacant B class of-fice premises.despite the fact that owners’ expecta-tions about rent levels have risen, the average rent level for the transactions

concluded since the beginning of 2013 has not significantly changed com-pared to 2012.

FUTURE OUTLOOK

taking into account that no new spec-ulative office building construction is currently undergoing within A and B class segments in the city centre of riga, the situation with the office sup-ply in the city centre will remain the same for the next 2 or 3 years. thus, the only opportunity for the tenants in need for new offices in the city centre will be monitoring the market for pos-sible lease expiries within the existing stock of offices.therefore it is time for the tenants who plan their move in a 6 to 12 month period to actively consider the remain-ing opportunities in the city centre in riga while it is still possible to negoti-ate more or less adequate commercial terms.


the most significantly hit by the crisis, Latvian industrial market started to revive from 2011 due to the import/ex-port growth and the increase in indus-trial production and transit services. 2013 was characterized by a growing demand for warehouse and production premises, whilst the shortage of vacant quality premises limited the number of take-up transactions. the demand for logistic premises in and around riga has increased significantly following the economic recovery.

LIMITED SUPPLY

the supply of warehouse and logis-tics space in riga and its region con-sists of almost 740,000 sq. m (out of which 25% are “built-to-suit” projects designed and built for specific ten-ant or user requirements and needs) at the end of 2013. total stock has not increased during 2013. the crisis has clearly revealed good and bad projects, as well as has attributed a crucial role to a professional asset management. de-

LAtVIA

lack of new supply and improving overall economic situation have led to rather significant vacancy rate decrease

velopers are ready to develop only built-to-suit logistic properties in the market; therefore the growth of the speculative space supply is not considered likely in the next couple of years. Buildings cur-rently in the planning stage most prob-ably will not enter the market in 2014 unless they find an anchor to sign a prelease.the supply of a qualitative stock exceed-ing 1,000 sq. m has become extremely limited. the shortage of big-size, vacant premises will lead to an upward pres-sure on rent rates and the commence-ment of new built-to-suit projects con-struction in the near future. Around 40% of the total stock is located within the riga city borders. the other 60% are located around the riga ring road (near Kekava, olaine, Marupe, Salaspils and Jelgava).

RENTAL RATES

In 2013 the asked rents of modern A class industrial space reached 3.5-4.5 Eur/sq. m/month. rates in prime loca-

tions have increased by 5-10% in 2013 due to an increasing activity of reloca-tion or expansion by the major play-ers. B class warehouse space rents are lower. However, they increased by as much as 25% in comparison with 2011 and now account for 2.5-3.5 Eur/sq. m/month. rental rates in Latvia are the lowest if compared among the Baltic countries. the rental rates are fore-casted to remain stable with a slight in-crease next year.

ZERO VACANCY

the vacancy rate of industrial premises in the end of 2013 reached the level of 5%. the vacancy rate of most modern A and B class industrial centres has reached zero. the vacancy rate and rent rates are very dependent on the location, facilities management and technical quality of the particular in-dustrial park. now there is a shortage of industrial premises for medium and large areas. that is the reason why the companies are starting to look for land

W&L Market | Latvia


0

10

20

30

40

60

50

0

200

400

600

800

1,000

2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m

W&L Market | Latvia


0

5

10

15

20

25

30

35

0

20

40

60

80

100

120

140

160

180

2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m


industrialmarket


LAtVIA

Several developers has started the construction of new industrial premises and this will affect the industrial market in 2014

Warehouse Rents | Riga

1

2

3

4

5

7

6

2007 2008 2009 2010 2011 2012 2013E 2014E

EUR/sq. m/month

Rental rate Avg Rental rate Min Rental rate Max

Source: newsec

plots in good locations for new „built-to-suit” industrial centres.

INCREASING DEMAND

2012 was characterised by an increas-ing activity of small and medium ten-ants’ rotation, as well as a few large lease transactions. Some production companies switched from 3PL opera-tors to own logistics operations (due to the quality of the outsourced services).the H1 of 2013 was characterised by a growing demand for warehouse and production premises, whilst the short-age of vacant quality premises limited the number of take-up transactions. the greatest demand was observed for mid-sized warehouses (500-1,000 sq. m) with a good location and competitive, modern technical equipment. there is a high demand for 1,000-5,000 sq. m light production facilities. In the H2 of 2013 was increasing demand of logistic companies which were looking for logis-tic premises with “cross-dock” function for lease. the most of absorption of the

industrial premises held in during 2HY of 2012 and 1Q of 2013 reaching about 70,000 sq. m. the major lease transac-tions were concluded for the industrial premises in the centres, outside the city of riga.russian companies are continuing to play very important role in demand of logistic premises in Latvia, together with local companies leasing the premis-es for their needs. due to the slowdown of the russian economy we forecast the growing interest from russian logistic companies to optimize their costs.

FUTURE DEVELOPMENTS

Expanding Baltic scale retailers and distributors faced difficulties in finding the premises for relocation due to the shortage of modern industrial premises suited for their needs. the potential development pipeline for 2014/2015 might include three projects. Balt cargo Solutions, which plans to put into op-eration 24,000 sq. m premises for own and speculative use. VGP Group has

announced their plans to develop VGP park Kekava with 40,000 sq. m in total. the delivery of these projects to market will highly depend on the mutual agree-ment.

Logistic company Sanitex has develop-ment plans across the all three Baltic countries. Sanitex has plans to develop 40,000 sq. m A class logistics centre in Kekava (the 1st stage development with 24,000 sq. m is currently under con-struction and will be finished in 2014) including dry and refrigerated ware-house.Export of goods is usually going through the ports directly to the end-user in russia, Scandinavia, Germany or other European countries. Projected logistics corridor via riga to Moscow would strengthen attractiveness of the riga port territory and increase ware-house and logistics space development in the long run. Synergy of ro-ro ferries and the port would increase logistics activities between Latvia and nordic countries and trigger industrial space development as well. the area of riga Freeport started to grow in 2012, and continued in 2013.

FULL SPEED RECOVERY

Positive economic indicators and the demand by the Latvian logistics sec-tor could signal to developers that the market could withstand an onslaught of construction and new warehouse prem-ises. Land plots that permit industrial and warehouse development could be-come objects of interest for end-users.


In 2013 along with the economic re-covery and increasing flow of tour-ists, the hotel market has continued to evolve - it was observed tourist growth, increase in total number of hotels and room rates, as well as the number of persons served in hotels and other accommodation establish-ments.In 2013, total number of visitors in ho-tels and other accommodation estab-lishments grew by 12% in Latvia and almost 16% in riga city, comparing to 2012.number of foreign visitors showed significant increase in growth rates. the estimated increase in 2013 was 14% comparing with the year 2012. International visitors traditionally account for around 65-70% of total hotel visitors in Latvia. In riga this proportion is calculated at about 87% and hasn’t changed for the last four years.

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in 2013 several three-star hotels requalified as four-star hotels

INCREASING SUPPLY

According to the Association of Ho-tels and restaurants of Latvia there were 64 rated hotels in riga in 2013 (85% of them 4 and 3 star hotels). In 2013 the total hotel stock has in-creased by two four stars hotels (the Astor Hotel and Wellton centrum Hotel & Spa) comprising additional 180 rooms in riga city. Another hotel developments (Mercure riga centre hotel 4* and Wellton Valnu Hotel 4*) is currently under construction and will increase total hotel supply by 360 rooms during 2014.the largest international hotel chain operating in riga is rezidor Hotel Group, which has 1,259 hotel rooms under management in riga.In 2013 several three-star hotels re-qualified as four-star hotels. number of two-star hotels increased as well. Some owners of guest houses and motels improved the concept till ho-tel level. the hotels upgrade trend al-lowed an upward pressure on average room rate.

DEMAND STRUCTURE AND CHANGES

In 2013, the majority of foreign visi-tors came from russia (24%), fol-lowed by Germany (11%) and Lithu-ania (9%). during 2013, the largest increase of tourists was noticed from the Belarus (46% growth), neigh-bouring russia (35%) and uSA (21%), however, a decrease in the number of tourists from the nordic countries, such as denmark (-8%) and Finland (-15%) was observed.

OCCUPANCY INCREASE

the flow of tourists during 2013 has increased occupancy rates in hotels of Latvia and riga up to 42% and 52% respectively. number of international tourists visiting Latvia continues to grow. Average length of trip to Lat-via for more than 70% of tourists still does not exceed 1.2 days - that shows activity among business tourists, who are coming to Latvia for short busi-ness trip, but not for long stay.

Hotels | Riga

5 Stars 4 Stars 3 Stars 2 Stars 1 Star

Demand and Occupancy of Hotels | Latvia

0

10

20

30

40

50

0

400

800

1,200

1,600

2,000

2005 2006 2007 2008 2009 2010 2011 2012 2013E



Source: Association of Hotels and restaurants of Latvia Source: newsec

Hotelmarket


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the development of new hotels has started in 2013 and will continue in 2014

Demand and Occupancy of Hotels | Riga

0

10

20

30

40

50

60

70

0

200

400

800

1,000

1,200

600

2005 2006 2007 2008 2009 2010 2011 2012 2013E



Source: Statistics Latvia

ROOM RATES

Hotel revenues continued to increase in 2013 driven by the consumption and GdP growth, the increasing flow of tourists and the hotel occupancy. Latvia was also among the countries that attracted some interest from foreign tourists as a shopping desti-nation. In general, all the profession-ally managed hotels in the city centre managed to boost their occupancy levels reaching the performance level of 2008.Along with the economic recovery and increasing flow of tourists, aver-age room rates, although varied from season to season, experienced a sig-nificant increase in 2013. Hotel room rates are dependent on the season. At weekends and during the events room rates are much higher than during a business week. 3-star hotel prices have remained stable, while the 5-star and 4-star superior rates increased by 20-25% since the begin-ning of 2013.

HOTEL DEVELOPMENT

In 2012/2013 the local hotel chain Wellton was expanding and at the end of 2013 united five Latvian Ho-tels - Gertrude, Elefant, old riga Palace, terrace design Hotel and centrum Hotel & Spa. Wellton chain plans to open one more hotel during 2014-Wellton Valnu Hotel (170 rooms) and Minstereja Hotel (300 rooms) in 2016. Furthermore, the Semarah ho-tels group was very active in Latvia this year, bringing under its own op-erator the Metropole Hotel in the old town and three hotels in Jurmala. currently, these hotels are under re-construction, and the Metropole Ho-tel is scheduled to open in the Q1 of 2014.Marriott, Kempinski and Mercure have announced their plans to enter riga hotel market. the Mercure hotel development is currently under con-struction and will be opened during the Q2 of 2014. the Grand Hotel Kem-pinski riga (236 rooms) is planned to

be opened in the middle of 2014. the development of a technical project for the Marriott Hotel riga has start-ed and the implementation of this project has been pending for several years.

RIGA IN 2014

In 2014, riga will be the European capital of culture, which will increase the number of tourists to Latvia. this will increase the hotel occupancy rates, boost the number of visitors and is expected to have an upward pressure on room rates as well.In 2014, riga will not only be the Eu-ropean capital of culture, but also the World capital of choral Music thanks to the 8th World choir Games – the world’s largest choir competition, which will take place in riga in the summer of 2014.


the Latvian residential market has split into two segments: the local population market and non-residents’ market. In the first market segment, there has been no significant increase in the activities observed with the min-imum price upward correction, while the non-resident market has demon-strated a sharp increase in prices in a short period of time.At the moment, management compa-nies of bank-owned property, play an important role in the housing market ensuring to their clients favourable credit terms and lower apartment prices.

RIGA AND RIGA REGION IS BOOMING

the activity in the housing market in 2013 has grown rapidly. the annual number of transactions in riga city in-creased by 32% in 2012, compared to 2011, and comprised more than 8,100 deals. the annual number of transac-tions in riga city increased by 16% in 2013, compared to 2012, and com-

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annual number of transactions increased by 16% and comprised of more than 9,400 during 2013

prised more than 9,400 deals. Around 15% of transactions took place in ri-ga’s centre.the number of total transactions in non-centre districts of riga has risen. the annual number of transactions in riga city and Pieriga region increased by 30% in 2013, compared to 2012.

INCREASING PRICES

there was also a slight increase of av-erage prices per square meter for new projects in riga’s centre – these grew by 6% during the year. However, new residential projects, both central and non-central, still accounted for just 16-18% of total number of transactions, so remained very sensitive to the sup-ply. despite of shortage of good sup-ply in riga city, the non-residents were seeking for apartments located out-side the riga city centre in other riga district’s or in riga planning region for a temporary residence permit or a liv-ing residence in Latvia. due to this fact the average prices for new non-central apartments increased by 10% and in

the end of 2013 reached the average price 1,300 Eur/sq. m (the end price for a user, including taxes). Prices in other segments (old construction apartments) showed a slight increase in average price as well.

SENSITIVE DEMAND

demand for residential real estate re-mains high in riga and Pieriga region. the capital city and region around this city is expected to maintain its lead-ing position. other regions represent much smaller markets and activity is forecasted to remain at the same level. the overall increase in transactions in newly developed projects was caused by the banks’ subsidiaries selling the apartments packed with parent banks’ special mortgage offers.High demand in residential segment (especially with transactions of apart-ments) is observed from non-residents due to the continuing interest in ob-taining temporary residence permits in Latvia.transaction number is mainly influ-enced by overall economic situation during the last years, economic devel-opment and by expectations. Highest activity during 2011-2013 was seen in economic apartment sector with av-erage transaction up to 50,000 Eur (in 2013 it was 75% of all transactions with apartments in riga). It is expect-ed to prolong during 2014-2015.

NEW SUPPLY

At the moment, a lot of new projects are being launched into the market

Residential Market | Riga


0

4,000

8,000

12,000

20,000

16,000

2005 2006 2007 2008 2009 2010 2011 2012 2013E

EUR/sq. mUnits

0

400

800

1,200

1,600

2,000

Source: Land Book

residentialmarket


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High demand in residential segmentis observed from non-residents due to the continuing interest in obtaining temporary residence permits in latviacompared to a few years ago. new projects by Merks, ncc, ncH, Larix Property, Pillar, r.Evolution city, dek-arta Property are expected to be com-menced in the forthcoming years. In the city centre, developers are mostly focusing on the most solvent audience – non-residents seeking either for a temporary residence permit or a liv-ing residence in riga. However, rapidly growing supply in riga’s centre may surpass demand.

FORECAST

Inspired by the increasing demand from non-residents and the successful sale of the existing stock to this audi-ence, more and more developers are commencing the construction of new residential projects in the city centre.due to an expected rapid increase of supply in the city centre, the price growth is expected to slow down with ca. 5-6% annual growth forecasted over 2014.It is expected that prices will remain relatively stable over the period. A slight increase in the average price in 2014 could be expected in prestigious locations for high class properties, mainly - due to the continuing interest in obtaining temporary residence per-mits in Latvia. Prices of old construc-tion will remain stable during 2014. number of deals is expected to in-crease by 5-10% during 2014 following a noticeable rebound in 2012 and 2013.


Foreigners are prohibited to acquire agricultural land directly or through the company.

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CORPORATE PRESENCE


the most common type of corpo-rate presence is limited liability com-pany (a private company) (in Latvian - Sabiedrība ar ierobežotu atbildību or SIA) and a joint stock company (in Latvian - akciju sabiedrība or AS, the same as in Estonian aktsiaselts or AS), whose owners also enjoy limited liabil-ity.

Joint stock companies have more ex-tensive corporate governance rules compared to a limited liability com-pany. However, a joint stock company may issue different types of shares unlike a private company. the below overview only covers private compa-nies as the most common company type.


It shall be managed only by the Board of directors and the shareholders. In addition, the Supervisory Board can be formed. Supervisory board is imposed on the joint stock company.

there are no participation restrictions applicable to the foreigners. Any for-eign citizen, irrespective of his/her origin, may be freely elected either to the Supervisory Board or the Board of directors of a private company.


As of 1 January 2014 the minimum authorized share capital of a private company is Eur 2,800 and minimal authorized share capital for a joint stock company is Eur 35,000.


the minimum number of shareholders is 1 and the maximum number is unlim-ited.

Are there any specific requirements for transfer of the shares in a private company?

In case the shares of a shareholder are sold, other shareholders have the right of the first refusal. A shareholder may make a gift of, exchange, or otherwise alienate shares (except sell) only with the consent expressed in the decision of the shareholders, unless it has been otherwise specified in the Articles of Association.

If a shareholder alienates shares, the subsequent division of the register of shareholders shall be made. Each di-vision shall be certified by the chair-person of the Board of directors or an authorised member of the Board of di-rectors with his or her signature and by the alienor of shares and the acquirer of shares with his or her signature. the signatures of the chairperson of the Board of directors or an authorised

member of the Board of directors, the alienor and the acquirer of shares shall be notarised.

What are the major fees involved in the incorporation of a private com-pany?

the notary fee for notarization of the form of application to the register of Enterprises is Eur 26 per person. the form of application to the register of Enterprises shall be signed by all of the incorporators.

the notary fee for certifying signa-tures of the Member of the Board of directors is Eur 19.02 if signed by a foreign person with no personal iden-tification number in Latvia, and Eur 26.11 if signed by person with an identi-fication number in Latvia.

notary fee for certifying document copies is Eur 2.5 per page. necessary certifications by the notary public usu-ally take 1 – 2 business days.

the costs for opening a start-up ac-count will depend on a Bank.

State fee for the registration in the commercial register is Eur 143. Fee for publication of announcement in the official gazette Latvijas Vēstnesis is Eur 26.


Are there any legal restrictions on the ownership of real estate (inter-ests in entities which own real es-


the law allows to acquire agricultural land by persons from eU Member States starting from 1 May 2014.

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tate) by foreign investors?

Restrictions for persons from other EU Member States until April 30, 2014, citizens of other Eu Member States and legal persons registered in other Eu Member States are prohibited to acquire ownership of agricultural land and forest land in Latvia.

Amendments to the law are submitted to the Saeima (the Parliament) of the republic of Latvia stipulating exten-sion of the deadline of 30 April 2014 by which citizens of other Eu Member States and legal persons registered in the other Eu Member States are pro-hibited to acquire ownership of agri-cultural land and forest land in Latvia, i.e. until 30 April 2020. It is impossible to predict whether these amendments will be adopted.

the restriction does not apply if a citi-zen or legal person registered in other Eu Member State (i) would like to do business in Latvia as a self-employed farmer; and (ii) throughout the time period of three consecutive years has been living in Latvia; and (iii) has al-ready been engaged in agricultural business in Latvia throughout a time period of three consecutive years.

Restrictions regarding foreigners (non-EU countries)

Foreigners from non-Eu countries are prohibited to acquire:

• land within city limits (urban land

title) to: (i) land in state frontier areas; (ii) protected coastal areas of the

Baltic Sea and riga Bay, and other public bodies of water, except for the areas where construction is permit-ted according to the municipal terri-torial plan; and

(iii) agricultural and forest land fall-ing within city limits and as indicated in the municipal territorial plan.

• rural land title to: (i)land in state frontier areas; (ii) land in nature reserves and zones

of other protected territories in na-ture reserves;

(iii) land in protected coastal areas of the Baltic Sea and riga Bay;

(iv) land within the protected zones of public bodies of water, except for the areas where construction is per-mitted according to the municipal territorial plan;

(v) agricultural and forest land as indicated in the municipal territorial plan; and

(vi) land within mineral deposits of national importance.

Note: Foreign (non-Eu countries) per-sons are not prohibited to acquire shares in a company which owns real estate in Latvia. However, there are certain restrictions on the companies themselves in connection with acquisi-tion of land in Latvia.

Land in Latvia can be acquired by a capital company registered in the re-public of Latvia or another Eu Member State:

•where more than a half of the share capital is owned by Latvian citizens, citizens of the Eu, Latvian state or municipality – by each individually or several of the aforementioned jointly;

•where more than a half of the share capital is owned by natural persons or legal entities from those countries with which the republic of Latvia has entered into international trea-ties on facilitation or protection of investments;

•where more than a half of the share capital is owned by several entities referred to in the above paragraphs (i) and (ii) jointly;

•which is a public joint stock compa-ny, and its stock is listed on the stock exchange.

If any changes in the above mentioned preconditions occur after acquisition of the real estate through a capital company, then in order to maintain the ownership the change must be notified to the city or county council, which grants or denies permission to continue to hold an ownership over the particular property.


Pre-acquisition agreements are com-mon in Latvia. often prior to acquir-ing real estate a purchaser is willing to perform due diligence of the real estate. the pre-agreement serves as a confirmation that the purchaser wish-


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Joint owners have pre-emptive rights to acquire imaginary parts of the real estate, if other joint owner sells his or her part of the real estate.

es to buy the property, but is, never-theless, retaining the possibility to re-fuse the property if any circumstances not acceptable for the purchaser are discovered.

the essence of pre-acquisition agree-ments is rather that of a conditional agreement aimed at conclusion of the purchase agreement in the future. Pre-acquisition agreement does not entitle to claim the real estate, even if identified and for which the price has been agreed upon in the pre-acquisi-tion agreement, but merely entitles to claim conclusion of the purchase agreement regarding the real estate.

the liability of the party for failure to comply with the pre-acquisition agree-ment may arise not for the failure to deliver the property or for failure to pay the purchase price, but rather for the failure to conclude the purchase agreement, and this liability may be expressed in compensation for losses.

It is often the case that the parties in pre-acquisition agreements state the performance of particular activities before the conclusion of the purchase agreement and the contractual penal-ties, if the other party due to unjusti-fied reasons refuses to conclude the purchase agreement.


According to the applicable laws and regulations of the republic of Latvia,

the ownership title can be transferred only if the real estate is registered in the Land register (except for some simple structures which are not sub-ject to the mandatory registration). In addition, it is the presumption of law that a person (natural person, legal en-tity, state or municipality) registered with the Land register as the owner of the real estate is considered to be the lawful owner having full control of the property.

In any transaction involving the trans-fer of the ownership title, it is of the ut-most importance to have the property registered in the name of the buyer as soon as possible in order for the buyer to obtain all rights of the owner with respect to third parties.

As a real estate purchase agreement should be filed with the Land register as part of the items needed to regis-ter the changes in the ownership title, this agreement must be expressed in writing. one original copy of the pur-chase agreement must be filed with the Land register in order to register the changes.


the law stipulates that in order to reg-ister the title to the purchaser docu-ments have to be submitted to the Land register in the official language (Latvian). In case if the contract is not concluded in Latvian, the contract

along with its translation into the offi-cial language, certified by a notary, has to be submitted to the Land register.

In practice bilingual contracts are of-ten made – in Latvian and a foreign language – stipulating that the text in Latvian shall prevail. In such case the contract with a notarized translation into the official language does not have to be submitted to the Land reg-ister.

Sale and purchase agreement of the shares of an entity might be made in any language.

Does any third person (governmental authority, etc.) have a pre-emptive right to acquire real estate subject to sale?

Latvian law recognizes the following pre-emptive rights :

• if the real estate is located in the territory of the municipality, then the respective municipality enjoys the pre-emptive right (with certain exceptions, such exceptions include selling of the apartment or selling ownership share of the real estate (i.e. without selling the whole real estate));

•co-owners of the real estate enjoy the pre-emptive right;

•an owner of a building has the pre-emptive right, if the building is lo-cated on the land owned by another person and the land is an alienated property in accordance with the data of the Land register;


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the seller is obliged to disclose to the buyer all major encumbrances with respect to the real estate subject to sale.

•pre-emptive right is contracted un-der an agreement;

•within the scope of the de-nation-alization process, former owners of the land (if they have not re-ceived equal land plot or compen-sation) have the pre-emptive right to acquire (among other things) buildings and construction objects that are located on the land plot.

Describe the moment of acquisition of ownership to real estate

the ownership title to the real estate passes over from the moment it is passed over to the buyer in accordance with the stipulations of the agreement between the contracting parties. In or-der to perfect the sale and purchase of the real estate as against all third par-ties, the transfer of the ownership title must also be registered with the Land register.

Does a seller have a statutory dis-closure or warranty obligation?

the civil Law of the republic of Latvia establishes the duty of the seller to disclose to a buyer all defects and en-cumbrances known to the seller - both physical and legal defects that could be reasonably expected to be known by the seller.

If the seller fails to comply with such obligation and is not able to prove that the buyer was aware or must have been aware of the respective defects or en-cumbrances at the moment of the sale, the buyer can submit a claim for the in-

demnification of losses or annulment of the transaction. the buyer cannot rely on this particular right if the seller has properly notified the buyer of such defects or encumbrances or the buyer could have obtained the necessary in-formation from the public registers.


Encumbrances registered in the Land register (for instance, servitudes, etc.) are not effected in the event of the change of the owner and remain binding on the new real estate owner as well. In addition, the parties may in-dividually agree on other contractual commitments concerning the property in the course of transaction, and they are either ended or transferred to the new owner.

If a lease agreement is registered in the Land register, then it is binding on the new owner, and the new owner can terminate the lease only under the procedure established by the lease agreement itself or by laws and regu-lations applicable to any lease.

If the lease agreement is not regis-tered in the Land register and the new owner decides to terminate the lease, the former owner is liable for the dam-ages arising out of premature termi-nation. nevertheless, the new owner must respect and grant a reasonable time to vacate the premises.

A lease agreement of residential prem-ises is binding upon the new owner ir-respective of whether it is registered with the Land register or not, and the new owner may terminate the lease agreement only under procedure set out in the laws and regulations howev-er the list of such cases for termination is strictly limited and the procedure of termination is strictly regulated.

Note: Any existing construction docu-mentation (technical designs, con-struction permits, guarantees, etc.) related to the real estate must be re-registered in the name of the new owner.

What are the conditions for termina-tion of real estate sale and purchase agreement?

As any other commercial agreement, real estate sale and purchase agree-ment may be freely terminated by the mutual agreement of the parties, ex-cept if such actions can influence the rights of any third party.

unilateral withdrawal from a purchase agreement is not permitted even if the other party does not perform its obli-gations. As an exception, a purchase agreement may be unilaterally termi-nated pursuant to a claim in the follow-ing cases:

•where the party has been compelled to enter into the purchase agree-ment through the acts of bad faith of the other party, or by fraud or du-ress; or


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only lease agreements of the real estate registered within the land register are binding to acquirer of the real estate.

•due to the defects in the purchased property that, based on the circum-stances, could not have been rea-sonably expected to be known to the buyer; or

•due to the excessive loss suffered by one of the parties; or

• if the seller has lost its interest in the performance of the contractual obli-gations due to the buyer’s payment delay; or

•on other grounds set out in the pur-chase agreement (the parties are free to establish any other grounds for the unilateral termination of the purchase agreement either through court process or outside of court).


the law stipulates that contracts based on which title to the real estate is changed may be concluded under procedure of a notarial deed or under private procedure. Privately concluded transaction on acquisition of real es-tate does not have to be certified by the notary.

If the transaction on acquisition of real estate is concluded under procedure of notarial deed, then the following fees are charged for making the no-tarial deed:

•Eur 15.65, if the transaction amount is up to Eur 1,424;

• if the transaction amount is from Eur 1,425 to Eur 7,115, then Eur 15.65 plus 0.9% of the trans-

action amount which exceeds Eur 1,424;

• if the transaction amount is from Eur 7,116 to Eur 28,458, then Eur 72 plus 0.7% of the transaction amount which exceeds Eur 7,115;

• if the transaction amount is from Eur 28,459 to Eur 71,145, then Eur 236.34 plus 0.5% of the transaction amount which exceeds Eur 28,458;

• if the transaction amount is from Eur 71,146 to Eur 142,288, then Eur 471.11 plus 0.3% of the trans-action amount which exceeds Eur 71,145;

• if the transaction amount is more than Eur 142,289, then Eur 705.89 plus 0.1% of the transaction amount which exceeds Eur 142,288.

COMMERCIAL LEASE

What are the formal requirements for the execution of a lease agree-ment?

there is no compulsory legal form for commercial lease agreements. there-fore, lease agreements can be entered into in a freely chosen form at the dis-cretion of the contracting parties. If the lease rights will be registered with the Land register, then the require-ment for written form of the lease agreement shall be complied with.

the lease becomes effective as of the date indicated in the lease agreement and it does not necessarily need to co-incide with the date of signing.

registration of the lease agreements with the Land register is not compul-sory. However, it is advisable in case the lessee wishes to ensure that the lease agreement will be binding in re-spect of the third parties and will re-main effective in the event that the les-sor changes. registration in the Land register can only be done by agree-ment thereon by both the lessor and the lessee.


there is no statutory requirement as to the term of commercial lease. It de-pends solely on the needs and agree-ment of the contracting parties.

If the lessee wishes to create autono-mous pieces of property on a leased land plot (construct a building which is a separate property and is not owned by the land owner), then the minimum validity period of the lease agreement is 10 years; furthermore, the lease right has to be registered with the Land register.

It is contemplated that in future legal framework will change restricting fur-ther formation of joint property (when land and building is not a single prop-erty, while considered separate and autonomous pieces of property), be-cause 2 draft laws have been submit-ted to the Saeima (the Parliament) of the republic of Latvia which stipulate that:

• further on, construction of residen-


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rent agreement is binding to acquirer of the real estate even if the rent agreement is not registered within the land register.

tial buildings on land owned by an-other person will not be allowed;

• it will be possible to construct non-residential buildings and engineer-ing communications on other’s land only on the grounds of such a con-tract that vests the eligible person with right to construction develop-ment for a period of time established in the contract which may not be shorter than 10 years and provided that after maturity of the contract for construction rights the buildings shall be deemed to be appurtenance of the land and property of the land owner, unless the parties have agreed on demolition of the building.

Does a tenant have a statutory right to extend or renew its lease?

In respect of commercial lease, the law does not provide for the rights of a lessee to extend or renew the lease term; however, such rights could be individually agreed upon in the lease agreement.


there are no statutory restrictions on the amount of the rent under com-mercial lease contracts. Parties usu-ally agree on a fixed fee payable on a monthly (sometimes on a quarterly) basis in advance.

It is a common practice in Latvia that the rent is adjusted annually based

on the consumer price index or other formula agreed individually by the in-volved parties. turnover rent quite of-ten is introduced in major retail leases in addition to the fixed (base) rent.

Alienation: what are the rights of the tenant and the landlord with respect to assignment, sub-lease or placing a charge over a lease?

The right to assignIn accordance with provisions and prin-ciples of the civil Law, the lessor can freely assign the lease (for instance, in case of the change of ownership) with-out any prior consent of the lessee. the lessee may assign the lease upon prior consent of the lessor.

The right to subleasethe lessee may sublease the property only if such rights are agreed in the lease agreement or upon prior consent of the lessor and the terms and condi-tions of sublease may not provide for broader rights in respect to the object of the lease than those provided for under the main lease agreement (for example, cannot exceed the term of the main lease agreement).


the civil Law expressly prohibits ar-bitrary eviction of the lessee, even if such right is included in the lease agreement. regardless of the fact that any of the parties may have the right to unilaterally withdraw from or re-quest termination of the lease agree-

ment, the lessor must allow a reason-able time period for vacation of the leased premises.

If the premises are not vacated, the lessor must claim at court for eviction of the lessee, as well as for the recov-ery of rent and damages. A person who fails to comply with the requirements regarding the vacation of leased prem-ises must compensate all damages.


Latvian laws and regulations do not provide for specific restrictions. the lessor is free to sell or otherwise trans-fer or encumber the leased property. restrictions could be imposed as a result of pre-existing contractual re-lationships, for example, providing for the rights of first refusal to the lessee to the object of lease in case of a sale thereof.

How does the transfer of real estate affect the tenant’s rights and obliga-tions?

change of the lessor of the real estate may not serve as reason for the lessee to terminate the lease and the lessee must continue exercising its rights and fulfilling its obligations based on the initial lease agreement. In the event that the lease agreement is not regis-tered with the Land register, the new owner of the real estate is not bound by the lease agreement and may ter-minate in accordance with procedure


LAtVIA

if the lessee wishes to create autonomous pieces of the property (to construct new buildings and register as the autonomous real property), lease agreement has to be registered within the land register and the lease term cannot be less than 10 years.set by Latvian laws and regulations.

CONSTRUCTION


Territorial planningusually, the territorial plan of the lo-cal government and, if developed or required by the laws and regulations, also the detailed plan or local plan of the land plot establishing specific de-velopment regimes (requirements). According to documents of the territo-rial planning, the location of engineer-ing communications, roads, infrastruc-ture, etc. is designed and planned.

Environmental impact assessmentis required in case the planned con-struction falls within the list of particu-lar activities established by the laws and regulations of Latvia and could constitute a possible environmental risk.

As of 1 May 2014 the new construction Law comes into effect in Latvia stipu-lating a different administrative regu-lation of the construction process.

the construction documentation sub-mitted to the competent authority be-fore the effective date of the new law is subject to requirements of laws and regulations which were valid on the day of submission of the respective documentation insofar the new law does not stipulate more favourable re-quirements in respect of content of the construction documents and timelines

for decision-making.

Below procedure prescribed by the new Construction Law which will come in effect on 1 May 2014 is de-scribed.

Application concerning intention of construction and construction per-mitthe person initiates construction by filing an application to the construc-tion board about the preliminary plan of construction (intention), as well as documents referred to in the General Building regulation and the Special Building regulation, also lodging a minimum draft of the construction de-sign, except for cases when develop-ment of the respective design is not necessary.

If the preliminary plan of construc-tion conforms with the territorial plan and the submitted documents comply with the laws and regulations a build-ing permit is issued. A decision of the municipal authority on issuance of the building permit is an administrative act.

the issued building permit does not grant the right to commence construc-tion work. the issued building permit grants the right to commence fulfil-ment of conditions stipulated therein – obtaining of technical regulations and commencement of designing work.

depending on the preliminary plan of construction the building permit shall be issued within 7, 14 or 30 days as

of submission of the preliminary plan of construction to the construction board.

Disputing of the building permitthe decision on building permit can be disputed within 1 month. disputing of the building permit suspends valid-ity of the building permit. disputing or appealing of a building permit issued for construction of objects of national interest does not suspend its validity.

the building permit may be annulled in case the procedure of construction es-tablished by law is not complied with, construction work is not commenced within one year after the building per-mit is obtained, or other requirements set out by the law are not complied with.

Designing workAfter the building permit is received development of a construction design is commenced. If the building permit is disputed, the designing may be contin-ued during the period while the build-ing permit is disputed or appealed at the customer’s risk.

If the construction design is developed in line with all requirements set out in the building permit and laws and regu-lations the construction board makes a notation in the building permit about fulfilment of all conditions for design-ing included in the building permit.

In cases prescribed by law the cus-tomer (employer – according to FIdIc rules) has to ensure performance of


LAtVIA

New and totally different administrative regulation of the construction process comes into the force in latvia staring from the1 May 2014.expert examination of the construc-tion design.

Performance of construction workthe construction work can be com-menced after the construction board has made the notation in the building permit about fulfilment of all condi-tions for designing referred there; ful-filment of conditions for commence-ment of construction work, and the building permit has become non-ap-pealable.

In cases prescribed by the law the cus-tomer has to ensure performance of author’s supervision and building su-pervision.

Monitoring of constructionMonitoring of construction is per-formed by the construction board and the building inspectors.

the building inspector has the right to inspect and verify a building either during the construction work or its operation. the building inspector veri-fies whether the construction work is commenced in line with requirements of the laws and regulations, as well as whether the building or its parts are operated pursuant to the designed type of use.

the construction work may be sus-pended if construction work not con-forming to the construction design and laws and regulations is being carried out, if unwarranted construction or de-viations from the construction design are discovered and in other cases es-

tablished by laws and regulations.

the building permit may be annulled, if the customer fails to comply with pro-visions of the law or other statutory regulations regulating construction, if the conditions set in the building per-mit and laws and regulations are not fulfilled at all, are not duly fulfilled or are not fulfilled within the time period set in the building permit, as well as in other cases stipulated by law.

Issuance of an occupancy permitPutting of the building into operation is performed by a special commis-sion established by the local govern-ment which assesses the readiness of the building for operation and issues an act on acceptance of the building for operation. on the basis of the oc-cupancy permit the ownership of the building is registered with the Land register.


As a general rule, any legal entity reg-istered in the republic of Latvia, also foreign legal entity having a licence (right) to carry out the construction works in its home country as well as a construction engineer is entitled to perform commercial activities in one or several fields of construction in which an individual for indepen-dent work in accordance with the laws would require a builder’s practice or architect‘s practice certificate (e.g. en-gineering research, design, construc-tion expert-examination, construction

works management, construction su-pervision), a merchant shall register in the construction Merchant register.

A merchant may apply for registration in the construction Merchant register if:

• the merchant employs at least one architect, performer of engineering research, designer, construction ex-pert, construction work manager or building supervisor on the basis of an employment contract and the rel-evant person has the right to inde-pendent practice in respective fields of construction or a member of the board of the merchant is a special-ist (this condition shall not apply to partnerships, at least one member of which is a construction merchant, and to individual merchants who are specialists);

•a specialist employed by the mer-chant is not concurrently a specialist in employment legal relations with more than two other merchants reg-istered in the construction Merchant register.

A merchant is not entitled to imple-ment works in the field of construction in which it does not have a relevant specialist.

Building practice or architect’s prac-tice certificates shall be granted, the period of validity of certificates shall be extended or certificates shall be cancelled by competent certification authorities, a list of which has been published by the Ministry of Econom-


ics. A certification authority shall reg-ister a building practice or architect’s practice certificate in the Building Practice and Architect’s Practice cer-tificate register established by the Ministry of Economics.

In order to receive a building practice or architect’s practice certificate, a person shall submit the following to a certification authority:

•an application regarding granting of the certificate;

•documents verifying education (if a person has acquired the relevant education and professional qualifi-cations in a foreign state, then a cer-tificate of recognition of the foreign entity’s right to engage in similar type of the construction works in its home country); and

•an approved list of construction ac-tivities, in implementation of which the respective person has participat-ed. the employer, the commission-ing party, the object and location thereof, the time of implementation of the works and the participation level of the person shall be indicated in the list. the list shall be confirmed by the employer and a certified spe-cialist responsible for implementa-tion of the respective works.


the minimum statutory guarantee term that must be applied regarding construction defects is 2 (two) years and the actual length of the term is

only registered real estate may be sold or otherwise disposed of.

negotiated with the person who has ordered the performance of the con-struction works.

REGISTRATION

Does all real estate require to be reg-istered?

All real estate must be registered with the Land register except for tempo-rary structures, engineering struc-tures and certain other structures exempt under law. only registered real estate may be sold or otherwise disposed of.


ownership rights must be registered with the Land register. other rights (for instance, servitude rights, lease rights, encumbrances) are not manda-tory registered; however, in practice persons enjoying such rights usually opt to register them to exclude risks and to ensure that their rights will be binding towards third parties and new property owners. other rights, if not registered with the Land register, will not be valid as against any third par-ties.


Registration procedureBased on the stipulations set by the purchase agreement, the party that is responsible to perform the registration

procedure must submit the necessary documentation to the branch of the Land register system based on the lo-cation of the property. the necessary documentation can also be submitted through the mail. If the documentation is correct and is submitted to the Land register in accordance with the appli-cable laws and regulations, the Land register registers the filed documents within 10 (ten) days.

Necessary documentation in case of the standard transaction•Application to the Land register.

Parties will need to notarize the signatures on the application to the Land register in order to change the ownership title.

•Payment of the state fee. the ap-plicable state fee may be paid in advance (please note that if the pay-ment is made in advance, the requi-site bank statement must be at least 2 days old) or at the Land register at the time of submission (please note that the public authorities of Latvia do not accept cash).

•original copy of the purchase agree-ment.

Please note that the additional neces-sary documentation can vary based on the individual situation.

What time and costs are involved in the registration of real estate (rights thereto)?

Registration timeIf the documentation is correct and is submitted to the Land register in ac-

LAtVIA


latvia has favorable tax regime for formation and management of the holding companies.

cordance with the applicable laws and regulations, the Land register regis-ters the filed documents within 10 (ten) days.

Registration costsregarding costs, as the signatures on the application to the Land register must be notarized, the services of the notary public for preparing and certi-fying the application will be approxi-mately Eur 70.

State fees of the Land register vary based on the entry to be made. the substantially lower fees will be applied in registration of, for example, encum-brances and legal facts pertaining to the real estate.

In order to register ownership title change based on the real estate pur-chase agreement, beginning as of 1 January 2014 the state fee will be cal-culated as follows:

•2 % of the value of property consist-ing of land and buildings or property consisting only of a non-residential building or buildings and engineering installations associated therewith, while no more than Eur 42,686.15;

•6% of the value of the residential property (apartment), if the acquirer is a legal entity conducting business;

• 1% of the value of the real estate if it is contributed in the share capital of a capital company;

•3% of the value of the real estate acquired on the basis of a donation agreement.

reduced state fees are applied if the

acquirer is a close relative (children, parents, spouse, brothers and sisters, half-brothers and half-sisters, grand children, great grandchildren and grandparents) – 0.5 % of the value of the real estate.

State fees are not payable if re-regis-tration of real estate in the Land regis-try is necessary due to re-organization process.

State fee for registration of real estate at the Land register shall be calcu-lated from the highest of transaction value or cadastral value.

the state fee for corroboration of title with the Land register is estimated by applying factor 1.5, if the documents for change of title are submitted to the Land register no later than within 6 months as of execution date of a sale and purchase agreement (or anoth-er deed of transaction pertaining to change of title).


By virtue of law, data recorded in the public register is deemed accurate and true (prima facie evidence) unless re-butted. the registration system is reli-able, and it reflects all actual and his-torical data registered at the specific time. the registration duty is imposed on the parties to the transaction; therefore, conformity of the entries with the actual situation for the most part depends on activities of the par-

ties to the transaction.

the data of the Land register provides comprehensive information on real es-tate owner, leases registered, encum-brances registered in respect of the real estate, as well as court decisions, liens etc.


data about cadastral numbers, ad-dresses, owners, registered encum-brances and prohibitions is publicly accessible to any person without any restrictions. the documentation based on which the entries in the Land reg-ister are made is not publicly available. the Land register will only show as the public information the fact that the particular entry is made and state the basic information.

TAXATION


Tax rate and basisLatvia has an attractive corporate tax system. the corporate income tax (cIt) rate is maintained at a low rate of 15%. the tax basis is accounting prof-its adjusted for tax purposes. Latvian registered companies are taxed on their worldwide income.

Capital gainscapital gains are taxed as ordinary in-come except for gains from the sales of shares which are exempt from tax-able income.

If real estate (or shares in a company

LAtVIA


Disbursement of dividends to a domestic company is not subject to corporate income tax.

with Latvian real estate constitut-ing 50% or more of its assets in the year of sale or in the previous year) is sold to a Latvian resident by a non-resident, the resident purchaser must withhold 2% withholding tax from the entire purchase price.

Dividendsdisbursement of dividends to a domes-tic company is not subject to corporate income tax. dividends paid out to a non-resident legal entity are not sub-ject to withholding tax. Exceptions ap-ply to companies located in statutorily designated low tax zones. dividends paid to natural persons are subject to 10% withholding tax except if such in-dividual is resident in a statutorily des-ignated low tax zone. dividends paid to statutorily designated low tax zone are subject to 15% withholding tax (or if in-terim dividends are paid 30%).

InterestFrom 2014 withholding tax will no lon-ger apply to interest payments made to non-resident related companies provided that the recipient is not lo-cated in a statutorily designated low tax zone.

Thin capitalization rulesthin capitalization rules are not ap-plicable to interest paid to Latvian or Eu banks, or to banks in double tax treaty countries. deductibility of inter-est paid to other lenders is restricted based on a 4:1 debt to equity ratio, or if the interest rate exceeds more than 1.57 times the market average rates as determined by the Bank of Latvia.

Tax losses carried forwardLosses incurred through 2007 can be carried forward for 8 years. Losses incurred from 2008 can be carried forward indefinitely. Where a change of control occurs in the sharehold-ers (more than 50%) a company can utilize its tax losses if it continues for five years the same business it carried on during the two years before the change of control. When companies are reorganized by merger or spin-off, it may be possible to continue utilizing losses accrued.

Intra-group consolidationLatvian law does not provide for tax consolidation. From 2014 it will no longer be possible to transfer losses within a group.

IndIvIdual taxes

Taxation of employment related in-comeSalary and benefits paid to an em-ployee resident in Latvia are subject to personal income tax and social insur-ance contributions.

Personal income tax is withheld by the employer at a rate of 24% in 2014 (the rate is expected to be reduced to 23% in 2015 and 22% in 2016).

In 2014 social insurance contributions are payable at a rate of 34.09% of which 10.5% is paid by the employee from gross salary and benefits re-ceived and 23.59% is paid by the em-ployer on the gross amount of salary

and benefits paid.

Sale and lease of real estatecapital gains from the sale of real es-tate are subject to personal income tax at a rate of 15%. the gain is calculated as the difference between acquisition value and sale value. Exemptions ap-ply to residential real estate which has been owned for a period of at least 5 years and has been the declared residence of the owner for at least 12 months prior to sale.

If real estate (or shares in a real estate company) is sold by a non-resident to a resident that carries on business activity (company or individual) a 2% withholding tax of the sale amount (en-tire purchase price) applies. From 2014 sellers in jurisdictions with which Lat-via has concluded a double tax treaty will be allowed to recalculate the tax based on a 15% tax of the actual gain (acquisition costs less sale value.)

Income from leasing of real estate is generally treated as business activ-ity and is subject to personal income tax at a rate of 24%. If an individual leases/rents real estate and holds the real estate as a personal capital asset without deducting business expenses for tax purposes, the income is taxed at a rate of 10%. In such case the indi-vidual is required to register with tax authorities as carrying on business activity and is required to submit the related lease agreements to the tax authorities.

Sale of shares

LAtVIA


Non-residential lease payments are subject to 21% latvian Vat.

Sale of shares in a real estate company is subject to capital gains at a rate of 15%.

Taxation of self-employed individu-alsIncome from self-employment (after deduction of valid business expenses) is subject to personal income tax at a rate of 24%. A self-employed individ-ual must pay social insurance at a rate of 32.17% on a minimum amount equal to the mandatory minimal monthly sal-ary but can choose to pay the social insurance on a higher amount.


the standard rate of Latvian VAt is 21%. certain supplies qualify for a re-duced rate of 12%. Exports and tran-sits as well as certain services treated as supplied outside Latvia may be zero rated (exemption with credit).

Property leases are subject to 21% VAt. renting property to individuals for residential purposes is exempt.

the sale of land and buildings, other than unfinished, newly built or refur-bished, is exempt.

the sale of unused real estate is sub-ject to 21% VAt on the sales price, while taxable value for sale of unfinished buildings is the difference between sales value and acquisition price. If a refurbished building is sold within one year of completion, VAt is charged on the difference between its selling price and value prior to refurbishment.

Sale of building land is subject to 21% VAt.

Input tax is recoverable on the devel-opment or refurbishment of buildings intended for taxable supplies. If the property is sold within a period of one to ten years of completion, then a por-tion of the VAt originally recovered must be repaid to the State.

resident taxpayers are required to register for VAt upon reaching a threshold of LVL 35,000 (approx. Eur 49,800) of taxable supplies dur-ing any 12 month period or upon reach-ing a threshold of acquisition of goods from another Eu member state of LVL 7,000 (approx. Eur 10,000).

real estate tax

the municipalities determine the real estate tax rate for property located in their territory based on binding munic-ipal regulations. the rates can range from 0.2 to 3% based on the below maximum rates:

• 1.5% of the cadastral value of land, buildings and engineering struc-tures;

•0.2-0.6% of the cadastral value of residential real estate or any part of a non-residential building that is functionally used for living; and

•3.00% of the cadastral value of un-cultivated farmland.

If a municipality has not set the rates by binding regulations the above rates

apply.

the cadastral value is determined by the Land Service considering the type, location and use of a particular property, transaction prices over the previous two years, and other factors. Although cadastral value should be approximated to the market price, ca-dastral value is not always up to date and may be lower than current market prices. Local municipalities calculate the tax charge and notify the taxpayer by sending a calculation and payment schedule.

newly constructed or reconstructed buildings used in business are exempt for one year after completion. other relief is available under the real Estate tax Act or determined by municipali-ties.

land tax

there is no separate land tax in Latvia. the real estate tax is imposed on land and other types of real property.


there is no separate land lease tax in Latvia. In addition to the lease pay-ment the lessee shall pay the real es-tate tax for leased land owned by.

LAtVIA


Estonia was successful in coming over financial crisis based on a balanced state budget, liberal trade and invest-ment laws.

SLOWDOWN IN GDP GROWTH

Significant GdP growth of 2011 (+9.6% y-o-y) was followed by rather moder-ate 3.9% in 2012. In 2013 slowdown in Estonian GdP growth rate has con-tinued. As a result of the 1st half of 2013, Estonian economy growth rate made up only 1.5% compared to the same period of 2012. result of the 3rd quarter was even weaker (+0.4%). this was caused mainly by weak foreign de-mand (as a consequence of lack of con-fidence in Euro-zone) and decreased VAt receipt.According to the forecast by newsec, the Estonian economy will grow by approximately 1.3% in 2013. In 2014 - 2015 economic growth is expected to be in range from 3.1 to 3.5%.

FOREIGN TRADE AND DOMESTIC CONSUMPTION

on the background of descending foreign trade volumes, Estonian GdP growth was driven by domestic de-mand. According to Statistics Esto-nia data, in 2011 retail sales volume was 10% above the number of 2010. Growth continued in 2012 at the same rate, followed by decrease of growth rate to 6% as a result of the 1st half of 2013. If in 2011 growth was driven by food segment, then since 2012 lead-ing role was taken over by clothes and footwear sales. As a result of 2013,

EStonIA

newsec forecasts 7% increase in Es-tonian retail sales, driven by food and beverage sales.After three years of consequent de-crease, Estonian private consumption grew in 2011 and 2012 by 3.5% and 4.4%, respectively, although in 2013 increase in private consumption is be-low 4%, again. In 2014 - 2015 private consumption growth rate is expected to remain to the same level (approxi-mately 4%). Inflation enhanced since 2011 and in 2013 consumer price index amounted for 3.2. Inflation is expected to stabilize at this level; in 2014 - 2015 we expect it at 2.7 - 3.2%.

OPTIMISM AT LABOUR MARKET

on the background of overall situation in Euro-zone, Estonian official labour market data looks comparatively op-timistic. Having been made negative record of 17% in 2010, Estonian unem-ployment rate came down to 12.5% al-ready in 2011. Positive trend continued in 2012 with 10.2% and 9% in 2013. Further improvement is expected: fore-casted unemployment rate for 2014 and 2015 is 8.5% and 8%, respectively. Beyond that, unemployment rate is not forecasted to decrease below 7.5%.After two consequent years of de-scending (2009 and 2010), average monthly gross wage turned to growth again since 2011. In 2013 gross aver-age wage made up 978 Eur per month in private sector and 1,099 Eur per month in public sectors, which is 7% and 6% above the numbers of 2012, respectively. Gross wage growth rate is expected to persist at this level in 2014,

followed by slowdown beyond.After rapid growth in exports and imports volumes in 2010 and 2011, growth rate demonstrated significant descending in 2012. due to continu-ous turbulence in Euro-zone resulting in decreased foreign demand, as a result of 9 months 2013 Estonian ex-ports volume have decreased by 1.5% compared to the same period of 2012. decrease in imports made up 0.3%. As of total 2013, exports and imports vol-umes are expected to decrease by 2% and 1%, respectively. the most impor-tant partners of Estonia in exports in 2013 are continuously Finland, Sweden and russia.

STABLE GROWTH IN FDI

In 2012, total amount of FdI in Estonia came over the record level of 2010, having been achieved 14.6 billion Eur (y-o-y increase by almost 12%). Moder-ate growth in FdI volume continues due to positive development of Estonian economy on the background of other countries of Euro-zone. In 2013 growth rate is expected to slowdown, remain-ing though positive. In monetary terms volume of FdI is expected to come over 15 billion Eur.Estonian economy is on the track, has been demonstrating ability to survive in stress situation and became less vulnerable. Well-balanced by itself, economic situation is to certain extent dependent on situation in Euro-zone. Given further developments in Euro-pean economy will be positive, Estonia will be able to continue moderately positive economic development.

eStoNiaeconomic outlook


EStonIA

on the background of descending foreign trade volumes, estonian GDPgrowth was driven by domestic demand

Economic Indicators | Estonia



-20

-15

-10

-5

0

5

10

15

20

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent

Inflation and Private Consumption | Estonia


-20

-15

-10

-5

0

5

10

15

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Percent

Retail Trade | Estonia



-30

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013E

Foreign Direct Investments | Estonia


Percent mEUR

-5

0

5

10

15

20

0

4,000

8,000

12,000

16,000

20,000

2007 2008 2009 2010 2011 2012 2013E

Exports and Imports | Estonia


Percent mEUR

-40

-30

-20

-10

0

10

20

30

40

50

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2007 2008 2009 2010 2011 2012 2013E

Wages and Salaries | Estonia


Gross avg EUR/month Percent

-10

0

10

20

30

0

200

400

600

800

1,000

1,200

2007 2008 2009 2010 2011 2012 2013E

Source: Statistics Estonia, newsec



Source: Statistics Estonia, European commission, newsec

Source: Bank of Estonia, newsec



RETAIL MARKET HIGH RETAIL STOCK PER CAPITA

In the end of 2010 volumes of Estonian retail trade has turned to increase. In both, 2011 and 2012 retail trade vol-ume increased by approximately 11% p.a. and achieved the level of 2007. In the first half of 2013, growth rate has slowed to 6%, and is not expected to come over 7% as a result of 2013.total GLA of modern retail premises in Estonia is over 900,000 sq. m, over 600,000 sq. m out of which are lo-cated in tallinn. the most active de-velopment of retail spaces took place in tallinn in 2009 – 2010, when almost 30% of existent shopping centers area and over ¼ of existent food mar-kets was added to the market. Among the new projects of 2013 were exten-sions of Mustikas, rocca al Mare and Kristiine Shopping centers as well as renovated Postimaja in city center. As of 2013, Estonia holds 4th place in Europe by retail space sq. m per

EStonIA

Demand remained the highest for the spaces in large modern shopping centres during 2013

Source: newsec

capita after norway, Luxembourg and Sweden.

ZERO VACANCIES, STABLE RENT-ALS

demand remains the highest for the spaces in large modern shopping centers. Vacancy in well-performing shopping centers of tallinn is below 1%: random vacant spaces of below 100 sq. m appear in this segment from time to time. Supply in this market segment is still below demand. occu-pancy rate at main shopping streets of tallinn is also close to 100%. Va-cancy in the old amortized premises persists at 8 – 10%.In the end of 2010 decline in rental rates has stopped. In 2011 consid-erable share of rental agreements terminated, which has caused some upwards movement in rentals. As of 2013 prime rent in tallinn shopping centers goes up to 50 Eur/sq. m/month, average rental exceeds 17

Eur/sq. m/month. In nearst couple of years, considerable growth is not expected due to forecasted increase in supply.In 2013, H&M has launched first three shops in tallinn and is planning to expand its network in Estonia fur-ther. First debenhams shop has been launched in rocca-al-Mare. First river Island will be opened in Viru Keskus in spring 2014. construction materi-als retailers, Bauhof and K-rauta, are also expanding. new opportunities to open stores are available in recently renovated Mustika Shopping center (expansion by 10,000 sq. m) and Siku-pilli Shopping center with recent ren-ovation, resulting also in insignificant extension.

GROWING NEW SUPPLY

Ülemiste center has also started ex-tension of 21,400 sq. m, which will be completed in 2014 Q3. Pro Kapi-tal is planning to develop new shop-

2007 2008 2009 2010 2011 2012 2013E Trend Ω≈¬


up to 100/150 sq. m 25–55 20–50 15–40 15–40 15–45 17–50 17-50 ¬

100/150-350/500 sq. m 15–30 12–30 9–25 9–25 10–29 10–30 10-30 ¬

> 350/500 sq. m 9–17 8–15 6–13 7–15 7–15 8–16 9-16 ¬

Anchor tenants 7–10 7.5–10 7–9 7–9 7–9 7–10 8-10 ¬

Vacancy rates, %


other 8–10% 9–10% 18–20% 15–20% 10–15% 8–10% 8–10% ¬

RENTAL RATES AND VACANCIES | TALLINN

retailmarket


EStonIA

although estonia holdsfourth place in europe by retail spacesq. m per capita, developers still seepotential in tallinn


Supply of Shopping Centres | Tallinn


0

100

200

300

400

500

0

200

400

600

800

1,000

2005 2004 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Sq. mThs. sq. m

Prime Retail | Tallinn



0

2

4

6

8

10

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013E 2014E

ping center (“Moekombinaat”) in tallinn on the border of city center and Lansnamäe, between existing Sikupilli and Ülemiste shopping cen-ters. We expect this busy office and shopping area to become a “modern city-center”, especially taking into ac-count possible development joint-sta-tion of rail Baltica at Ülemiste. taking into account this scenario, Moekom-binaat is forecasted to be introduced to the market in the HY2 2016. retail premises development has arrived to Põhja-tallinn, where only food mar-kets were developed so far. new shop-ping center with GLA of 10,000 sq. m is planned to be opened in autumn 2014 at Stroomi. Kaubamaja has also decided to move out of city center to Haabneeme (Viimsi Parish), where new shopping center of ca 10,500 sq. m is to be completed in 2015. Finnish real estate owner and developer city-con (a new owner of Kristiine center) does not exclude further extension of Kristiine and rocca-al-Mare Sc. con-

struction works at Ameerikanurga retail Park tallinn border are tempo-rarily stopped.Largest planned retail premises de-velopment Gate tallinn with total gross area of 240,000 sq. m by tri-gon capital is also postponed on un-definite time. Further development in retail segment will depend on demand from the side of large foreign retail-ers and purchase power of the local (descending) population.despite the fact that Estonia holds fourth place in Europe by retail space sq. m per capita, developers still see potential in tallinn: new retail prem-ises supply of 2014 is expected to ex-ceed volume delivered in 2013 more than twice. Significant changes in va-cancies and rentals are not expected in short prospective.


NEW SUPPLY IS DESCENDING

the modern office stock in tallinn ac-counts for ca 600,000 sq. m, of which ca 540,000 sq. m is speculative. over 30% of tallinn office spaces are lo-cated in cBd, another 25% - in city center. city center remains the ma-jor office development area although development activity is moving to outskirts - Lasnamäe, Mustamäe and Haabersti. due to favorable location between city center and tallinn Air-port, Lasnamäe is the most important office area among outskirts, hosting over 20% of total office spaces.After rather low office develop-ment activity in 2010 and 2011, over 30,000 sq. m of new office space were launched in tallinn in 2012 - mostly in outskirts. In 2013 below 30,000 sq. m of new offices were delivered, includ-ing Selvaag office building in city cen-ter (4,000 sq. m of rentable space) and opening in december navigator in cBd (7,000 sq. m of rentable space). Large long-term projects under active

EStonIA

tenants activity has moved to outskirts as they pay more attention to side-costs

development are Ülemiste city on the border of city center and Lasnamäe and tehnopol in Mustamäe. develop-ers are cautious; as of end of 2013, ca 14,000 sq. m of new offices is an-nounced to be delivered in tallinn in 2014. Among them are new building in Ülemiste city with 9,800 sq. m and first Green office Building in Estonia with 2,500 sq. m of rentable space.

MODERATE GROWTH IN RENTALS

Most demanded are continuously premises up to 150 sq. m at prime lo-cation with good parking possibilities. In tallinn cBd, it is practically impos-sible to find vacant spaces of over 500 sq. m. Highly demanded are quality B class spaces located in city center or in close vicinity to it. tenants pay more and more attention to side-costs (such as parking, heating and transporta-tion). deficit in prime quality and cen-tral location segment prevailed in 2012 is deciding. demand for office spaces is expected to be satisfied with new

projects introduced during 2013.

derived from deficit, moderate growth in rentals continued in 2013: tallinn monthly prime rent made up 17 Eur/sq. m. Average rent in cBd was 12 Eur/sq. m/month.

Average vacancy rate is below 6%. In cBd and several office buildings on the border of the city center and outskirts (short distance to the city center and free parking) is below 4%.

the largest potential office develop-ment with an area of 40,400 sq. m, start-time of which is currently un-known, is located in cBd between Swissotel and radisson SAS (Maakri Street). In 2012, detailed planning for construction of 10-floor office build-ing at rävala bvd in cBd has been es-tablished. Switch of owner of Baltika Moetänav Quarter in city center al-lows expecting start of development process there. Projecting process at Admiraliteedi has been started. office

Office Stock | Tallinn


0

5

10

15

20

30

25

0

100

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m

Office Market Indicators | Tallinn

Absorption New supply Total vacancy, %

0

5

10

15

20

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m

0

20

40

60

80

100

120


officemarket


EStonIA

tallinn office market is close to saturation

Office Vacancy | Tallinn


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 0

5

10

15

20

25Percent

Office Rents | Tallinn

A class A class Max B class B class Max

2007 2008 2009 2010 2011 2012 2013E 2014E 5

10

15

20

25EUR/sq. m/month


and retail development (total 180,000 sq. m) is planned to Filtri rd. area close to city center.

tallinn office market is close to satura-tion, where demand and supply of of-fice spaces will come to balance. this will hold average vacancy in 2014 to the level of previous year with insignif-icant downwards correction in A class. In 2014 increase of 3% in upper class office segment rent is expected.


CONCENTRATION AROUND TALLINN

Activity in the industrial and ware-house real estate market segment started modest increase since the second half of 2010, along with start-ed recovery in terms of export and transit.trend of concentrating industrial, warehousing and logistics premises into industrial parks persists in Esto-nia since mid-2000-ies. over half of industrial parks in Estonia are situ-ated in tallinn vicinity (Harju county), close to tallinn Airport, largest ports and main motorways. the largest industrial parks in this area are tän-assilma, Jüri, Mõigu. Another two comparatively large regions with de-veloped industrial and logistics infra-structure are tartu and Pärnu coun-ties, followed by central and Southern Estonia. Share of industrial facilities located in Ida-Viru county, along the northern coast of Estonia, is currently small, but this region has great devel-

EStonIA

During recent years the companies were building and renovating premises mainly for own use

opment potential.In 2011 - 2012 total real estate invest-ments by Estonian business com-panies increased by 20% and 15%, respectively. total amount invested during 2012 made up approximately ¾ of the amount invested during pre-crisis year 2008. In the 1st half of 2013 total amount of real estate invest-ments increased by 8% compared to the same period of 2012. during recent years, growth took place only in the field of construction – the com-panies were building and renovating premises mainly for own use.total area of industrial and warehous-ing premises delivered to the market annually after 2008 dropped approxi-mately two times. In 2012, most of new construction was carried out for own need, and volume of new specu-lative spaces made up only 25,000 sq. m. In 2013 volume of new speculative development in this market segment came down to 10,000 sq. m. Specula-tive development volume of 2014 is forecasted to climb back to the level

of 2012. over 80% of new facilities in Estonia are delivered in tallinn and Harju county.

DEMAND FOR qUALITY PREMISES

In 2013 deficit in the segment of qual-ity industrial and warehousing prem-ises persists. Major demand lies in the larger spaces segment (1,000 – 3,000 sq. m). this situation may get some ease in 2014, as growing heating and electricity prices accompanied with increase in wages may bring down attractiveness of Estonia for foreign manufacturers.difference between rental rates in new/renovated and old industrial and warehousing facilities located in tal-linn and Harju county remains around two times, rentals level has been sta-ble since late 2011. Prime rental level goes up to 5 Eur/sq. m/month. At secondary locations rental rates are below 3 Eur/sq. m/month. the larg-est new development in this segment is Lookivi logistics park by ncc, situ-

W&L Market | Estonia


0

10

20

30

40

0

200

400

600

800

2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m

W&L Market | Estonia


0

5

10

15

20

25

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013E 2014E

Percent Ths. sq. m


industrialmarket


EStonIA

Speculative development volume of 2014 is forecasted to climb back to the level of 2012

Warehouse Rents | Tallinn

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013E 2014E

EUR/sq. m/month

Rental rate Avg Rental rate Max Rental rate Min

Source: newsec

ated near Jüri by tallinn-tartu high-way. there is altogether approximate-ly 128,000 sq. m of building right on three properties.Further developments in Estonian industrial and warehouse market segment are to certain extent depen-dent on foreign investments inflow in respective sectors of economy. Low supply of new premises is expected to somewhat raise the rental level in 2014 and (insignificantly) reduce va-cancies.


RENOVATION WORKS AT LARGE HOTELS

total number of accommodation es-tablishments (including hotels, hostels, guest houses, B&B, rental apartments) in Estonia is over 1,200, of which 122 are located in tallinn. Estimated number of hotels in Estonia is 123, of which ap-proximately half is concentrated to tal-linn and surrounding it Harju county. 13 hotels are situated in the second larg-est Estonian city of tartu, 12 in the re-sort city of Pärnu, 10 – at Saaremaa and other islands. Major part of the hotels is not rated (including such international brands like Swissotel, radisson Blue, Sokos). classified hotels have mostly 3 stars; 6 out of 8 4-star hotels are situ-ated in tallinn; 2 of 3 highest (5-star) class hotels are also in tallinn. In 2011, Estonia has joined the Hotelstars rating system, which is expected to raise the number of rated hotels.Several large hotels in tallinn are cur-rently off the stock being under reno-vation: Park Hotel&casino with 120

EStonIA

2013 appears to be a beginning of stabilization phase in terms of number of incoming tourists

rooms has been demolished and will be opened again in 2015 as Hilton. EFtEn, who acquired historical hotel Palace located on the main square has also closed the hotel for renovation. French Accor is planning to construct new ho-tel in tallinn city center close to Pas-sanger Port.

STABILIZATION IN TOURISTS INFLOW

After downturn caused by economic crisis, in 2010 trend in Estonian hotel market has turned to positive: in 2010 and 2011 foreign and domestic demand increased by 12% and 13%, respective-ly. 2012 has become the best year ever in terms of hotel sector activity: total number of tourists accommodated has achieved 2.8 million. 2013 appears to be a beginning of stabilization phase: y-o-y growth made up only 3%.Average occupancy rate turned to growth in 2010, being reached 46% in 2012 (almost back to the level of 2006), which is 10 points above the lowest re-

sult of 2009. As of 9 months 2013, aver-age occupancy rate in Estonian hotels made up 44% (almost equal to 45% in the same period of 2012). In tallinn, hotels were occupied from January to September 2013 at 63% in average (level of 2012). due to hot summer in 2013, SPA hotels located at Saaremaa were occupied at 70-90%.After two consequent years of de-cline, average Estonian Adr started to increase again in 2011, having been grown in 2013 over 31 Eur per night (over the top level of 2008). In tallinn hotels, Adr is approximately 10% over Estonian average.Started in 2011 new period of positive development in Estonian hotel sector was caused by several reasons - status of tallinn as European culture capital, opening of tallinn-Helsinki-St. Peters-burg ferry-line and rapid development of tallinn Airport created additional tourists inflow.Hotel sector further development is dependent on the economic situation in Europe. Frequent nature disasters

Hotels | Tallinn

5 Stars 4 Stars 3 Stars 2 Stars

Demand and Occupancy of Hotels | Estonia

0

10

20

30

40

60

50

0

500

1,000

2,000

3,000

1,500

2,500

3,500

2005 2006 2007 2008 2009 2010 2011 2012 2013E



Source: Estonian Hotels and restaurants Association Source: Statistics Estonia

Hotelmarket


EStonIA

changes are to start in estonian hotel segment in 2015 with entering of new international hotel chains

Demand and Occupancy of Hotels | Tallinn

0

10

20

30

40

50

60

70

0

400

800

1,600

1,200

2005 2006 2007 2008 2009 2010 2011 2012 2013E



Source: Statistics Estonia

in Asia and political troubles in north-Africa may affect positively European tourists flow in Baltic/nordic direction. to certain extent further development of hotel sector in Estonia depends on development of national flying com-pany Estonian Air, which is cutting the number of aircrafts and implements staff reduction.restrained growth in hotel segment is expected in 2014 in terms of occupancy rates and Adr. no new delivery is ex-pected. changes are to start in 2015 with entering of new international hotel chains.


GROWING MARKET ACTIVITY

Estonian residential market is driven to certain extent by tallinn market, were approximately half of the all transac-tions is concluded. Apartments mar-ket activity peaked in tallinn in 2005 – 2006, being achieved 1,100 transac-tions per month. After dramatic down-fall in 2007 market has started mod-erate growth in 2010. After new small drawback in 2011 caused by “Euro-shock” and turbulence in Euro-zone, upwards movement in terms of number of transactions concluded continued in 2012 and 2013. In 2012 market activity increased by 20% compared to previ-ous year. during ten months 2013 y-o-y growth in transaction activity in Esto-nian residential segment made up 14%, having been achieved a level of 2003 - 2004.In 2013 total value of transactions came over 800 million Eur, which means 25% increase compared to 2012.

EStonIA

Developers are cautious, undertakingrather small-scale projects in upperprice range

DEVELOPERS ARE CAUTIOUS

In tallinn, the largest residential mar-ket of Estonia, new apartment con-struction volume peaked in 2007, when over 500,000 sq. m p. a. (9,800 apartments) were commissioned. Since 2008 residential construction activity has started to shrink. during 9 months of 2013 volume of construction premis-es issued (in sq. m) exceeded the same indicator of 9 months 2012 by 16%, which is the highest growth rate since 2006.2,230 new apartments were commit-ted in tallinn during 3 quarters of 2013. developers are not willing to take risks, so new residential projects are rather small – 30 flats per project in average. Larger projects (40 – 70 flats) are de-veloped outside of city center, in lower price segment. In city center, where new apartment prices go up to 4,000 Eur/sq. m, there is a number of proj-ects with 10 - 20 apartments.on the other hand, most demanded are new apartments priced in range of 1,600 – 1,800 Eur/sq. m, but on the

side of offer there are mostly city cen-ter and Põhja-tallinn projects, where prices start from 2,000 Eur. If before crisis significant share of new apart-ments buyers made up foreigners, then today interest from the side of foreign private persons towards investing into Estonian residential real estate has de-creased remarkably.In 2012 average apartment sq. m price growth made up in tallinn 3% com-pared to 2011. As of the 3rd quarter 2013, average sq. m price in tallinn increased by 16% compared to the same period of 2012. Average sq. m price remains the highest in city cen-ter (which includes such highly valued areas as old town and Kadriorg). In the 3rd quarter of 2013 average price here accounted for 1,658 Eur/sq. m, having been increased by 13% compared to the same period of 2012. this is a price level of early 2006, which is 20% below the “boom” price level. considerable increase in price in the nearest future is not forecasted.Estonian banks are still cautious to-wards both, financing residential de-velopment projects and housing lend-ing. number of “bankable” households without existing liabilities is shrinking. developers are cautious, undertak-ing rather small-scale projects in up-per price range, whereas demand lies mostly in mid-price range.Setting restrictions by Swedbank on loan and deposit portfolios for Baltic daughter-companies may influence households’ ability take new mortgag-es. this may bring down development activity and increase deficit in new apartments segment.

Residential Market | Tallinn


0

4,000

8,000

12,000

16,000

2005 2006 2007 2008 2009 2010 2011 2012 2013E

EUR/sq. mUnits

0

500

1,000

1,500

2,000

Source: Estonian Land Bord

residentialmarket


EStonIA

establishment of a company in estonia is easy and cheap.


CORPORATE PRESENCE


the most common type of investment vehicle among both foreign and local investors is a private limited liability company (in Estonian osaühing or oÜ), which is analogous to a Latvian SIA, German GmbH, French SArL or BV in the netherlands. the owners of the private company (shareholders) enjoy full limited liability.

the other common investment ve-hicle type is a public limited liability company (in Estonian aktsiaselts or AS), whose owners also enjoy limited liability, but it has a higher minimal share capital level (Eur 25,000 com-pared to Eur 2,500 in case of private companies) and more extensive cor-porate governance rules compared to a private company. However, a public limited liability company may issue dif-ferent types of shares unlike a private company. the below overview only covers private companies as the most common company type.


the private company (oÜ) can have a two-tier governance structure consist-ing of:

•Shareholders;•Management Board,

or a three-tier governance structure (as in public companies) entailing:

•Shareholders;•Supervisory Board;•Management Board.

It is not obligatory to form a Super-visory Board in a private company. Supervisory Boards are formed quite often in larger private companies or if there are several shareholders in order to implement specific corporate governance rules agreed between the shareholders in shareholders’ agree-ments.

the executive body of a private com-pany is the Management Board whose members represent and manage the company, deal with the actual every day running of the company.

the Supervisory Board is responsible for strategic management of a com-pany and election of the Management Board. the Supervisory Board plans the activities of a private company, organises the management and super-vises the activities of the Management Board. the consent of the Supervi-sory Board is required for conclusion of transactions by the Management Board which are beyond the scope of everyday economic activities.

Shareholders adopt certain decisions in respect of a private company, e.g. approving of annual reports, payment of dividends, mergers, liquidation, di-vision, increasing or decreasing share capital, etc. Shareholders elect and

recall the members of the Supervisory Board and in case there is no Supervi-sory Board – members of the Manage-ment Board.

Specific corporate governance rules may be adopted internally and also set forth in the Articles of Association of a company.

Estonia’s corporate laws do not re-strict in any way the participation of foreigners in the management of Es-tonian companies. Any foreign citizen, irrespective of his/her origin, may be freely elected either to the Supervi-sory Board or Management Board of a private company in accordancewith-general rules concerning board mem-bers.


the minimum authorised share capital of a private company is Eur 2,500.


the minimum number of shareholders is 1 and the maximum number of share-holders is unlimited.

It should be noted that in case of a pri-vate company each shareholder has shares with a specific nominal value, e.g. if the share capital is Eur 2,500 and there are two shareholders, then each shareholder owns shares with a nominal value of Eur 1,250.


EStonIA

Foreigners can acquire real estate in estonia on conditions similar to estonian residents.

Are there any specific requirements for transfer of the shares in a private company?

A shareholder may freely transfer shares to another shareholder.

upon transfer of shares to a third per-son, other shareholders have a right of pre-emption within one month after having received the shares sale and purchase agreement. the seller shall submit the shares sale and purchase agreement executed between the seller and the third party (purchaser) to the Management Board of the com-pany who shall promptly notify other shareholders of entry into the share purchase agreement. the Articles of Association may prescribe that the transfer of shares is permitted exclu-sively in case of the fulfilment of an ad-ditional condition, primarily that a res-olution of the other shareholders, the Management Board, the Supervisory Board or another person is required to transfer a share. It may also be stipu-lated in the Articles of Association that the right of pre-emption does not ap-ply upon the transfer of shares.

Share transfer agreement of a private company must be in a notarized form. In case the shareholders’ list is kept by the Estonian central register of Securities (EcrS), i.e. the shares of a private company are registered in the EcrS, notarization of share transfer agreement is not required.

What are the major fees involved in the incorporation of a private com-

pany?

the registration of a private company involves the following notary fees and state fees:

•notary fees for examination and certification of incorporation docu-ments depends on the share capital of the company. In case share capi-tal is Eur 2,500 the notary’s fees would amount to Eur 21 plus VAt, in case the share capital is Eur 25,000 the notary’s fees would amount to Eur 45.40 plus VAt;

•state fee for registration of the com-pany with the commercial register is Eur 140.60.


Are there any legal restrictions on the ownership of real estate (inter-ests in entities which own real es-tate) by foreign investors?

Generally, foreigners have a right to acquire real estate similarly to Esto-nian residents. However, there are two main exceptions when acquisition of real estate by foreigners is restricted:

•Acquisition of real estate in border regions of Estonia. citizens or legal persons of countries which are not contracting party to the European Economic Area (EEA) Agreement need a permission of the Govern-ment to acquire such real estate. the permission is issued only due to the reasons significant to the state.

•Acquisition of land plots, which in-

clude more than 10 hectares of ag-ricultural or forest land. Such land plots can be acquired only by:(i) Estonian citizens and citizens of

another country which is a con-tracting party to the EEA Agree-ment or a Member State of the organisation for Economic coop-eration and development (oEcd) without any restrictions;

(ii) legal persons of the oEcd or EEA contracting State if the legal per-son has been producing agricul-tural products/doing forest man-agement for 3 years immediately before the acquisition of the land plot or upon the authorization of the county governor;

(iii) legal persons from other than the oEcd or EEA contracting State can acquire forest or ag-ricultural land only with the au-thorisation of the county gover-nor and if: a) the entity has been producing agricultural products/engaged in forest management in Estonia for at least one year and b) a branch of the legal entity is entered in the Estonian com-mercial register.

Any other land plots can be acquired without restrictions.

there are no restrictions imposed on foreigners (irrespective of their origin) to acquire interests in Estonia-based entities which own real estate.

there are no limitations to the maxi-mum area of agricultural or forest land owned by a foreign investor.


EStonIA

all real estate transactions require notarization.


According to Estonian law the pre-acquisition agreements have to be notarized in order to be enforceable. notarized pre-acquisition agreements or notarized contracts under the law of obligations (that do not include real rights agreement and can therefore be conditional) are commonly used in complicated transactions. Addition-ally, in some cases pre-acquisition agreements are concluded without no-tarization, however, such agreements are not enforceable.


the notarization requirement applies to a sales agreement as well as a real right contract on transfer of owner-ship to real estate. usually, these two agreements are included in one docu-ment, which furthermore contains the application for the Land register to register the change of the ownership. In order to complete the sale and pur-chase of real estate, the transfer of the ownership must also be registered with the Land register of Estonia.


Yes, if a party to a notarial act re-

quests, a notary may prepare a no-tarial agreement in another language if the notary is sufficiently proficient in the corresponding language.

All applications to the Land register must be submitted in Estonian, i.e. an official translation of the application and real right agreements is needed before the submission.

Does any third person (governmental authority, etc.) have a pre-emptive right to acquire real estate subject to sale?

the most significant pre-emptive right under Estonian law is the one belong-ing to the co-owners. With one excep-tion this pre-emptive right is applied to any sale of a legal share of real estate held in co-ownership. the only exception is the apartment ownership where, in case of the sale of an apart-ment, owners of other apartments lo-cated in the same building have no pre-emptive right.

In addition to the co-owners’ pre-emptive right, several laws provide for further pre-emptive rights. According to the Heritage conservation Act, the state and a local government entity have the right of pre-emption for real estate under heritage protection. the nature conservation Act stipulates the right of pre-emption for the state in respect of certain natural conserva-tion areas as well as land plots located in coastal building exclusion zone and restricts the use of real estate in these areas. According to the Principles of

ownership reform Act, tenants who live in a restituted building have a joint right of pre-emption to that building.

Describe the moment of acquisition of ownership to real estate

the title to real estate is acquired upon the respective entry in the Land reg-ister.

Does a seller have a statutory dis-closure or warranty obligation?

Generally, a seller is required to dis-close any relevant aspect of the target. otherwise, the seller will be liable for any defects that may not be discov-ered in the course of usual inspection.


In case of a transfer of real estate, all real rights and obligations in respect of the real estate pass over to the ac-quirer. Also rights and obligations un-der the lease agreements pass over along with the title. Any other con-tractual rights and obligations may be assigned to the acquirer of real estate upon agreement.

contractor’s or designer’s warranties/guarantees in respect of a newly con-structed building remain valid upon transfer of real estate.

What are the conditions for termina-


EStonIA

lease agreements survive transfer of ownership of any real estate.

tion of real estate sale and purchase agreement?

real estate sale and purchase agree-ment can be terminated:

•by mutual agreement of the parties;•by either party’s withdrawal if the

other party commits a breach of the agreement and fails to rectify the same in due course (the parties may agree on what is considered to be a breach under the agreement; otherwise, the material breach is to be determined based on statutory provisions);

•on other withdrawal grounds set out in the agreement.


A notary fee charged for certifica-tion of a real estate sale and purchase agreement depends on the value of property. For example, if the value of the real estate is Eur 1 million, then the notary fee is approximately Eur 3,000; if the value of the real es-tate is Eur 10 million, then the notary fee is approximately Eur 11,000.

Parties to a real estate sale transac-tion are free to agree whether the notary fee is to be covered by both of them or by a particular party.

COMMERCIAL LEASE

What are the formal requirements for the execution of a lease agree-

ment?

there are no mandatory formal re-quirements for the execution of com-mercial real estate lease. A tenant may demand from the landlord making an entry on the lease in the Land regis-ter. Such entry in the Land register se-cures tenant’s rights in case of trans-fer of the real estate by excluding new landlord’s right to terminate the lease due to the change of ownership.


no. However, if a lease agreement has been concluded for a term exceeding 30 years, then after the first 30 years, either party may terminate the agree-ment without indicating a reason, by giving the other party a three-month prior notice.

Does a tenant have a statutory right to extend or renew its lease?

no. However, in case of residential lease, a tenant may claim extension of the lease term for up to 3 additional years, if terminating of the agreement would bring along serious results for the tenant or his/her family.


there are no statutory restrictions on the amount of rent.

In case of residential lease, an agree-ment on periodical increase of rent is valid only if:

• lease term is at least 3 years;• rent is increased not more often

than once a year; and• limits or principles of calculation of

increase are set forth in detail in the lease agreement.

General market practice is that in case of commercial premises, rent is in-creased (adjusted) annually according to the consumer price index.

Alienation: what are the rights of the tenant and the landlord with respect to assignment, sub-lease or placing a charge over a lease?

A tenant may assign the lease only upon landlord’s consent. Also sub-let-ting is allowed only on landlord’s con-sent, but the landlord may not withhold its consent without a material reason.

there are no restrictions on encum-bering a lease with a pledge or a simi-lar right.


First, the landlord should file a claim to the court demanding the premises out of the tenant’s possession back to the landlord. A court resolution in effect can be enforced by a bailiff on the landlord’s request. In frames of the execution proceedings, the bailiff first gives to the tenant a term of up


EStonIA

real estate development process has a clear step-by-step regulation.

to three months to voluntarily comply with the court resolution and leave the premises. After this term has passed without success, then the bailiff will evict the tenant, if necessary, with the help of the police.


there are no such restrictions. In case of transfer of the title to real estate subject to lease, the lease will remain in force.

How does the transfer of real estate affect the tenant’s rights and obliga-tions?

the tenant’s rights and obligations re-main in force in case of the transfer of real estate. A new landlord may termi-nate the lease agreement, by giving a three-month prior notice, within three months as of the date of acquiring real estate, unless the lease agreement is registered with the Land register. A residential or commercial lease agree-ment can be terminated only if the new landlord strongly needs these premis-es for its own needs.

CONSTRUCTION


Enacting of a detailed planIn densely populated areas (such as towns), any developing and construc-tion works are subject to a detailed

plan enacted by the rural municipality entity. A detailed plan sets forth spe-cific requirements for the construction works, such as intensity of construc-tion, maximum allowed height of build-ings, etc.

Environmental impact assessmentEnvironmental impact assessment will need to be performed when the planned constructions falls within the list of particular activities established by the laws.

Designing worksthe design of a building is prepared in accordance with the designing condi-tions issued by the rural municipality entity. If the rural municipality entity has enacted a detailed plan, then the designing conditions are issued in ac-cordance with such detailed plan. In certain cases, expertise of the design documentation is required.

The construction permitthe construction permit is issued in re-spect of a specific land plot and not to a certain natural or legal person. the validity period of a construction per-mit is not limited, but a construction permit becomes invalid if the construc-tion works are not commenced within 2 years as of the date of issuance.

Carrying out of the construction worksAs a rule, supervision of the owner should be carried out by a competent person during the construction works. the process of construction works should be covered with a record of

construction works, reports on cov-ered works, minutes of working meet-ings, as-built drawings and certificates of building materials.

Applying for authorisation for opera-tionAfter completion of the construction works and before the commencement of operation of the newly erected or reconstructed building, the owner must apply for authorisation for use. the respective certificate is issued by the rural municipality entity if the construction works have been carried out duly in accordance with the design documentation.


In order to be permitted to perform construction work a person must:

•be registered as an undertaking (a company or a sole proprietor); and

•be registered in the register of eco-nomic activities by filling a specific application with information on the planned field of activities, informa-tion on competent person(s), con-tact details etc.; and

•have a corresponding legal relation-ship with a competent person (a person who is holding a professional qualification and has completed a higher education in an appropriate field and has three years’ experience in positions related to his or her pro-fession ) or, if the person is a sole proprietor, he or she must be a com-petent person.


EStonIA

estonia has a strong land register system ensuring the legal certainty of real estate ownership.

the above requirements also apply to:design works;

•conducting site investigations; •conducting energy audits; •owner supervision;•expert assessments of building de-

sign documentation; •expert assessment of construction

works; • issuing energy performance certifi-

cates; •engaging in project management.


under Estonian law, statutory con-struction guarantee is an obligation assumed by a building contractor to ensure that building operations per-formed by the contractor comply with the terms of the corresponding con-tract and that the construction works or any part thereof built by the con-tractor will, if used for its intended purpose and properly maintained, re-tain for a specified period of time the safety and usability properties and the high quality required for the use of the construction works as a whole or of any part thereof.

the following statutory guarantee terms are applied for construction works:

•construction guarantee – for at least 2 years from the date on which the building is completed;

•Guarantee for equipment perma-nently incorporated in the construc-

tion works in the course of construc-tion – for at least 6 months.

REGISTRATION

Does all real estate require to be reg-istered?Yes.


All real (in rem) rights to real estate are subject to registration, including own-ership right, servitudes, real encum-brances, mortgages, building rights and real pre-emption rights. the real rights are created and cease to exist only upon registration thereof with the Land register. Pre-emption rights un-der Estonian law, such as co-owners’, municipality’s and state’s pre-emption rights, are not subject to compulsory registration.


Along with the agreement for transfer-ring of the ownership (real right agree-ment), a specific notarized application to the Land register is signed. Both real right agreement and application for the registration of the ownership is submitted to the Land register by the notary. the registration procedure may take up to one month as of sub-mission.

What time and costs are involved in the registration of real estate (rights

thereto)?

notary’s fees (including deposit fees if notary’s account is used) and state fees need to be paid.

the amount of the notary fees de-pends on the value of the real estate (or rights thereto). For example, if the value of the real estate is Eur 10 mil-lion, then the notary fee is Eur 11,000.

registering the title of the new owner to real estate may take up to a month as of the submission of a notarized ap-plication to the Land register. If the former real estate is divided into sepa-rate real estates, then the registration of the new real estate may take up to three months.

note that in addition to the notary fee and in order for the transfer to be reg-istered in the Land register, a state fee must be paid. State fee is charged for the registration of ownership with the Land register. the amounts of the state fee mainly depend on the trans-action and the value of property. the state fee cannot exceed the estab-lished cap of Eur 2,556.46 irrespec-tive of the transaction value.


the registration system is reliable, and a bona fide third party can rely on the correctness of the data of the Land register.



EStonIA

corporate profits are not taxed until distributed.

Yes. Information from the Land reg-ister regarding data of the land plot, ownership, encumbrances and mort-gages can be accessed by any person electronically from the e-Land reg-ister for a small fee (Eur 8) or at the Land registry departments. Verifica-tion of identity is needed.

TAXATION


Tax rate and basisEstonian corporate income tax sys-tem is rather unique since only profit distributions are taxed. retained (re-invested) earnings are not subject to corporate income tax until distributed. therefore, Estonian corporate income tax system shifts the moment of cor-porate taxation from the moment of earning the profit to the moment of its distribution (deferred corporate in-come tax).

corporate income tax is charged on direct profit distributions such as divi-dends, and on implicit distributions in-cluding fringe benefits, gifts and dona-tions, and expenditures/payments not related to the business activities of the company.

the above profit distributions are taxed at company level with income tax at the rate of 21/79 (approx. 26.6%) from the net amount of the distribu-tion, which is equivalent to 21% from the gross amount. An amendment has been introduced

into Estonian Income tax Act on 1 January 2012 according to which the income tax rate will be lowered to 20% starting from 1 January 2015.

the same corporate income tax rules apply with respect of foreign compa-nies’ permanent establishments lo-cated in Estonia, i.e. permanent estab-lishments are not taxed with income tax until profits derived by such per-manent establishments are withdrawn from Estonia by the foreign parent companies.

note that under certain conditions profit distributions are not subject to corporate income tax (e.g. dividend payments made at the expense of dividends or permanent establishment profits received from other EEc coun-tries, provided participation criteria are fulfilled).

Capital gainsProfits of Estonian resident compa-nies, including those received in the form of capital gains, are taxed only upon the distribution of such profits. there are no tax reliefs available for the distributions of profits at the ex-pense of capital gains.

capital gains of a foreign entity from the sale of real estate located in Esto-nia and also rental payments received by non-residents for the lease of im-movable property located in Estonia as well as movable property subject to registration in Estonia are subject to Estonian withholding income tax at the rate of 21%.

Income tax is not, as a general rule, imposed on gains received by non-resident companies from the sale or exchange of shares in Estonian com-panies. there is, however, an excep-tion which relates to the sale of shares in real estate companies, i.e. compa-nies where at the time of transfer or during some period during two years immediately preceding the transfer, more than 50% was directly or indi-rectly made up of immovable property or structures as movables, located in Estonia, and in which the non-resident at the moment of transfer held at least a 10% shareholding. capital gains from the sale of shares in a real estate com-pany are taxed at the general income tax rate of 21%.

Dividendsthere is no withholding tax on divi-dend distributions, irrespective of the residence of the recipient or the recipi-ent’s legal status (i.e. legal person or individual).

In other words, profits are only taxed upon distribution with corporate in-come tax as described previously.

Interestuntil 31 december 2013, there was no withholding tax on interest payments to non-residents provided that the in-terest charged did not significantly ex-ceed the arm’s length rate at the time the debt was incurred and the interest payments were made. Starting from 1 January 2014, there is no withholding tax on interest payments to non-resi-dents (unless transfer pricing regula-


EStonIA

No income tax is imposed on sale of real estate used for residency purposes.

tions apply).

Thin capitalization rulesEstonia has no thin capitalization rules.

Tax losses carried forwarddue to the fact that the classical sys-tem of corporate taxation, where cor-porate profits are taxed upon their accrual, is not used in Estonia, there is also no need for and there are no loss carry forward rules in Estonia.

Intra-group consolidationsIntra-group consolidations are, as a rule, tax neutral, i.e. if no profits are distributed out of the company/com-panies in the course of the intra-group consolidation no tax consequences arise.

IndIvIdual taxes

Taxation of employment related in-comePayroll taxes subject to payment in Estonia from salaries or similar mon-etary remuneration (e.g. additional remuneration, bonuses, holiday pay, compensation upon cancellation of employment contract, etc.) are as fol-lows:

taxes payable by the employer:

•Social tax: 33% from the gross amount;

•unemployment insurance premium (employer’s part): 1% from gross amount.

taxes payable by the employee (with-

held by the employer):

• Income tax: 21% from the gross amount, from which relevant de-ductions are made (including basic monthly exemption of Eur 144, em-ployee’s unemployment insurance premium and mandatory funded pension premium);

•unemployment insurance premium (employee’s part): 2% from the gross amount;

•Mandatory funded pension premium: 2% from the gross amount (obliga-tory for employees, who were born in 1983 or later; optional for employ-ees who were born before 1983).

the taxable period for payroll is a cal-endar month, and the taxes must be reported and paid to the tax authority by the tenth (10th) day of the month following the taxable period.

Sale and lease of real estateGenerally, capital gains from the sale of real estate are subject to a 21% per-sonal income tax.

Full exemption from personal income tax is applied on the income of both resident and non-resident individuals derived from the sale of real estate, which is used for residency purposes. this tax exemption is not applied to more than one transfer in two years. Some further tax exemptions, as well as certain deductions from taxable income (for example housing loan in-terest, training expenses, etc.) are pro-vided by domestic law.

rental income received either by a tax resident or non-tax resident of Estonia from the lease of immovable property located in Estonia is subject to income tax at the rate of 21%.

note, that rental income from the lease of movable property (in the case of resident persons) and movable prop-erty, which is subject to registration in Estonia (in the case of non-resident persons) is also subject to income tax at the rate of 21%.

Sale of sharescapital gains derived by an Estonian resident individual from the sale of shares are generally subject to income tax at the rate of 21%.

capital gains of a non-resident from the sale of shares are generally not subject to taxation in Estonia except for capital gains derived from the sale of shares in a real estate company, i.e. companies where at the time of transfer or during some period within two years immediately preceding the transfer, more than 50% was directly or indirectly made up of immovable property or structures as movables, located in Estonia, and in which the non-resident at the moment of trans-fer held at least a 10% shareholding. capital gains from the sale of shares in a real estate company are taxed at the general income tax rate of 21%.

Taxation of self-employed individu-alsIncome generated by a self-employed individual from his/her individual busi-


ness activity is subject to personal in-come tax at the rate of 21%.

A self-employed individual, who is reg-istered as such in the Estonian com-mercial register, is allowed upon cal-culation of the taxable base to deduct from the income derived, expenses related to his/her business activities, provided that such expenses are duly documented (except for certain ex-penses, deduction of which is not al-lowed under applicable law). Self-employed persons, who had de-rived income during the taxable year, are obliged to make quarterly advance income tax payments during the next year (3 quarterly payments on the 3 quarters following submission of the annual income tax return).

Profit of the self-employed individu-als is subject to social tax at the rate of 33%, whereas a minimum social tax obligation calculated from the mini-mum monthly limit determined annu-ally by the state budget, is subject to payment regardless of the amount of income received. Advance social tax payments have to be paid quarterly.


Estonian VAt legislation is based on the council directive 2006/112/Ec (recast of the Sixth directive of the council of the European community (77/388/Ecc)). VAt is levied on the supply of goods and services at the standard VAt rate of 20%. the re-duced rate of 9% applies to books, pe-riodicals, certain listed medicines and

the only state tax applying to real estate in estonia is the land tax, which is relatively low. there is no real estate tax as such.

accommodation services. VAt rate on the export of goods and certain ser-vices is 0%. Some supplies are VAt- exempt, such as insurance, banking, financial services.In Estonia a person (including a self-employed person) is obliged to register as a VAt-liable person if the amount of taxable supply from the beginning of the calendar year exceeds the amount of Eur 16,000. However, voluntary registration is possible also prior to reaching the aforementioned thresh-old.As a rule, immovables are tax exempt in Estonia. However, there are certain exceptions, with respect of which the general VAt exemption does not apply and which are taxed at the general VAt rate of 20%. these exceptions are as follows:

•An immovable if an essential part thereof is a construction works, or a part of a construction works, which is to be transferred prior to the com-mencement of use of the construc-tion works or a part thereof;

•An immovable if an essential part thereof is a construction works which has been significantly im-proved, or part of such construction works, which is to be transferred pri-or to the post-improvement resump-tion of use of the construction works or the part thereof;

•Land plot if the plot does not contain any construction works.

the building is deemed to be signifi-cantly renovated if the costs related to the improvements exceed at least 10%

of the acquisition value of the con-struction works or the part thereof be-fore the making of the improvements.

note also, that the seller of an immov-able may voluntarily add VAt to the sales price of an immovable (which is exempt from VAt under the general tax exemption rule) upon prior notifi-cation of the tax and customs Board. If upon the sale of an immovable VAt is added voluntarily, a reverse VAt charge applies under which the buyer (and not the seller) is subject to trans-ferring the VAt amount into the state budget.

real estate tax

there is no real estate tax in Estonia.

land tax

Land tax is calculated on the assessed value of land at rates between 0.1 and 2.5 depending on the municipality. the tax is paid by the owners of the land or by the users of the land specified by the Land taxation Act. the tax is paid generally in two instalments by 31 March and 1 october. Starting from 2013 land used for residential purpos-es and corresponding to certain crite-ria is exempt from land tax.


there is no state-owned land lease or similar tax in Estonia.

EStonIA


tHE FuLL SErVIcE ProPErtY HouSE In nortHErn EuroPE

OSLOBERGEN

TRONDHEIM

GOTHENBURG

JÖNKÖPING

ÖREBROSKÖVDE

VÄSTERÅS

ESKILSTUNANORRKÖPING

VETLANDA

KALMARVÄXJÖ

MALMÖ

HALMSTAD

KOPENHAGEN

STOCKHOLM

TURKU

HELSINKI

TALLINN

RIGA

VILNIUS

JOENSUU

OULU

TAMPERE

JYVÄSKYLÄ

HÄMEENLINNA

today, newsec employs over 550 professionals in over 20 offices and covers all parts of the commercial property market. newsec provides services to most of the leading property owners, investors and corporates in the region.

tHe FUll SerVice ProPerty HoUSe iN NortHerN eUroPe

newsec – the Full Service Property House in northern Europe – is by far the largest specialized commercial property firm in northern Europe.

With over 600 professionals in 20 of-fices newsec covers all parts of the commercial property market. newsec provides services to most of the lead-ing property owners, investors and cor-porates in the region.

newsec manages more properties and carry out more transactions, more let-tings and more valuations than any other firm. We have the largest re-search team. together this gives us depth and breadth of the market.

As in many other geographical regions the vast majority of the transactions take place between local players. It is therefore vital to have a strong lo-cal presence in every country in order to find the right counterpart. We also have an exclusive collaboration with BnP Paribas real Estate - one of the leading advisors in Europe.

newsec is a stable and long-term play-er. the company was founded in Swe-den in 1994. the founding family have been the main owners from the start, with the rest of the company owned by key executives in the Group.

newsec is divided in five Business Ar-eas, and is without question the market leader in each of them.

the main thing that differentiates us from other advisors is that we offer all relevant expertise in all seven coun-tries.

the newsec Group is highly research-driven – for instance we carry out our own macroeconomic analysis – and we produce a unique five-year forecasts for all relevant data for all submarkets of interest in northern Europe.


TRANSACTIONS ADVICE

VALUATION RESEARCH &ANALYSIS

ASSET & PROPERTYMANAGEMENT

tHE FuLL SErVIcE ProPErtY HouSE In nortHErn EuroPE

newsec offers a comprehensive range of services in the business areas of transactions, Advice, Asset & Property Management, Valuation and research & Analysis.

NEWSEC ADVICE• Portfolio Allocation • Corporate Real Estate • Strategic advisory and Leasing

brokerage• Office • Logistics / Industrial • Retail & Urban Development• Residential• Tenant mix strategy

NEWSEC VALUATION• Real estate valuation• Business valuation• Movable property valuation• Due diligence• Construction monitoring

NEWSEC ASSET & PROPERTY MANAGEMENT• Property strategy• Profitability analysis• Investments (in the property)• Financial administration • Accounting service • Lease administration• Leasing• Renegotiation• Tenant relations• Property development technical

planning• Property caretaking• Trimming operations • Handlings faults in property

NEWSEC TRANSACTIONS• Sell side representation: advise,

marketing, negotiations• Buy side representation: advise, DD,

valuation, negotiations• Corporate Finance• Retail, logistics / industrial, office• Residential• Infrastructure / Wind Power

NEWSEC RESEARCH & ANALYSIS• Situation in the region, Baltic/Nordic

market overviews• Tailor made solutions based on the

analytical research• Forecasts on RE market develop-

ment• RE portfolio analysis and recommen-

dations on its optimization• Concept development• Highest and best use scenario con-

sulting• Financial analysis, cash flow and

analysis• Business plans


LAWIn

With over 140 legal professionals, LAWIn is ideally positioned to provide the highest-calibre, specialized legal services both domestically and in a pan-Baltic dimension. the LAWIn real Estate practice is a team of highly experienced lawyers who provide top-tier, innovative advice for clients on a broad range of commercial real estate and construction matters in Estonia, Latvia and Lithuania.

• We often act as equal members in the project management teams of major development projects, from planning on paper till opening for business and further operation or sale.• LAWIn continues to be the principal legal adviser on real estate matters in all international infrastructural projects.• Long record of LAWIn’s close work with the largest real estate investors in some of the countries has resulted in by far the biggest volume of transactional practice.

• LAWIn is proud to have advised the largest institutional real estate investors present in the Lithuanian market.• European Law Excellence Centre (ELEX) Brussels office is an extension of LAWIn practices at the heart of the Eu. ELEX is a cross-practice group of highly experienced LAWIn lawyers who provide legal advice for clients on a broad range of Eu laws.

For nearly two decades, our practices and lawyers in Estonia, Latvia and Lithuania are continuously top-ranked by the most prestigious international legal directories chambers Global and Europe, Legal 500, and IFLr 1000. LAWIn is the exclusive member in the Baltic States for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in 100+ countries. More: www.lawin.com

to learn about investment opportunitiesvisit us here at MiPiM

litHUaNia Stand: 13.19

city oF riGa Stand: 15.18, 17.13

city oF talliNN Stand: 13.18, 15.17

contact andaddresses

NEWSEC LITHUANIA

VilniusGedimino av. 20LT-01103 Vilnius, Lithuania Tel: +370 5 252 [email protected]

LAWIN VILNIUS offICE Jogailos 9Vilnius, LT-01116, LithuaniaTel: +370 52681888Fax: +370 [email protected]

CITy of TALLINN Tallinn City Enterprise BoardVabaduse väljak 715199 Tallinn, EstoniaTel. +372 6404 218Fax +372 6404 [email protected]

LAWIN RIgA offICE Elizabetes 15Riga, LV-1010, LatviaTel: +371 67814848Fax: +371 [email protected]

CITy of KAUNAS Head of Investment and strategic planing devisionVygintas Grinis Mob. + 370 699 91942Tel. + 370 37 42 41 [email protected] al. 96LT-44251 Kaunaswww.kaunas.lt

LAWIN TALLINN offICENiguliste 4Tallinn, 10130, EstoniaTel: +372 6306460Fax: +372 [email protected]

CITy of VILNIUSDeputy Director of ECONOMIC AND INVESTMENT DEPARTMENTRasa CibulskienePhone +370 5 211 2213Mobile +370 613 23 [email protected] ave. 3 LT-09601 Vilnius, Lithuaniawww.vilnius.lt www.development.lt/2014

NEWSEC LATVIA

RigaZala street 1LV-1010 Riga, LatviaTel: +371 6750 [email protected]

NEWSEC ESToNIA

TallinnRoseni av. 7EE-10111 Tallinn, EstoniaTel: +372 664 [email protected]

CITy of RIgATel. +371 6 702 6049Fax. +371 6 702 6337Ratslaukums 1, [email protected]

Documents

Baltic property market report 2014