RE market: worse than geopolitics – thriving bureaucracy and disorder in the legal framework
The ongoing war in Ukraine has clarified certain truths in the Lithuanian RE market and is adjusting future directions for its development. The Lithuanian Real Estate Development Association (LNTPA) has noticed a curious moment in the market after conducting a survey among its members: a record-breaking decrease in RE supply is caused by thriving bureaucracy and statutory events instead of the tensions of war.
The LNTPA member survey shows that the most significant change in the behaviour of buyers since the beginning of the war relates to the reputation of the developer – as many as 87% of clients currently place great importance on the image, experience and smooth financial history of the RE developer.
“The financial and managerial capacity of a builder to fulfil its obligations to clients is becoming more important than ever: will the RE project be built, will the terms of the contract be met, and will the agreed price remain unchanged? So far none of the big market players have suspended their projects or changed the terms of their contracts,” says Mindaugas Statulevičius, the Head of LNTPA, by also adding that higher tensions in the market are likely to become particularly dangerous for RE developers with lower financial capacity and less business experience.
When asked about their planned investments, almost 90% of respondents say that they do not intend to reduce their investment volumes. Most RE developers even see favourable opportunities in the context of the current geopolitical situation – Ukrainians and Belarusians fleeing the war and the regime have great potential to become active participants in the RE market:
“Some of them will of course return to their countries after the war, some will travel further west, but some will definitely stay in Lithuania, settle in our country, and become RE buyers, therefore the demand for housing will only grow,” says M. Statulevičius, the Head of LNTPA.
Today, the vast majority of clients of LNTPA members – as many as 75% – are convinced that RE prices will rise. Potential buyers have also begun to assess their financial capabilities much more carefully. According to the survey conducted by LNTPA, one third of them are increasingly talking about alternatives to purchase RE abroad.
“There are simply no longer any valid arguments for prices to fall. In addition to the drastically increasing prices of building materials which are raising construction costs, we also have a completely hollow supply of housing. We are rapidly approaching the threshold when housing will simply become unaffordable,” states M. Statulevičius. For example, the latest data from the Department of Statistics shows that metal product prices have increased by 40% in February of this year compared to the same period last year.
When talking about the poor state of the RE supply, developers say that the main cause of RE development disruptions was not the tense geopolitical situation regarding Ukraine or the disrupted chain of supply of materials, but the unbridled bureaucracy in public institutions, and the legal disarray regarding adopted amendments to the Land Law:
“It is one of the biggest obstacles preventing developers to patch up the holes of supply. The law that provides for but is unable to control bureaucracy in state institutions and handle the legal disarray regarding the adoption of the Land Law amendment providing for an additional fee for the possibility of developing RE on state land has been adopted, however businesses were forced to wait for almost two months for the adoption of by-laws necessary for the implementation of the said law. This means two months of stagnation in the issuance of construction permits. And new RE supply is pushed even further to the future,” says M. Statulevičius, the Head of LNTPA, while describing the current situation.
RE developers who participated in the LNTPA survey indicated that 38% of their clients continued to purchase housing after the start of the war, and 62% slowed down the purchasing process but did not terminate their signed preliminary contracts. “The diminished interest in RE and the caution of clients observed since the beginning of the war is entirely logical and justified. We are all well aware that the persistence of global uncertainty is leading to a much more subdued mood in making important current decisions,” says Head of LNTPA.
When assessing the most probable scenario of RE market development in the context of the ongoing war, most LNTPA developers believe that almost all of the launched RE projects will be implemented, the prices and supply of construction materials should stabilize, and there should be no workforce shortages, at least in the long run.
Despite the prospects for stability, survey participants have indicated material supply chains that have not yet recovered from the pandemic, the growing cost of constructions and increasing inflation to be one of the greatest challenges which the RE market will have to face: “It will take time for the market to adjust before alternatives can be found and stable supply restored. We are seeing an increase in the cost of constructions which is likely to continue.
Continuously rising energy resource and material prices, as well as increasing inflation are likely to lead to higher RE prices. The upward trend in prices will depend on market activity and affordability indicators,” says M. Statulevičius, while summarizing the results of the survey. The Head of the LNTPA adds that the record decline in housing supply and rapidly growing demand is putting enormous pressure on the already hot rental market, in which the increase of prices is unlikely to halt in the near future.
In terms of the general development prospects of the RE market, it is already clear that more expensive, but at the same time higher quality materials will be used in construction. Increasing populations in major cities will make the search and purchase of housing even more intense, and there will be more thought-out and long-awaited decisions in the RE market both from the buyers and from the developers themselves, as shown by the LNTPA survey.