We are still at an early stage in what is happening in Europe, and the big effect is yet to come. However, certain things are already visible today. And, in my opinion, they will only develop over time.
Economics is a social science, and there are only a few precise things in it. Therefore, in this article, I make assumptions based on the current situation and the facts of the economic history of the modern world. It is no secret that the economy and its cycles are repetitive, so we can learn a lot from what has already happened.
The influence of war on the real estate development market
First, the real estate market should be divided into two major segments. One segment is real estate development, and the other is the rental segment. There are very big differences between these two segments.
Real estate development is a risky business that can be suddenly affected by circumstances. From the data already available, the current situation in Europe will have a strong impact on this segment.
First of all, this is evident from the rising prices of materials. Europe imported about 80% of its timber from Russia and Ukraine, and this is a very large number that suddenly needs to be replaced by other sources of supply.
On a positive note, timber was also transported from Canada during the COVID-19 pandemic. So a supply mechanism is already in place and, likely, even more Canadian timber will soon reach Europe.
However, more materials have been massively imported from Russia, Belarus, and Ukraine. For example, glass and various metals. In just a week, the metal price rose by about 20%. In addition, the prices of these raw materials are likely to continue to rise until they are not in short supply anymore. Alternatively, prices will rise until new trade routes (from Africa or Asia) are established.
One of the most important questions now is, how long will it take for the real estate development market to stabilize? After all, it is not difficult to notice that there are still delays in certain products/goods, which started at the beginning of the pandemic and stabilized after its first year.
So, thinking about real estate development, I think delays are now inevitable. It is also very much up to the real estate developers themselves and whether they secured the materials by buying futures.
Another important effect of the war is the lack of staff. It is no secret that many of the construction workers in Lithuania were Ukrainians, and recently, many of them went to defend their country. Thus, in addition to rising materials prices, labor prices are likely to rise as well.
Finally, sales slowed down. When unexpected situations arise in a country or the world, people get scared and refuse to make decisions so consumption eventually slows down. We saw the same situation at the beginning of the pandemics and in the first days of the war in Ukraine. Today, however, the situation is already different; people are getting into the rhythm. The real estate market is recovering.
The influence of war on the rental market
The supply of real estate for rent is rapidly decreasing in Vilnius and Kaunas, and in Klaipėda it is no longer available at all. If we look into Vilnius rental market, the price "floor" has been set in the whole city before, i. y. the lowest absolute price for a rented property ranged from €250 to €300, depending on the residential area. It rose with €100 in March and today to rent a small apartment in the capital costs €350-400 a month.
Because our country and cities are small, even a slight number of Ukrainian immigrants (20-50k) may pose some challenges to the rental housing market.
Thus, given the challenges facing real estate developers, it is unlikely that the situation will also change so quickly in the rental market. What does this mean? First, we will get back to higher rental returns.
A 6% return on rent in Lithuania was a good indicator in the past. While real estate prices increased significantly over the last few years, the rental prices did not grow so fast, and the return on rent decreased to 4-5%, and in Vilnius Old Town - even to 2-3%. However, the return on rent is starting to grow again due to the current situation, while real estate prices are no longer rising.
So what are the opportunities and risks related to investing in rental properties?
Opportunities and risks arise during every crisis. In my opinion, investing in long-term or short-term rental housing is one of the most obvious option.
Short-term accommodation is already recovering from the outbreak of pandemics, and such housing needs are set to grow even more in today's context. It is important to note that apartments have more opportunities for short-term rent than cottages or houses.
Another option is strong tenants and commercial properties. Investors are often skeptical about the latter, arguing that businesses may not always be doing well or that some facilities have become redundant in the face of a pandemic - what will ensure that this does not happen again?
However, with a good understanding of your tenant and his needs, renting a commercial property is an option to be considered. Why? The rise in real estate prices was observed mainly in the residential segment. So those who invested in commercial properties on time could already profit from the situation.
For example, in Vilnius, Ateities str. The modern office, financed by InRento's investor community, was successfully sold in less than a year, so instead of the projected 6.06% investors earned a return of 20.32%.
Another example by "InRento" is the second fully completed project in Švitrigailos str. 11-A, Vilnius. Following the successful sale of the office space here, the total annual return on investment (together with monthly rental yield and capital growth) has reached 17.48%!
Another option is to invest abroad. In Lithuania, people tend to invest locally, but in my opinion, they miss certain opportunities. First of all, it is always better to diversify your investments and not concentrate everything in one market. Investing abroad can not only bring financial benefits but also reduce investment risk.
Finally, the opportunity is properties in the affected sectors. During the heat of the pandemic, investors rushed to underestimate hotels, restaurants, and even office spaces, not estimating that the situation was temporary.
It is up to each investor to decide their risk appetite, but what is a risk for one person becomes an opportunity for the other.