As the Vaccine Alters Expectations, Economic Recovery Is Also Anticipated

The current economic situation considerably deviates from expectations: due to the poor epidemiological situation and tightened various requirements, people avoid having any social contacts; as a result, activities in some economic sectors have decreased significantly or have virtually ceased. However, the fact that people have already begun to vaccinate themselves against COVID-19 gives hope that we will only have to wait for a few difficult months before experiencing significant economic acceleration not only in Lithuania, but also in Europe, by the middle of next.

According to SEB bank’s economist Tadas Povilauskas, Lithuania’s economy will grow by several percent next year. Meanwhile, Mindaugas Statulevičius, President of the Lithuanian Real Estate Development Association (LNTPA), is confident that returning to normal office life will be quick, and the residential real estate (RE) market will benefit from savings and funds deferred during quarantine.

Residents Will Yearn for Entertainment Next Year

According to SEB bank’s November forecasts, Lithuania’s economy will grow by 3% next year, following a 1.5% contraction this year; in the meantime, economic development will accelerate even further in 2022. As usual, the sector that suffers the most and places where customers are most likely to return, such as food and accommodation business, should recover the quickest. It is likely that not all representatives of the sector will survive until the middle of next year, but those who do should have a pretty large flow of national and international customers. T. Povilauskas is convinced that once the pandemic is over, the recreational tourism will return to pre-pandemic levels in the next two to three years, especially because Lithuania remains an undiscovered tourist destination for the rest of the world.

As the pandemic situation improves, trading venues, particularly those that provide not only trade but also entertainment or leisure services, should also recover. A higher flow of customers can also be expected as a result of the increase in residents’ income this year, a large portion of which was deposited into their bank accounts.

“The irony of fate is that Lithuania, which had one of the worst economies in the European Union (EU) during the 2008-2009 financial crisis, will have one of the least deteriorated economies this year. Despite the fact that the country’s unemployment rate increased, the income of those who were employed increased rapidly. The average net salary in the third quarter of the year was 10.4% higher than a year ago – such an increase is unusual even in a calm and favourable year for our country. In addition, the government policy regarding borrowing possibilities was also favourable to the population’s income; thus, it is not surprising that retail trade, despite all fears, grew this year and has so far kept pace with previous years,” explained SEB bank’s economist T. Povilauskas.

Physical Trading Venues Will Recover at the Expense of Online Stores

During the eleven months of this year’s retail trade, excluding fuel expenses, the turnover was 6.6% higher than a year ago (e.g., the growth was 7.1% in 2019). Such an increase in turnover has been achieved despite a decrease in the physical flow of customers. People visited trading places less frequently, but when they did, they spent more, and the importance of online stores grew. Retail sales via mail order houses or the Internet are expected to account for close to 8% of total retail trade this year, excluding the fuel sales market.

“If expectations regarding the improving epidemiological situation are met, and residents are able to move without greater restrictions or avoidance of social contact in the second half of next year, physical trading venues may see a return of customers. First of all, it will be at the expense of turnover of online stores. However, the overall share of online sales will continue to grow – this will be accompanied by traders’ contributions to develop online shopping habits of their buyers,” – stated T. Povilauskas.

According to his forecasts, unemployment will begin to fall only in the second half of next year; thus, the growth of traders’ income in the coming year will be heavily dependent on whether consumers save less and are able to spend money on services more confidently again. Since consumers have renewed their household this year, sales of furniture, computer equipment or household appliances are likely to be lower.

The Housing Market Will Be Stimulated by New Projects and Arriving Belarusians

Meanwhile, the housing market went through several stages this year, from complete stagnation in the spring to record sales of new housing in the autumn. People were looking for ways to create home offices or learning spaces even in the smallest spaces; thus, making larger housing more marketable. M. Statulevičius, the President of the Lithuanian Real Estate Development Association is confident that Lithuanians will continue to seek more spacious housing at affordable prices; meanwhile, the prices should grow moderately.

The first quarantine in the spring demonstrated that, even after a complete halt, life became a pretext for upgrading homes and improving the household for a variety of reasons. The lack of space was not the least important factor, so we may hope that the new projects will be more spacious. The price increase in the coming year should remain consistent for several reasons, such as a lack of foreign labour force, the implementation of the highest energy class A++ in 2021, and a scarcity of land plots in central city areas, which will raise the cost of construction,” says M. Statulevičius. According to him, more housing may have to be chosen from drawings because, during the first quarantine, some of the unfinished projects were halted due to high uncertainty, so supply may fall short of demand.

The increasing number of Lithuanians returning to Lithuania, as well as new arrivals of Belarusians, who are also looking for new homes or housing for investment, are not less important. “There are approximately a thousand Belarusian families planning to relocate to Vilnius and, as a result, are looking for houses to rent or buy over time – this is a pretty large number of people to stimulate demand,” says M. Statulevičius.

Will the Time of Vacant Offices Come to an End Soon?

This year was an era of empty tables and chairs in the office market, but it is too early to speculate on the fundamental changes in this commercial real estate market. “Changes will occur, and they will be related to greater opportunities for workers to work from home; as a result, many companies will re-calculate the area required for rented office space. However, I believe it is more important for the Lithuanian office market to know whether or not the number of service sector employees will be maintained. This is largely related both to the development of existing international service centres and IT companies, as well as the opportunities to attract new investors. There was an opportunity this year to attract IT companies and their employees from Belarus; therefore, if this opportunity is realised, these companies could positively contribute to the growth of demand for rented space next year,” says T. Povilauskas.

  1. Statulevičius, the Head of LNTPA, is convinced that once the pandemic is over, it will be easy to return to normal office life. “As soon as the vaccine achieves the desired results, first emotional factors should be triggered: we will be tired from working from home, so we will return to our offices and only work part-time from home. Furthermore, when employees work in the office, it is easier for businesses to maintain contact between the team members, and the desire of businesses that survived the pandemic to make up for lost years will play not be less important, so the office market should recover quickly”, – says M. Statulevičius.

Hotels Will Recover More Slowly, Whereas the Logistics Sector Will Thrive

“Business trips will return to their normal rhythm much more slowly than recreational or sightseeing trips. We have learned to communicate quickly and efficiently via remote means; therefore, the recovery of hotels will most likely be slower than that of offices. Small businesses are currently struggling the most, so they may look for ways to sell their business to large networks. However, there is no shortage of optimism in the markets – the share price of the “Airbnb” accommodation platform increased twice in December following the public distribution of shares. Those who invested in the logistics sector won the most during the pandemic because this sector is expected to maintain a similar rate in the coming years,” explained M. Statulevičius.

This year, the commercial logistics real estate sector drew a lot of interest from investors not only in Lithuania, but also from all over the world. It wasn’t just because of the rapid growth of e-commerce – the coronavirus pandemic primarily affected the service sector, rather than the goods manufacturing sector.

“Now, during the second wave of the virus, we see that the industrial production sector is not complaining very much: the volume of manufacturing in Lithuania, excluding petroleum products, increased by 1.4% in the first eleven months of this year. As previously stated, retail trade volume was increasing, as was the volume of goods transit – re-export of goods this year was only 1.2% lower than a year ago. It is likely that industrial performance will improve next year, and that investments halted by the companies in the sector this year will resume. Furthermore, the Belarus issue remains unresolved, which may have a negative impact on the flow of transit goods to the East and, as a result, on the employment of warehouses in this chain,” stated T. Povilauskas.

He believes that if the fight against the coronavirus ends successfully, there will be a greater willingness to take a risk next year. Investors always try to forestall the events; thus, as the amount of unused investor money in the market continues to grow, it will be attempted to employ it by assuming a higher risk. In the event of a positive scenario, all market participants will have to work together to maintain a balanced position in the commercial RE market.