The expectations of real estate developers are upset, but they maintain caution
Lithuanian real estate developers are extremely cautious about this year’s prospects, as shown by the Real Estate Market Expectations Index in 2023. The value of the index calculated on a scale from 0 to 100 is 50 points for this year. This means that this year the real estate market would be inactive, very cautious, and at rest. It is noteworthy that the mood of real estate builders this year is the worst since 2014, when calculations of the Expectation Index started. Compared to the most optimistic year, i.e., 2019, the value of the index decreased by even 25 points in 2023. Last year, this indicator reached only 3.
“This year’s Expectations Indicator (50) shows that the mood of uncertainty prevails in the real estate sector. The indicators of the volume of work (55; it was 79 in 2022), capacity (53; it was 78 in 2022), work orders (45; it was 75 in 2022), and the number of employees (53; it was 73 in 2022) dropped sharply. The indicator of the expected level of unsold real estate has increased and reaches 40 (it was 35 in 2022)”, Mindaugas Statulevičius, the President of the Lithuanian Real Estate Development Association (LNTPA), says when presenting this year’s Expectations Index at the annual Lithuanian Real Estate Conference CORE.
The evaluation of the financial aspects of the expectations index encompasses an expectation for moderate staff wage growth which is predicted to be slower than in the previous year (indicator of 73, which was 95 in 2022), as well as the need for corporate borrowing (indicator of 62, which was 80 in 2022). The demand for work in the domestic market and the prices of raw materials are expected to drop sharply: the indicators reach 35 and 47, respectively (they were 71 and 96 in 2022).
According to a fifth (18 percent) of the surveyed companies, the expectations of the previous year 2022 were exceeded, and four out of ten (40 percent) companies claim that the expectations were fulfilled as predicted, while 42 percent of the surveyed real estate developers claimed that their expectations were not fulfilled in 2022, when the portion of such companies last year accounted for 15 percent.
When assessing the factors with the biggest impact on last year’s performance, the respondents mostly cited the war in Ukraine (48 percent) followed by rising construction costs (24 percent), and the population expectations (30 percent) ranked third.
In the opinion of a quarter (25 percent) of the respondents, in 2023 the greatest incentive for real estate development would be the current level of real estate supply, the improving economic situation (23 percent) and the growing expectations of the population (20 percent) were mentioned somewhat less often.
“Speaking of the obstacles to real estate development in 2023, real estate developers mostly indicated the rising cost of borrowing, 39 percent of them, and the uncertainty caused by the war in Ukraine, which was mentioned by 14 percent of them,” M. Statulevičius says. The Head of LNTPA notes that the obstacles to the sustainable development of real estate resulting from bureaucracy and an unfavourable legal framework prevailing in 2020 and 2022, would decrease by almost three times in 2023: from 32 percent to 12 percent. Popular previous obstacles, namely, the growth in labour and service prices in 2023, decreased to 2 percent, as opposed as much as 36 percent reached in 2022.
32-50 square meter area (78 percent) and the same price ranges of 87-145 thousand euros (64 percent) remaining for the second year would continue to be considered the most attractive housing characteristics in 2023. The main criteria affecting the choice of housing are the price (90 percent) and the location (86 percent).
The importance of the developer’s experience and reputation continues to decline (18 percent in 2023, 26 percent in 2022, 52 percent in 2020), while the value of the construction quality criterion is growing again following the anti-record results in 2022 (22 percent in 2023, 9 percent in 2022, 35 percent in 2020).
As for investments in residential projects in 2023, it is usually intended to invest more than 10 million euros (35 percent), while the surveyed real estate developers are usually preparing to invest up to 5 million euros in commercial projects (31 percent) or do not foresee such investments at all (29 percent).
“Very reserved expectations will be associated with the commercial real estate. A much happier mood will be observed in the development of trade projects in 2023 (indicator 67, it was 62 in 2022), while the development of storage projects will grow slower than in 2022 (the indicator reaches 63, it was 78 in 2020). Meanwhile, it is very likely that we could not avoid stagnation in the office real estate market”, M. Statulevičius, the Head of LNTPA, says. The office market indicator reaches 42 this year, when this indicator was 61 in 2022.
About the index
The Lithuanian Real Estate Development Association calculates a preliminary macroeconomic indicator enabling to forecast the state of the Lithuanian real estate developer market for a year. The market expectations index of real estate developers calculated by LNTPA enables to predict the prospects in this field for the coming years in advance, to forecast real estate prices. The real estate market is traditionally closely tied to the general market expectations and it is important for the assessment of the state of the economy as a whole.
The index is calculated according to the “Markit Economics” standard by supplementing it with relevant issues in the Lithuanian real estate market.
The index is calculated from 2014. Survey participants are managers of real estate companies or development managers.
Index values can range from 0 to 100 points. If it is below 40 points, a recession can be expected in the real estate market in the near future. If the value of the index fluctuates between 40 and 50 points, it can be said that the mood of uncertainty prevails in the real estate sector, and stagnation in the market can be expected in the coming years. The value of the index exceeding the limit of 50 points indicates that growth trends would prevail in the real estate market in the near future, which would contribute to the growth of the Lithuanian economy as a whole.
“SPINTER Research” conducted the survey in the months of January – February in 2023 on behalf of LNTPA and “Ober-Haus”. Answers were submitted by 50 Lithuanian real estate developers.
A review of the expectations index can be found here:
LNTPA-Lūkesčių indeksas-ataskaita -2023 m. (LNTPA-Expectations Index-Report 2023)