Real estate plan promises real change

Real estate plan promises real change

A scheme requiring foreign investors in Latvian property to pay into a new economic development fund will “boost the capabilities of the Latvian economy”, the country’s economics minister says. Anna Rozenfelde reports

In an interview with BQ Baltic, Latvia’s minister of economics Daniels Pavluts outlined a proposal, agreed between the three parties in the country’s governing coalition and subjected to parliamentary approval, to channel new one-off payments of €25,000 by purchasers into a fund to promote grass-roots economic development.

Pavluts’ suggested new “economic development fund” appears designed to allay fears, including those of right-wing coalition partners the National Alliance party, that the proceeds of the existing residency permit scheme were not sufficiently benefitting ordinary Latvians.
Mr Pavluts said: “We are introducing this mandatory payment of €25,000 per [residency] permit. That money goes into an economic development fund we can then distribute to develop the capabilities of our economy.

“We do see the need to finance programmes related to re-migration [ie. encouraging Latvian expatriates to return], to labour force development, to the co-ordination of improvements in education, for grants to SMEs, for creating jobs etcetera.”

He added: “We want to find more direct ways of stimulating the Latvian economy and its capabilities rather than just relying on the real estate sector and increases in consumption. As part of [the solution to] these temporary resident permit issues, this new fund will be created by these one-off, non-refundable contributions.” The proposal has been given a guarded welcome by the National Alliance, Latvian nationalist coalition partners of Pavluts’ centre-right Reform Party, who believe that the extra payment “may reduce total residency permit requests”.

But the party demanded “more clarity” about the scheme’s implementation.

Introduced in 2010 in an effort to boost foreign investment in Latvia, the residency permit regime was designed to attract foreign cash to bolster Latvia’s recovery through the offer of renewable five-year residence permits in return for property purchases.
The scheme, which has parallels in other investment-hungry European countries, including Portugal, Spain and Ireland, has proved too successful for some immigration-wary Latvians. Residence permits allow purchasers, many of whom are from the CIS and a significant minority of whom are Chinese, rights of residence and free movement throughout the 26 Schengen countries of the EU.

Since it was introduced, the offer has attracted nearly US$1bn worth of foreign investment in real estate and equities, according to Latvia’s Office of Citizenship and Migration Affairs. Property investors must spend a minimum of  LVL50,000 or LVL100,000 (US$95,000-US$191,000), depending on location, to obtain a permit.

Those buying Latvian equities have needed to invest at least LVL25,000.

As part of the negotiations over the 2013 budget, the larger parties in Latvia’s three-party coalition were forced to make concessions to the right-wing National Alliance, ending the LVL50,000 payments for purchases outside the main urban centres.

Changes to the scheme are widely opposed within Latvia’s property sector, which has credited it with restoring their fortunes after the disastrous bursting of the property bubble in 2008-2009.

Aldis Riekstins, head of brokerage for Latio Property, one of the many real estate companies who have praised the scheme, describes the proposed changes as “stupid”.  
He claims that up to 25% of his firm’s transactions are comprised of foreign buyers taking advantage of the residency permits-for-investments scheme to buy Latvian property, and, because the properties involved tend to be high-end, “an even bigger proportion of our income”.

He declined to give a specific figure of the proportion of Latio’s turnover derived from sales to foreigners.

“It has been very important” Riekstins told BQ Baltic. “A lot of investment has come via real estate since 2010.

“There has been a big demand for new property, and more and more foreign buyers have been coming in.”

“Usually it’s Russian clients who are renting quite expensive apartments in Riga and [upmarket seaside resort] Jurmala, they are not just spending [the minimum] €143,000, usually it’s more, it’s between €200,000-300,000.

“But it’s not just benefitting us in the real estate sector, it’s lawyers, it’s notaries, it’s all different kinds of companies providing due diligence, book-keepers, tax and legal services. Then there’s the construction companies who are making all the necessary changes in the apartments, it’s furniture, it’s cars, it’s restaurants - there are a lot of different ways that money is coming into the economy”.

According to Riekstins, on top of the 2000-€3000 per sq m that well-heeled, usually Russian, foreign buyers will pay for their properties, they will pay an additional€
a500-600 per sq m on refurbishing their new properties, in various taxes and also on
physical refurbishment.
This is provided by local labour, which takes the money it earns, Riekstins says and “puts it back into the economy."

“Foreigners are worried about the proposed changes that they read about in the local media, but even if the amount of investment needed will be upgraded, they will not close this programme”.

Riekstins claimed that raising the bar to entry into Latvian property risked restricting its ability to bolster poorer parts of the country:  “We will be cutting the rural areas. From my point of view this is stupid.

“The money will not go to the countryside, the money will just go to Riga and Jurmala, as it always has, not going to the rural areas where the money is needed more”.
“This is just because of next year’s election, it’s the only way to attract ordinary people to vote for the Government.”

Einars Cilinskis, a Latvian nationalist National Alliance member of the Saeima [parliament] told BQ Baltic that his party opposed the residency permit scheme on the grounds that:  
“We oppose immigration and we don’t feel that immigration from Russia and China is something that should be specially stimulated. The second reason is an economic argument. Bringing money in and stimulating the growth of the property sector harms other sectors. We see the possibility of the growth of a new economic bubble that might collapse, and in the meantime might push up property prices.”

“This harms the ability of local citizens to improve their living conditions and it leads them to choose to emigrate to some other country, where it will be cheaper to live”.

Cilinskis however hinted at support for the economic development fund.

“We think that this payment may reduce total residency permit requests because of the extra expense but it is not fully clear how it will be used.”

But he added “Anyway it does not change what we think about the residency permits system as such.”

The budget, containing the new residency permit rules was submitted to the Latvian Saeima after BQ Baltic went to press.