Lithuania is the largest of the Baltic states, but while it has enjoyed significant economic out-performance of late in the EU, it has underperformed the other Baltic states. In the property sector performance has been good. Although the capital, Vilnius, has the most developed market, activity is becoming more evenly spread than in Estonia or Latvia, with occupier and developer interest extending to such cities as Kaunas and Klaipeda. Despite higher levels of recent development, there is still a general shortage of modern property, particularly outside Vilnius, which has constrained the growth of the investment sector.
Although sales volumes rose by over 15% last year, Lithuania has the least developed retail market of the three Baltic states. Large chains are slowly increasing their market share however and the number of small outlets is falling, particularly in the food sector. Discounters have a strong presence and supermarkets are rapidly establishing themselves as the major destination for grocery purchases.
Demand for retail space is high despite a relative lack of modern stock. In Vilnius, numerous up-market international brands are located on Didzioji Street. Vokieciu and Pilies are also popular among domestic retailers, and Kaunas is attracting more interest. Investment and development interest is good, with new sites for shopping centres actively being sought due to the existing under supply. To date, 11 modern schemes totalling 289,000m2 have been built, all in Vilnius. A number of schemes are due to be completed this year in Vilnius and Kaunas but while such development may have an impact on high street locations, it is not expected to be serious in the long term as international brands continue to seek flagship high street locations.
The current office stock of Vilnius is around 170,000m2 with vacancy of 8-10%. Activity is centred on the capital which has experienced good levels of development and an additional 28,000m2 due for completion over the next year. Prime rents have remained stable but may be set to rise, particularly in some decentralized markets, as occupiers look for better-quality space in new schemes, offering larger floor plates and parking space.
The investment market is underdeveloped and restrained by the limited amount of modern stock. Prime yields narrowed over the last year to 10% and are expected to harden further in 2006. Demand is particularly strong in the “business triangle area” but while most international-grade product is located in Vilnius, Kaunas and Klaipéda might offer sale-and-leaseback deals.
Demand in the industrial sector is running ahead of supply, with negligible vacancy and the majority of development for owner occupation. Rents are among the highest in the region as a result but look set to grow further. Speculative supply is beginning to emerge, however, as developers recognise the potential gains to be made be developing greenfield sites or refurbishing existing space.
The majority of demand and development is by the Vilnius-Kaunas-Klaipeda highways where costs are lower, more space is available and traffic congestion is less significant. Local investors are willing to expand to secondary cities where there is potential. Investor interest is generally increasing and yields are set to harden this year as a result.
Darren Yates, Joanna Tano, Darren Mansfield and Claudia Visini of Cushman & Wakefield