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Investors do not buy just a land plot, they buy its potential

Land

Radiks Landaus, Senior Consultant, Land and Development Projects

 

When moving around Riga, the undeveloped squares and fenced land plots can often be noticed even in the city center, and there is no impression that there is an absence of supply on the market. However, investors, while investigating whether and how the building can be used there, what the potential encumbrances are, often conclude that the specific place is not suitable for the realization of business ideas. In addition, property is often owned by private individuals, who perceive it as their funds for retirement; for example, using the land plot as a car parking plot, which is quite profitable business, especially in the city center. Often owners, even if they are considering selling, would like to get ‘millions of euros’ for their land plot.

The city, including its center, is developing and the area under construction is expanding. However, unfortunately, the Avotu street neighborhood has not changed significantly in the last five years, there is still no feeling that it is located in the center of Riga, so investors consider other places, like Skanste, when searching for land plots. They find good infrastructure and well-functioning office centers there, with plans of housing development in the near future, which makes this part of the city quite interesting. At the same time, thus we are "losing" a large part of the city center for investment.

If some new projects appear in the area, they positively affect its further development, the area is in the spotlight and the demand for land is increasing (the land in the places which have not been extremely popular before, is often cheaper). Currently developers pay more attention to Maskavas street area that is closer to the center. It has been noticed that for the land owners, the income that can earn now is often of greater importance than the potential income. Besides, people do not know where and how to invest their funds after the land plot sale.

When investigating the plots of land with the buildings, investors often wonder— what do we pay for in this location: the value of the building or the land plot? If the building does not generate cash flow, if it’s really old, the value of the property is only slightly higher than the value of the land. In this case the land plot is being bought as there are many other problems for the investor to solve, such as large-scale demolition.

The majority of investors know very well what they want to achieve, they have a clear vision, a business plan and their own investment strategy. Therefore, it is easy for such developers to say whether the planned business is possible on the specific plot of land or, conversely, nothing will really happen. In one case, if the investment term is longer, it is possible to offer an area in need of regeneration, in another—a slightly more expensive area without building (greenfield), which will allow the project to move forward faster.

For the owners who want to sell their land plots, it is highly recommended to create a story and carefully research all possibilities in the specific location. If the big deals of recent years are considered, it becomes clear that not square meters, but ideas, business plans that are related to a particular plot of land has been sold. By creating a story, a concept, exploring possibilities, it is easier for the owner to understand which buyer to look for, where to address it.

 

Risk factors

According to our estimates, the land market will be active for another couple of years. There’s nothing really to offer for a larger potential tenant. To some extent, this may give the illusion that the land plots should be bought, and the projects started immediately, but it is important to understand what to expect in a few years' time. In addition, developers have to reckon with rising construction costs, which are already causing difficulties for many.

For many investors, the development time of a real estate project is too long, which has been further extended by Covid-19. Thus, buying a plot of land for a million euros, and not doing anything with it for two years, seems like an inadequate investment. And this is not only Riga specific problem —in Latvia, in general, it takes quite long time to get a building permit. However, this is not an insurmountable problem if thorough due diligence of the land plot has been carried out before the acquisition.

It is not expected that a similar situation will arise in Riga, as in Vilnius, where there is a huge lack of land plots for real estate development projects and there is a fierce struggle for them. Riga has quite a lot of opportunities for development.

 


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Radiks Landaus

Senior Consultant | Industrial & Land Agency

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After few years with projects manegment in 2014 I started to work in real-estate market.  For more than 4 years I have been working in local real-estate company and in November 2018 I made challenging decision aimed to my professional growth and started working for Colliers International.

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