Forecast decrease in return on investment from home rental

Whereas the market for the lease of residential property directly dependents on the numbers of working people and changes in their income, with the rise in salaries over the past five years, residential rents in all three major cities of Lithuania have been on the rise. According to the official statistics, over the past five years the average salary in the country increased by over 20%, while the unemployment rate decreased by eight percentage points (twice as much). It should also be noted that the market of the lease of residential property in Lithuania is not particularly transparent, therefore, the influence of the shadow economy in this sector can also be significant. It is only natural that such situation would be reflected in rents.

For example, over the last five years the rent of the most popular two-room apartments in Vilnius, Kaunas and Klaipėda increased by a third on average. In the meantime, apartment sales prices during the same period saw both falls and rises on a different scale in different cities. If in mid-2010, sales prices in Vilnius were record low, so in other cities they continued to decrease reaching the lowest level only in 2012–2013. Therefore much more rapid increase of rents (compared with the value of the property) increased the average yield indicators in the major cities. This is particularly visible in Kaunas and Klaipėda, as rents and sales prices in Vilnius during this period, although at different rates, moved in one direction. According to Ober-Haus, in Q1 2016, the average gross rental yield in Vilnius (the ratio between the annual rent and the acquisition price) amounted to 5.6% and was one percentage point higher than in 2010. At the same time in Kaunas and Klaipėda, higher yield indicators and their faster changes were recorded. In Kaunas, the gross rental yield was 6.0% and was 1.8 percentage points higher than in 2010; the indicator in Klaipėda was 5.9% (1.7 percentage points higher than in 2010).

Different yield indicators in these major cities of Lithuania were determined by erratic changes in property prices and investor expectations. “Over the past few years investors in Vilnius could observe stable and visible changes in sales prices and therefore were prepared to come to terms with lower earnings from rent than investors in Kaunas or Klaipėda. Higher liquidity of the property and higher growth rate in the value of the property allows to expect higher return on assets over a longer period. In the meantime, in Kaunas and Klaipėda private investors did not have greater expectations regarding the increase in prices and tried not to overpay for the purchased property; they saw return on investment based on earnings from rent, but did not expect to earn significantly on increase of sales prices,” Saulius Vagonis, Head of Valuation & Analysis at Ober-Haus, said.

However, it is likely that with the growing number of investors, the difference between rents and sales prices should decrease, which will determine a decrease of return on investment from lease. This is particularly likely in Kaunas and Klaipėda, as relatively lower sales prices of residential property (compared with rents) in the current economic environment have a higher growth potential than, for example, in the country’s capital. At the same time in Vilnius, return on investment may decline, because in recent years there has been a great interest from private investors in the residential property market in Vilnius, which increased the supply of apartments for rent. On the other hand, some existing lessees are leaving (or will leave) this market by becoming owners of residential property. It is therefore very unlikely that the rental yield will increase in the future.

Full review (PDF): Lithuania Residential Market Commentary Q1 2016

Whereas the market for the lease of residential property directly dependents on the numbers of working people and changes in their income, with the rise in salaries over the past five years, residential rents in all three major cities of Lithuania have been on the rise. According to the official statistics, over the past five years the average salary in the country increased by over 20%, while the unemployment rate decreased by eight percentage points (twice as much). It should also be noted that the market of the lease of residential property in Lithuania is not particularly transparent, therefore, the influence of the shadow economy in this sector can also be significant. It is only natural that such situation would be reflected in rents.

For example, over the last five years the rent of the most popular two-room apartments in Vilnius, Kaunas and Klaipėda increased by a third on average. In the meantime, apartment sales prices during the same period saw both falls and rises on a different scale in different cities. If in mid-2010, sales prices in Vilnius were record low, so in other cities they continued to decrease reaching the lowest level only in 2012–2013. Therefore much more rapid increase of rents (compared with the value of the property) increased the average yield indicators in the major cities. This is particularly visible in Kaunas and Klaipėda, as rents and sales prices in Vilnius during this period, although at different rates, moved in one direction. According to Ober-Haus, in Q1 2016, the average gross rental yield in Vilnius (the ratio between the annual rent and the acquisition price) amounted to 5.6% and was one percentage point higher than in 2010. At the same time in Kaunas and Klaipėda, higher yield indicators and their faster changes were recorded. In Kaunas, the gross rental yield was 6.0% and was 1.8 percentage points higher than in 2010; the indicator in Klaipėda was 5.9% (1.7 percentage points higher than in 2010).

Different yield indicators in these major cities of Lithuania were determined by erratic changes in property prices and investor expectations. “Over the past few years investors in Vilnius could observe stable and visible changes in sales prices and therefore were prepared to come to terms with lower earnings from rent than investors in Kaunas or Klaipėda. Higher liquidity of the property and higher growth rate in the value of the property allows to expect higher return on assets over a longer period. In the meantime, in Kaunas and Klaipėda private investors did not have greater expectations regarding the increase in prices and tried not to overpay for the purchased property; they saw return on investment based on earnings from rent, but did not expect to earn significantly on increase of sales prices,” Saulius Vagonis, Head of Valuation & Analysis at Ober-Haus, said.

However, it is likely that with the growing number of investors, the difference between rents and sales prices should decrease, which will determine a decrease of return on investment from lease. This is particularly likely in Kaunas and Klaipėda, as relatively lower sales prices of residential property (compared with rents) in the current economic environment have a higher growth potential than, for example, in the country’s capital. At the same time in Vilnius, return on investment may decline, because in recent years there has been a great interest from private investors in the residential property market in Vilnius, which increased the supply of apartments for rent. On the other hand, some existing lessees are leaving (or will leave) this market by becoming owners of residential property. It is therefore very unlikely that the rental yield will increase in the future.

Full review (PDF): Lithuania Residential Market Commentary Q1 2016