BRICKS & MORTAR: Time to raise a glass again to Baltic real estate?

By bne IntelliNews August 29, 2012

Mike Collier in Riga -

Of all the real estate bubbles to burst in recent years, none did so more spectacularly than the one in the Baltic states of Estonia, Latvia and Lithuania - they popped like a champagne cork and went from fizzy to flat in an instant. The region was drunk on property speculation thanks to banks all too happy to lend plenty for another round at the bar.

When property prices halved in many cases in 2009 alone and the banks woke up screaming into their mirrors at their own stupidity, many people swore never to touch Baltic real estate again. But never is a long time, and the announcement on August 27 that the biggest listing on the Baltic bourses in five years will come from a real estate company looks set to test whether investors have really fallen off the property wagon or were just going through a period of detox.

Certainly, the offering from Estonian firm Pro Kapital Grupp (PKG) looks tempting enough to risk a relapse from all but the most stringent teetotaller. Until September 7 the company is pushing a public offering of its shares - the first such offering on Baltic stock exchanges since 2010 - and if fully subscribed, one that is set to be the largest offering in the region since 2007. It would make PKG the second largest listing on the Baltic bourses after ferry-to-hotels giant Tallink.

PKG is hoping 37m shares worth around €1.90-2.05 each, accounting for 41% of the total share capital, will rake in up to €75m, with trading likely to begin on the Main List of the Nasdaq OMX-operated Tallinn Stock Exchange on September 14. That may not seem like a huge amount, but in context it is significant. According to Colliers International, total real estate investment volume in 2011 in the Baltics was around €600m: Tallinn leading with investment volume of €250m, followed by Riga on €212m and Vilnius with €140m.

The free float cash will be used to finance a trio of new developments: Peterburi road shopping centre (€89m) and Tondi residential quarter (€11m) in Tallinn and (slightly confusingly) the Tallinn street residential project (€29m) in Riga. So does the Baltic binge v.2.0 start here?

Banishing boom and bust

"We do believe in the future of Baltic real estate market, however we do not foresee a new boom. We believe in more gradual development of real estate prices," PKG CEO Paolo Michelozzi tells bne. "While we do have substantial debt headroom, the initial phases of three new developments require investments exceeding €130m and therefore we have decided to do a public offering of shares."

"We are looking to attract various investors - both the ones that already have an exposure to Baltic companies as well as the ones that are currently considering their first new investments into the region. We are also specifically looking to present the opportunity to investors who have an understanding about the real-estate development and can appreciate the specifics of that business," Michelozzi says.

Importantly, PKG does have a track record of delivering on its developments and was smart enough not to get sucked into the tailend of the boom too deeply. Its shopping centres Domina in Riga and Kristiine in Tallinn were landmark developments in every sense when they opened and still compare well with newer arrivals, and the company retains a portfolio of 11 properties worth around €150m, having taken 20 projects to completion since it was founded in 1994.

Indeed, the sale of Kristiine in 2011 for to Finland's Citycon for €105m was the largest single investment deal the Estonian market has ever seen.

That's not to say PKG has been without its problems. This is not the first time the company has been listed: it was listed in Tallinn between 1998 and 2001, before being delisted after it emerged that the company had only partially followed disclosure requirements. Shareholders unanimously found that no damage had been caused and a completely new management board and supervisory council has been appointed since, but chief operating officer Allan Remmelkoor tells bne lessons have been learned. "We are planning to be as open as possible after becoming listed on the stock exchange," Remmelkoor says. "We believe that all the right policies and internal procedures are in place for high-quality information disclosure. We moreover believe that the supervisory council of the company which includes experienced professionals with executive level experience from Finnish listed real estate companies significantly strengthens our corporate governance."

Investors still nervous about getting too intoxicated will take heart from the presence of some cool heads helping with the listing. Bookrunner is the vastly experienced Ivars Bergmanis of LHV Bank, while advisor is Mikus Janvars, one of the smartest young players on the Baltic financial scene with Porta Finance.

In the wider context it can only be hoped that the great Baltic binge of the last decade will not be repeated and that a more mature market will soon be seen sipping fine vintages instead of getting well and truly plastered.

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