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January-February
2008
Estonia, Latvia, Lithuania, Finland, Sweden |
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RoschierRaidla News
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Inside this Issue:
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Estonia |
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Latvia |
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Lithuania |
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Estonia
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Estonian Real Estate Market Attracts
Domestic and Foreign Investors |
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Estonian real estate market has been developing rapidly since 2000,
which resulted in a record year in 2006, when almost 63,000 real
estate transactions were made with the aggregate value of
approximately EUR 5 billion. After that in 2007 the activity on the
real estate market and specifically in the residential part thereof
decreased.
During 2000-2006 the biggest growth took place in
residential part of the real estate market mainly because of very
low level of investment into that part of the market in the past, favourable credit conditions and increase of income. In 2006 the
demand for residential premises in Tallinn and surrounding area was
in most locations exceeding the level of offers and the average
price of an apartment in Tallinn reached EUR 1,900 per
m˛
compared to EUR 350 per
m˛
in year 2000. However, second
half of 2007 and the beginning of 2008 has shown that the
residential part of the real estate market has changed and further
changes are expected. For example, the number of transactions in 2007
was on the same level with 2004 and most likely there will be no
increase in 2008. Generally, the prices of residential premises are
approximately 10% lower compared to the beginning of 2007. These
changes in the residential part of the market are referred to by
most of experts as normalization or stabilization caused by less favourable credit conditions, slowing economic growth, expectation
of potential buyers for the decrease in prices and increase of the
number of available residential premises. However, the residential
premises in prime locations have not faced any price decrease and
there is still high demand for those premises resulting in 5%
increase of the price during year 2007. In addition to that, it must
be taken into account that even after 2007 the average residential
area per inhabitant is in Estonia still 30% smaller than in Finland
and 40% smaller than in Sweden. This means that despite of slowdown
on the residential market there is room for further growth but only
when the reasonable financing will be available and the economy
continues to grow.
Similarly to the residential market also the commercial part of the
real estate market expanded considerably during the period from 2000
to 2006, although this expansion was more balanced when compared to
the residential market. In 2002, when mostly domestic investors were
active on the residential market, the foreign investors
started to enter more actively into the commercial part of the
Estonian real estate market. The biggest foreign investors who are
active on the Estonian real estate market are Metro Baltic Horizons
plc, Baltic Property Trust, Linstow, Sveafastigheter, EVLI, Citycon,
Explorer Property Fund and Boultbee.
The Estonian economy slows down at the moment and the banks are more cautious
in respect of financing of the commercial part
of the market. This means, among other things, that the leverage levels
have decreased compared to 2006. Despite of that there still
is
sufficient demand for high quality modern office space
with good parking solutions
in the city
area of Tallinn. There are only few
vacancies in this market sphere
at the moment and
there are many
companies which are looking for the bigger premises. To meet that
demand approximately 100,000 m˛ of new office space in 2008 and
approximately 45,000 m˛ in 2009 will be put on
the market. At the moment the highest demand is for small offices
(200 -300 m˛). There is also a need for additional space in retail
sector (mainly in big shopping centres) not only in Tallinn but also
in other bigger towns of Estonia. Almost all existing bigger
shopping centres in Tallinn have already started or are planning to
start an extension of their existing premises.
Although the Estonian economy is not going to
achieve the growth rate comparable to the one in 2006 for several
years, the prognosis
is that the economic growth will still be higher than average.
The abovesaid enables to assume that during the next few years the
commercial part of the Estonian real estate market continues to
develop and attract both foreign and domestic investors.
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Recent Legislative Developments |
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Environmental Liability Act Adopted
On 14 November 2007, the Estonian Parliament (Riigikogu)
adopted the Environmental Liability Act. This Act sets forth general
provisions for environmental liability and transposes Directive
2004/35/EC of the European Parliament and of the Council. The
adoption of the Act resolves problems that had arisen from enforcing
various environmental standards in separate laws (for example the
Nature Conservation Act, and Water Act). The new act is based on the
principle of preventing and remedying of environmental damage, by
ensuring restoration or replacement of the damaged environment by
the operator whose activity has caused the damage. It applies the
"polluter pays" principle, which is one of the core principles of EU
environmental policy. Pursuant to the Act environmental damage means
damage to natural habitats, species and protected areas, water
damage and land damage that has significant adverse effects on the
environment. In general, an operator is liable whenever the operator
has caused environmental damage or any imminent
threat of such damage. The costs of preventing or remedying
environmental damage shall be covered by the operator who is liable
for causing the damage or any imminent threat of such damage. The
act entered into force on 16 December 2007.
New Provisions in Commercial Code
On 21 November 2007, the Riigikogu passed amendments to the
Commercial Code, concerning cross-border mergers of Estonian
companies. The amendments transpose an EU directive establishing
procedures for cross-border mergers of limited liability companies
from States which are Contracting Parties to the EEA Agreement.
Until now the Estonian Commercial Code only applied to mergers
between companies entered into the Estonian commercial register, and
did not regulate such cross border mergers. The amendment introduces
a special section on cross-border mergers, setting forth additional
requirements for merger agreements, merger reports and certain
aspects of approval of merger agreements relating to these
transactions. New exceptions apply for the protection of creditors.
Moreover, requirements are imposed for obtaining documents
certifying the conduct of mergers. The latter is assigned
cross-border probative value. The Act also transposes principles of
involving employees in the management of the company in certain
enumerated cases. The amendments also bring provisions concerning
mergers of financial institutions in line with the Commercial Code.
These include provisions in the Credit Institutions Act, Investment
Funds Act, Securities Market Act and Insurance Activities Act. The
amendments entered into force on 15 December 2007.
Additions to Insurance Activities Act
On 6 December 2007, the Riigikogu passed the Act Amending the
Insurance Activities Act, Financial Supervision Authority Act and
Personal Data Protection Act. The additions transpose the
Reinsurance Directive. New provisions are added to the Insurance
Activities Act regulating matters pertaining to reinsurance
activities and reinsurance undertakings, establishing requirements
for engaging in different types of insurance activities and
liability for violation thereof. The scope of insurance companies’
activities is expanded: under certain conditions life insurance
undertakings may be simultaneously involved in providing both life
and certain types of non-life insurance (for example accident
insurance and sickness insurance). Changes in reinsurance regulation
concern requirements for the activities of reinsurance undertakings
and prudential requirements applicable to them (including
restrictions on activities, cross-border activities, minimum own
funds, calculation of provisions and restrictions to investing
assets representing technical provisions). In addition to
traditional reinsurance activities, the amendments allow special
purpose vehicles (i.e. securities transactions) to be used for
reinsurance. Through such transactions capital markets or investors
take over the risks which are traditionally borne by reinsurance
undertakings. The amendments also introduced special rules for
processing personal data for the purposes of insurance activities.
The amendments entered into force on 1 January 2008.
Provisions of Electronic Communications Act Specified
On 15 November 2007, the Riigikogu passed the Electronic
Communications Act Amendment Act. The aim of these amendments is to
ensure appropriate and unambiguous implementation of the new EU
acquis concerning electronic communications, and the smooth and
seamless regulation of the electronic communications sector. New
terms are added and existing definitions are specified. Estonian law
is brought into compliance with the EU law with respect to
obligations applicable to undertakings with significant market
power. Provisions concerning access, interconnection and line
facilities are specified. A simplified legal procedure is introduced
for obtaining approval of the Health Protection Inspectorate for
frequency authorisations. Procedures applying to frequency
authorisations and numbering authorisations in the register of
economic activities are also added. Other newly added provisions
concern confidentiality requirements and number portability. The law
entered into force on 17 December 2007. Some provisions became
applicable as of 1 January 2008 and others will become applicable on 1 June 2008 and on 15 March
2009.
Regularisation of Notaries' Electronic Information System
On 21 November 2007, the Riigikogu adopted the Act on
Amendments to Acts Related to the Notaries’ Electronic Information
System and Legal Registers, and by doing so created a general legal
basis for the introduction of an electronic information system for
notaries (E-Notary System). The Act replaces a set of more limited
government regulations, and allows for more broad digital exchange
of data between the E-Notary System and state databases. The
E-Notary System is used for uploading notarial documents to the
registers, in order to reduce delay as well as the need for
processing of documents submitted on paper or applications filed by
e-mail. The amendments entered into force on 28 December 2007.
Legal Bases for Schengen Information System Completed
On 14 November 2007, the Riigikogu adopted the Act Amending
the Police Act, Aliens Act, Obligation to Leave and Prohibition on
Entry Act, Identity Documents Act and the Border Guard Act. In line
with the Schengen Convention, the amendments specify the rights and
obligations of government departments with respect to processing
personal data and cross-border pursuit. The Schengen Information
System enables designated authorities, by means of an automated
search procedure, to gain access to alerts on persons and property
for the purposes of border checks and internal police and customs
checks. The system also makes it possible to exchange data on aliens
who are subject to prohibition on entry. The Act entered into force
upon Estonia’s accession to the common visa area on 21 December
2007.
New Provisions in Pension Insurance Act
On 14 November 2007, the Riigikogu adopted the Act Amending
the State Pension Insurance Act and the Funded Pensions Act. The
amendments facilitate the transfer of funds corresponding to pension
rights from pension schemes of EC institutions to the Estonian
pension system and vice versa. The amendments entered into force on
1 January 2008.
Roads Act Amended
On 14 November 2007, the Riigikogu passed the Act Amending the Roads
Act and Railways Act. The amendments authorize the Government of the
Republic to establish a state road register. They also provide a new
definition of protection zones of local roads and introduce the term
"road works". Provisions concerning planning and financing of road
management, as well as road construction design documentation are
amended. Provisions concerning owner supervision of road
construction and road repairs are added. The competence of the
authority exercising state construction supervision and the
requirements for issuing road construction permits are specified in
more detail. Under the amendments only persons holding a relevant
activity licence may prepare road design documentation and perform
expert assessments. The amendments entered into force on 1 January
2008.
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| For further information please contact
Raino Paron,
Partner at Raidla &
Partners in Tallinn. |
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Latvia
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Commercial Property Market Shows No Slow-down
in Latvia |
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Until the first half of 2007 the Latvian real estate market experienced a rapid
growth both in the real estate prices and the number of transactions taking
place on the market, the demand in most real estate sectors constantly exceeding
the supply. The market growth was primarily supported by the forthcoming joining
of Latvia to the European Union in 2004, the growing trust of foreign investors
in Latvia’s economy, favorable tax treatment of capital gains on sale of certain
real estate investments, and rapid decrease in mortgage rates since early
2002-2003. During this period the mortgage financing for the first time became
affordable to the general public. This greatly contributed to development of
residential properties for sale in urban areas, attracted substantial inflow of
speculative investment in the real estate market and caused the real estate
prices to skyrocket. For a number of years, most of the new residential development
projects tended to be fully sold out while still in development stages. The
annual inflation rate (CPI) 2007 exceeded 7% p.a. in Latvia in January and is
still growing, as compared to ~2% p.a. in 2001 -2002. (The present inflation
rate (CPI) exceeds 15% p.a.)
The soaring inflation caused Latvia’s government to implement certain
anti-inflation measures in May 2007. These measures included, inter alia,
introduction of a capital gains tax on income obtained by individuals on the
sale of real estate, real estate companies and real estate holding companies, a
withholding tax on capital gains obtained by non-residents on sale of real
estate companies and real estate holding companies, increase of the state duties
payable by individuals in respect of registration of title to third or any
subsequent real estate owned by them and perfection of third or any subsequent
mortgage, as well as certain restrictions to credit institutions concerning
their mortgage-backed financing affecting primarily loans to end-consumers.
These measures have caused a slow-down in the residential properties market
since the second half of 2007, suspension of certain new development projects
which were still in their planning stages, and decrease of prices on secondary
residential real estates markets. The new developments have been affected to a
lesser extent, and while the selling rates have decreased, most of the
developers still consider that they will be able to sustain their current
pricing level. Only a small number of developers have announced price decreases
in their developments. The other factor contributing to the slowdown of real
estate market was the lack of financing for new residential developments in the
Latvian banking market, which was caused primarily by the concerns in respect of
the over-heated stage of the Latvian economy and the large exposures the banks
had in the real estate development markets in Latvia. Also the consumer buying
pattern has changed as more and more end-buyers have become quality-aware and
reluctant to purchase real estate in its development stage.
The changes in the residential real estate markets and the expiry of the rental
caps that were imposed on lessors in respect of maximum rent they could charge
to the residential tenants which had entered lease agreements prior to
denationalization of the respective apartment building have contributed to
certain growth in residential lease market and increase in the rental rates.
However, that market is still fairly small and the yields are limited, as the
residential customers tend to prefer to purchase their apartments rather than to
lease them. The first entirely residential rental developments remain yet to be
seen.
On the other hand, there is a considerable demand in the commercial and business
rental markets. The first substantial sale and lease back transactions took
place in 2006. That trend continued in 2007, and is expected still to continue.
The change in the taxation of capital gains from the sale of real estate and
real estate companies has taken away the competitive disadvantage which the
corporate investors and investment funds had vis-ŕ-vis individual investors that
were able to realize capital gains from real estate tax free in short term by
selling shares in real estate companies. This has had an overall positive
stabilizing effect on the real estate markets by reducing the price races, the
number of non-professional developers on the market, increasing the availability
of construction and other related services, and increasing the over-all quality
of the real estate on the market.
As the speculative and non-professional real estate investments are likely to be
phased-out in 2008, a number of attractive medium to long term real estate
investment opportunities are likely to appear on the market in the coming
months.
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Law on Personal Income Tax Amended
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On 8 November 2007, Saeima (the Parliament) amended the Law on Personal
Income Tax, introducing a fixed income tax rate for certain categories of
self-employed persons and small entrepreneurs and new rules for the distinction
between the income subject to income tax at the rate of 25% and the income
subject to income tax at the rate of 15%. The fixed income tax rates became
applicable as of 1 January 2008, while the rules concerning distinction in the
tax rate – as of 12 December 2007.
The
individuals which have registered themselves as performers of a business
activity and which do not have any employees will be able to benefit from a
fixed income tax rate based on a sliding scale of income if their annual income
in the previous taxation year did not exceed LVL 10 000 (approx. EUR 14 228) and if
they do not forecast a larger income in the current tax year. The fixed income
tax will range from LVL 25 (approx. EUR 35.60) to LVL 500 (approx. EUR 711) per tax year
depending on the tax payer’s annual income. These rates are considerably lower
than the current 15% income tax rate applicable to individual’s business income
as of 1 January 2008, however, they will not be available to performers of
independent professional activities like scientists, doctors, lawyers, actors,
artists and musicians.
As the income tax payable by individuals on their business income as of the 2008
tax year is decreased from 25% to 15%, an important amendment has been
introduced in the Law on Personal Income Tax to distinguish the individual’s
business income from its salaried (non-business) income which still remains
subject to tax at the rate of 25%. Article 8 of the law was supplemented by a
list of specific criteria to determine the types of income which irrespective of
its legal form (i.e., the legal basis on which it is paid) will be treated as
salaried income. Thus, according to Article 8(22) of the law, individual’s
income will be subject to tax at the rate of 25% if at least one of the
following criteria is met:
1) tax payer’s economic dependence of the person to whom it provides services;
2) tax payer bears no financial risk for non-profitable works or lost debts;
3) tax payer’s integration in the company to which it provides services.
(Integration in the company within the meaning of this Article means that the
person has work place or resting - place, is subject to the internal regulations
and similar characteristics);
4) tax payer has holidays and vacations and they are subject to the internal
regulations of the company or other type of work schedule of the persons engaged
by the company;
5) tax payer carries out his work under the management or control of another
person, the tax payer cannot engage his own staff or sub-contractors for the
performance of the work;
6) tax payer does not have fixed assets, materials and other assets used in the
business activities (this criterion is not applied to individual car or some
individual instruments used for the performance of the assigned work).
The aim of the above amendments is to exterminate those cases when, in order to
reduce the amount of payable taxes, services agreements are used, although the
substance of the relations between the company and the individual corresponds to
the employment relations. Also before these amendments the State Revenue Service
would have been able to charge extra tax payments in such situations based on
the general principle of the tax law providing that economic substance dominates
over the form. However, considering that the criteria for distinguishing the
employment relationship from a genuine independent services arrangement were not
clearly set in the law and court practice, the State Revenue Service would have
been reluctant to enforce the above principle due to litigation risks and
burden. However, with the introduction of a clear rule the burden of proof will
be largely shifted to the individual tax payers to depend their entitlement to a
lower tax rate.
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Law on Prohibition of Unfair Commercial
Practices
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On 22 November 2007, Saeima adopted a new Law on
Prohibition of unfair commercial practices. The law implements the Directive
2005/29/EC concerning unfair business-to-consumer commercial practices in the
internal market. The new law entered in force as of 1 January 2008.
The substantive provisions of the law closely follow the provisions of the
Directive. Compliance with the law will be supervised by the Consumer Rights
Protection Board, Health inspection and Food and Veterinary Service, the
decisions of which are appealable to the administrative courts.
Latvia has not opted to grant the persons and organisations having a legitimate
interest in combating unfair commercial practices the right to take an
independent legal action against the unfair commercial practices. Instead any
person may apply with a claim to the competent supervisory authority which will
be bound to open an investigation in accordance with the laws on administrative
procedure, provided that the applicant has a standing to commence such
investigation.
The supervising authorities will have a right to apply provisional (interim)
measures if they have grounds to believe that the breach of a prohibition of
unfair commercial practice may have an immediate and material harm to the
economic interest of a specific consumer group. These measures may be in a form
of an obligation to cease immediately the respective commercial practice, or as
a prohibition to commence the commercial practice if it has been intended but is
not yet commenced. The decisions on application of interim measures have an
immediate effect as of the moment they have been notified to the addressee.
These decisions on interim measures are appealable to regional administrative
courts. The appeal does not suspend the application of the decision, and the
court’s decision on the appeal is final and non-appealable.
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| For further information please contact
Dace Silava-Tomsone
(CV),
Partner at Lejins, Torgans
& Partners in Riga. |
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Lithuania
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Lithuanian Real Estate Market Is No Longer
Landlord's Market |
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Lithuanian real estate market has
expanded rapidly during the last ten
years and many developers have benefited
greatly from soaring property prices.
The most rapid growth of prices has been
seen in residential sector. According to
the data of Real Estate Register of the
Republic of Lithuania, in the third
quarter of 2007 the average price of
secondary market housing per square
meter was almost 4 times higher (382.2%)
than the average price in the fourth
quarter of 1998 while the average price
of new housing – almost 8 times (790.1%)
higher than that in the fourth quarter
of 1998. Captivated by roaring prices
and fast returns, majority of developers
have prioritized residential projects
over long term commercial projects.
Department of Statistics to the
Government of the Republic of Lithuanian
reports that the residential area which
was newly constructed between 2000 and
the third quarter of 2007 (4,631,900.00 sq.m.) exceeded newly built office,
industrial, warehousing, retail and
hotel space added together (4,267,000
sq.m.). However, due to increasing
interest rates and financial
institutions being more cautions with
their lending after the “credit crunch”,
activity in residential sector of
Lithuanian real estate market has slowed
down since the second half of 2007. On
the other hand it should be emphasized
that in 2007 Lithuania (contrary to
Latvia and Estonia) has not witnessed
any decreases in the prices of either
new apartments or secondary market
apartments. Majority of real estate
consulting companies agree that
construction of residential space will
decelerate, however, there should not be
any significant decreases in price since
the demand is still high.
In recent years office market, which is
mainly concentrated in Vilnius, has been
characterized by shortage of modern
office space and vacancy rates close to
zero in existing business centers.
However, by 2010 the current modern
office space in Vilnius is expected to
double up if all the projects that are
currently in the pipeline are
successfully implemented. This might
increase the vacancy rates in old office
buildings and less competitive new
business centers.
The retail market is the most developed
segment of Lithuanian real estate market
which has been roaring along the
constant growth in the consumer spending
power of Lithuanian population. There
have been vast expansions in all 5
largest Lithuanian cities (more than 13
shopping centers opened within the last
three years). If 3 or 4 years ago the
retail segment could be characterized as
the landlord’s market, recently the
tenants became more selective when
choosing location of their stores.
Numerous projects are still in the
pipeline. Once they are finalized, the
size of current retail premises will
double up and rentable retail space per
capita will reach the average European
level. Majority of real estate
consulting companies forecast that after
this expansion only those shopping
centers which have a clear concept,
attractive tenant mix and professional
management will be able to maintain
vacancy rates relatively low. At the
same time they claim that there is a
significant development potential for
outlet centers.
With the developers concentrating in the
residential sector the warehouse and
logistics market has been left aside and
the demand for leasable space still
exceeds the supply. Due to its favorable
geographical location, the fastest growth
in warehousing market has been recently
seen in Kaunas region. Predominant
feature of the warehousing and logistics
market is that the developers do not
start construction of the facilities
until they have a pre-lease
agreement signed with an anchor tenant.
This results in “built to suit” projects
dominating the market. Furthermore, due
to the lack of developers who would be
active in this segment large logistic
companies, retail chains and importers
have been building their own warehouses.
Thus, the supply of empty warehousing
facilities that would be available for
smaller tenants is very rare.
Foreign investors became active in
Lithuanian real estate market after
Lithuania had joined the European Union
in 2004. Department of Statistics to the
Government of the Republic of Lithuanian
reports that as of 1 October 2007 8.1%
of all foreign direct investments have
been made into the real estate sector.
Investors from Scandinavian and Nordic
countries have been the most active in
this sector: Baltic Property Trust,
Verdispar, Genesta Property Nordic, EVLI,
Citycon, Explorer Property Fund and etc.
However, recently the number of
investors coming from other countries
(Germany, Britain, Ireland, US, Canada)
has been also increasing: Deka
Immobilien Investment GmbH, Dawnay Day
Carpatian, Baltic Real-Estate
Developments, Heitman, Homburg Invest
etc.
Analyzing foreign investments into
separate real estate sectors, it should
be concluded that majority of office
buildings are still owned by their
developers. However, the years 2006 and
2007 were highlighted by a number of
transactions in this segment. In 2006,
Baltic Property Trust acquired the
highest class rated office building
prior to its opening in Vilnius prime
location with 9,402 m˛ of rentable
area. In 2007, SEB group sold portfolio
of its 54 properties (mainly office)
located in Lithuania, Latvia and Estonia
to Homburg Invest Inc. The transaction
was completed at an aggregate purchase
price of approximately EUR
185,000,000 and has been the largest
sale and leaseback transaction in the
Baltic Region ever. The same year
Invalda Real Estate Fund sold three
office buildings to Terra Prospera,
which is part of Irish private equity
group Via Lucrosa.
Investment activity in retail market has
been dynamic already for a number of
years. Since the end of 2004, Baltic
Property Trust has acquired three
shopping centers in Vilnius, Kaunas and Klaipėda with the total rentable area of
more than 50,000 sq.m. and three
supermarkets in Vilnius with the total
rentable area of almost 9,000 sq.m. In
2007, the sale and leaseback transaction
of 23 supermarkets of Norfos Mazmena UAB,
one of the leading players in the
Lithuanian retail market, was completed.
The supermarkets with the total area of
43,500 m˛ were sold to the Norwegian
owned Verdispar Group for the price of
approx. EUR 49,000,000. There have a
number of other investments deals:
Finnish EVLI acquired a shopping centre
Grand Duke Palace (net area – 4,600 sq.m.)
on one of the high streets of Vilnius,
Irish Baltic Real-Estate Developments –
Grandus (11,275 sq.m.) in Klaipėda and
Radviliškis shopping centre (3,200 sq.m.)
in Radviliškis, British investment fund
Dawnay Day Carpatian – Babilonas (21,242
sq.m.) in Panevėžys, Finnish Citycon –
Mandarinas (7,800 sq.m.) in Vilnius,
Swedish Explorer Property Fund – Deco
(5,200 sq.m.) in Klaipėda, German Deka
Immobilien Investment GmbH – BIG (15,000
sq.m.) in Vilnius. As the retail market
is further expanding, more investment
transactions are expected both in the
capital and in the secondary cities.
For a number of years warehousing has
been the most attractive sector for
foreign investors. Pioneered by Baltic
Property Trust which had acquired two
logistics and distribution centers in
Vilnius and Kaunas with the total
rentable area of more than 23,000 sq.m.,
the market witnessed further
acquisitions: Verdispar has bought two
modern logistics centers in Vilnius with
the total warehousing space of almost
37,000 sq.m., Genesta Property Nordic –
newly built Kaunas Terminal located in
the Kaunas Free Economic Zone and
covering an area of more than 28,000 m˛ intended for warehousing and offices, Heitman – modern logistic facilities
(approx. 14,000 sq.m.) close to Vilnius,
Terra Prospera – two modern logistics
centers with the total area of almost
20,000 sq.m. in Vilnius and Kaunas.
Having in mind that majority forecast
further growth of the warehousing
market, investors should still find
attractive investment opportunities
within this segment.
Auction sales were on their wave at the
end of 2006 and beginning of 2007.
Recently the market has been shifting to
a “buyer’s market” and majority of the
objects are acquired in direct sales
transactions. Having realized that it is
becoming more difficult to find buyers
for less attractive properties, local
developers started selecting their
tenants more carefully and improving the
lease agreements so that they would be
concluded on the terms usually preferred
by the investors. Therefore, the quality
of the lease agreements has improved
during the recent years. Furthermore,
since the leverage levels for
development projects have decreased
significantly during the last six months
(down to 50% in certain cases),
local developers more and more often
look for the investors who would jointly be
willing to participate in their
future projects.
Finally, it should be emphasized that
commercial property market has only
recently discovered the advantages of
the sale and leaseback transactions.
Majority of real estate consulting
companies agree that such type of
transactions should be attracting
increasing attention in the future. On
the other hand, it is worthwhile
mentioning that due to increasing
competition between the investors the
yields have been constantly decreased
starting from 2003. Majority of the
recent deals have been completed at the
following net yields: approx. 7% in
office segment, approx. 6.5% in retail
segment and approx. 7.5% in warehousing
segment. However, since the yield levels
in Lithuania are still higher than in
the rest of Western Europe, Lithuanian
real estate market should continue
attracting foreign investors.
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Law on Prohibition of Unfair
Commercial Practices |
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On 1 February 2008, the Law
on the Prohibition of Unfair
Business-to-consumer
Commercial Practices came
into force. The law
implements Directive
2005/29/EC concerning unfair
business-to-consumer
commercial practices in the
internal market and amending
Council Directive
84/450/EEC, Directives
97/7/EC, 98/27/EC and
2002/65/EC of the European
Parliament and of the
Council and Regulation (EC)
No 2006/2004 of the European
Parliament and of the
Council. Thereby the
prohibition of unfair
business-to-consumer
commercial practices has
been established, types of
unfair commercial practices
listed, liability for unfair
commercial activities set
and authorities competent to
decide upon complaints or to
initiate appropriate legal
proceedings in respect of
unfair commercial practices
nominated. The law is
applicable to unfair
business-to-consumer
commercial practices before,
during and after a
commercial transaction in
relation to a product.
According to the law, a
commercial practice is
unfair if it does not meet
the requirements of
professional diligence and
it materially distorts or is
likely to materially distort
the economic behavior of an
average consumer with regard
to the product or of an
average group member when a
commercial practice is
directed to a particular
group of consumers. It is
further stipulated in the
law that unfair commercial
practices most often show
themselves as misleading or
aggressive. The supervision
of the compliance with the
provisions of the law has
been entrusted to the State
Consumer Rights Protection
Authority, except for those
cases that are related to
the misleading and
comparative advertising that
are entrusted to the
Competition Council.
Moreover, the law institutes
a system of administrative
penalties (in the amount of LTL 1,000 (approx. EUR 290) to
LTL 120,000 (approx. EUR
34,754)) for the violation
of the legal requirements
related to unfair commercial
practices.
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Geneva Act of the Hague Agreement
Concerning the International Registration of Industrial Designs
Ratified |
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On 18 January 2008, the
Seimas (the Parliament)
adopted the Law on
Ratification of the Geneva
Act of the Hague Agreement
Concerning the International
Registration of Industrial
Designs. The Geneva Act
system provides a
possibility for the
applicants to obtain design
protection through a single
international application
that is filed with the World
Intellectual Property
Organization, replacing
series of registrations with
different national or
regional offices. An
international registration
creates the same effect in
each of the designated
countries as if the design
were registered there
directly. The Geneva Act
will enter into force in
respect of Lithuania on 5
February 2008, and
Lithuanian applicants will
be allowed to apply for
international protection of
their designs under the
Geneva Act of the Hague
Agreement.
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further information please contact
Irmantas Norkus, (CV),
Managing Partner at
Norcous & Partners in Vilnius. |
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Finland
and Sweden
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International Capital
Strenghtens Nordic Real Estate
Markets |
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In line with global trends,
the Swedish and Finnish real
estate transaction markets
have been very strong and
real estate transactions
have been an increasing part
of the M&A market in the
region with many new
investors entering the
market as a consequence of
the international capital
moving in to new regions.
Foreign Investors Active on
the Swedish Real Estate
Market
The M&A activity on the
Swedish real estate market
has expanded rapidly during
the last ten years.
Estimated real estate
transactions in 2007 reached
EUR 13.3 billion, which was
approximately 5%
less than in the record year
2006 as a consequence of the
turbulence on the global
financial market.
The recent years' increase of
real estate transactions is
explained by the fact that the
real estate market in
Sweden, some ten years ago,
started to attract foreign
real estate investors. Today
the Swedish real estate
market is dominated by
foreign real estate
investors and funds. The
reason for this development
is that the yield levels in
Sweden in general were (and
still are) higher than in
Central Europe and in the UK
and that Swedish industrial
companies quite often owned
significant real estate
portfolios. The entry of
foreign investors resulted
in sale and leaseback
transactions between the
industrial companies and the
foreign real estate funds.
The most influential foreign
players on the Swedish real
estate market are CGI (Commerzbank
Grundbesitz Invest), IVG,
ING Real Estate, GE Real
Estate, Unibail-Rodamco,
Whitehall Funds, Acta
Kapitalförvaltning, Vital
Forsikring, ADIA, Boultbee,
Carlyle Group, DB Real
Estate and some additional
German real estate funds.
Even though the Swedish
market has been dominated by
foreign investors, domestic
players have during the last
two years increased their
market share. This may be
explained by the fact that
some of the foreign real
estate investors who made
their entry to the Swedish
market some time ago, like
Whitehall Funds, have now
carried out several exits of
their investments. However,
sale and leaseback
transactions as described
above are still very common
on the Swedish real estate
market and foreign investors
are still very interested in
attractive property
portfolios in Sweden.
After the “credit crunch”,
the activity on the Swedish
real estate market has, as
mentioned above, to a certain
extent decreased. The
number of auction processes
has decreased and more
objects are now instead
acquired “off the market”.
Further, the transaction
processes are now subject to
longer lead times and it is
also harder to find bidders
for less attractive property
portfolios. It should,
however, be noted that there
are still many bidders for
attractive property
portfolios. The “credit
crunch” seems also to have
had an impact on the foreign
financiers of real estate
acquisitions since they have
become more cautious after
the summer. As a consequence
of the slowdown in activity
by foreign financiers,
Swedish banks became more
involved in structuring the
financing arrangements,
which has resulted in a
recent increase of the
market share for Swedish
banks.
Another impact of the
“credit crunch” has been
that the high leveraged
investors have been less
active and institutions,
listed property companies
and other actors investing
with a lot of equity (for
example German open-ended
funds) have been more
competitive on the
purchasing side.
Even though the activity did
slow down following the
“credit crunch” a number of
larger transactions were
concluded just before the
end of 2007: such as Kungsleden’s EUR 500 million
sale to Orkla Finans
Kapitalförvaltning and
Doughty Hanson’s EUR 290
million sale to DnB Nor
Markets.
Furthermore, vacancies in
the rental market have
fallen rapidly pushing up
the rent levels, and
especially the prime rent
levels, which could be
expected to prevent
decreasing property values
at least in prime locations.
The terms used in real
estate transactions have not
been subject to any
significant changes during
the past year. However, on
the financing side the
leverage levels first
increased and then decreased
slightly. In spring and
early summer, some
transactions saw leveraged
financing at some 90-95% of the deal value.
After summer, the leverage
level has decreased by some
10-15 percentage units. Even
if this would indicate that
the banks are becoming more
risk-averse, the deal volume
is expected to continue at
high levels. For example the
Swedish Government’s
contemplated sale of the
real estate company Vasakronan is expected to be
carried out in 2008 whith an
expected deal value of EUR 4-4.25 billion.
The Swedish real estate
market is still very
attractive for foreign
investors and the number of
foreign property investors
looking for investments in
Sweden is still increasing.
Global Credit Crisis Has
Little Impact on Finnish
Transaction Volumes
The Finnish real estate
market has seen another
record year in 2007, with a
transaction volume of EUR 5.7
billion just topping the
figures of 2006 (EUR 5.6
billion). In comparison to
2006, also the number of
transactions has been
greater in 2007.
The Finnish real estate
market started expanding
rapidly some five years ago.
Like in Sweden, in the
relatively underdeveloped
real estate market the yield
levels were generally higher
than in Central Europe and
in the UK, attracting a
large number of – initially
mostly opportunistic –
foreign real estate
investors. In 2007, foreign
investors overpowered
domestic investors by being
involved in more than 60% of
all transactions that year.
With so many players active
in the Helsinki Metropolitan
Area (HMA), domestic
investors were the first to
direct their attention to
investment opportunities in
other parts of Finland.
Cities such as Tampere,
Oulu, Kuopio, Turku and
Vaasa were recognized as
some of the most attractive
growth centers. This trend
was, however, rapidly
adopted by foreign investors
and has led to numerous
acquisitions by foreign
investors outside the HMA in
2006 and 2007, such as the
EUR 65 million purchase of the
Revontuli shopping center in
the heart of Rovaniemi by
British investor Boultbee.
The increased competition on
investment opportunities
outside the HMA has led to
lower yield demands and more
and more occasions where
properties were sold at
equal yields as required for
similar properties in the
HMA.
Another distinctive feature
of the Finnish real estate
market constitutes the fact
that Finnish companies, in
particular the industrials,
traditionally have held and
continue to hold a lot of
real estate on their balance
sheets. However, sale and
leaseback transactions are
becoming more common and
this trend is expected to
continue. A distinct example
was the recent sale and
leaseback by Finnish
elevator manufacturer KONE
of its Helsinki head office
to the German open ended
fund HANSAimmobilia, for a
purchase price of EUR 35
million and a 10 year lease
period. It is also becoming
increasingly common that a
buy-out acquisition of an
industrial target is soon
after followed by the target
company divesting its real
estate holdings – even its
core assets – in a sale and
lease back transaction.
Interesting is also the role
that Finnish pension
insurance companies have
played in the real estate
market in the past few
years. Owning significant
real estate portfolios, they
contributed to the real
estate boom by divesting
considerable parts thereof
to foreign investors hungry
for opportunities and by
converting their direct real
estate holdings into
indirect real estate fund
investments. The trend is
now reversing a bit, as some
Finnish pension insurance
companies are again looking
to directly acquire property
portfolios. However, it
remains to be seen whether
their holdings in Finland
will reach the previous
levels as they are at the
same time striving for more
geographical diversification
of their real estate
interests.
It is worth mentioning that
in January 2008 amendments
were introduced to the
provisions of the Finnish
Value Added Tax (VAT) Act
relating to real estate
investments. Although the
impact of these amendments
on the terms used in
transactions remains to be
seen, pricing advantages in
the form of a lower transfer
tax exposure may be gained
through the introduction of
a proportionate repayment
duty of deducted VAT
(included in the
construction costs) in case
of a change in the taxable
use of a property. Further
information on this topic
may be found in our special
edition of Roschier Real
Estate News that deals in
more detail with the
amendments to the VAT Act
introduced in 2008 and that
has been published at:
www.roschier.com.
What applies to the terms
used in real estate
transactions in Sweden
applies likewise to Finland:
the terms have not undergone
significant changes in the
past year and also on the
financing side of Finnish
real estate transactions a
similar decrease was seen in
terms of leverage to value
with borrowers having become
more cautious under
influence of the global
credit crisis. However,
unlike in the UK where the
real estate market is
currently experiencing a
significant downturn, the
global credit crisis had
surprisingly little impact
on the real estate
transaction volumes in
Finland. Although the high
leveraged investors have
been less active in the last
half year of 2007, strong
equity investors were eager
to take their place with the
German open-ended funds
playing a most prominent
role. One effect has,
however, been that the less
attractive property
portfolios have been pulled
from the market. It is
doubtful whether the credit
crisis is to blame for this,
as it could also reflect the
generally high-quality
portfolios still available.
With the Finnish economy
having grown strongly in the
past years and offering a
further healthy perspective
for 2008, an attractive and
busy investment climate on
the Finnish real estate
market is expected to
remain.
For further information
on the Real Estate practice at
Roschier please contact
Kaj Swanljung
(CV),
Partner at Roschier in Helsinki
or
Marcus Hedén
(CV),
Partner at Roschier
in Stockholm.
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For further information please contact
Dimitrios Himonas
(CV),
Partner at Roschier in Helsinki
or Axel Calissendorff
(CV),
Partner at Roschier
in Stockholm. |
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| This Newsletter is a
periodic publication of RoschierRaidla and
should not be construed as legal advice or legal opinion on any specific
facts or circumstances. We have used reasonable efforts in collecting,
preparing and providing the information in this newsletter, but we do
not warrant or guarantee the accuracy, completeness, adequacy or
currency of the information contained herein. The contents are for
general informational purposes only, and you are urged to consult a
lawyer concerning your situation and any specific legal questions you
might have. |
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