Latvia: Overview

RENTAL YIELDS

Last Updated: Jul 18, 2008

Low to average gross rental yields

Gross rental yields for Riga City Centre apartments are low to average ranging from 4.19% to 6.48%. Prices start from €171,520 on 40 sq.m apartments to €1,205,380 for 220 sq.m apartments.

Apartments outside the city centre range from €102,945 to €410,040. Rental yields average slightly better for suburb apartments at 5.09% versus a 4.91% average for city apartments.

The residential market of Riga is characterized by a strong demand and rises in price with a slight drop in the last months. It is also one of the sectors with the most dynamic economical development. Comparing it to such developed cities as Helsinki and Berlin, there is not enough housing at disposal of Riga and this is a potentially positive indicator for residential market of the city.

According to the 2008 Baltic States Real Estate Market Report, there remains high demand for cheaper one and two room apartments in suburbs as well as a rising demand for apartments in newly built projects in suburbs as well.

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TAXES AND COSTS

Last Updated: Sep 17, 2008

Rental income tax is high in Latvia

Effective Tax Rate on Rental Income
Monthly Income	€1,500	€6,000	€12,000
Tax Rate	0%	0%	0%
Click here to see a worked example
Source: Disclaimer

Rental Income: Nonresident property owners who register their economic activities with the tax authorities are liable to pay tax on their rental income at a reduced rate of 15% and can deduct depreciation expense when computing for the taxable income.

Capital Gains: Capital gains are taxed as ordinary income, at 25%.

Inheritance: There is no inheritance tax.

Residents: Residents are taxed on their worldwide income at a flat rate of 25%. However, as of 01 January 2008, business income is taxed at a reduced rate of 15%.

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BUYING GUIDE

Last Updated: Mar 30, 2007

Roundtrip costs are low in Latvia, except for newly-built units

Roundtrip buying costs range from 4% to 7.5%. However, this can be as high as 26% because of the 18% VAT on newly-built properties. The real estate agent’s commission is negotiable from 2% to 5%.

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LANDLORD AND TENANT

Last Updated: Nov 10, 2006

Latvia is pro-landlord

Latvia’s rental market is generally pro-landlord.

Rents: Rents can be freely agreed between landlord and tenant. Rent control exists only on denationalized buildings.

Tenant Security: Contracts for any period of time are possible, and terminate on the expiry of the term, without need for notice. If the tenant withdraws from the lease, he can in theory be made to pay the entire amount of the lease or rental payment.

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ECONOMIC GROWTH

Last Updated: Jan 26, 2009

Economic recession hits Latvia’s economy

Latvia, together with the other Baltic States, has successfully shifted from a centrally planned to a market–oriented economy. Located in northeastern Europe, Latvia has a population of 2.27 million. It was admitted into full-membership in EU in 2004.

The consensus view is that the Latvian economy is in for a ‘hard landing’ after the rapid growth of the past few years. Latvia’s economy shrank by 0.9% in 2008. Economic contraction is expected to persist, with GDP falling by as much as 5% in 2009 and 3% in 2010. This is a dramatic reversal from an average annual GDP growth of 11% from 2005 to 2007 and 7.5% from 2000 to 2004.

During the boom years, low interest rates combined with high GDP growth caused the economy to overheat, together with the housing market. Latvian banks were lending money to consumers at interest rates lower than the inflation rate.

Annual inflation rose from an average of 2.5% between 1999 and 2003, to 6.5% from 2004 to 2006. In 2007, inflation was 10.1%, way beyond the EU limit of 3.2%.

The crisis has been worsened by the impact of the lats’ peg to the euro. The Bank of Latvia’s options in tackling inflation are limited. During the boom years the currency peg to the euro took away the central bank’s ability to tame inflationary pressures by raising interest rates. Hence, the fiscal and monetary authorities had to resort to other measures to bring down inflation. Access to credit was limited; taxes were raised. The government sharply reduced spending, leading to economic contraction.

These measures caused a crisis in the housing market. The market’s problems were then compounded by ballooning interest rates, initially in line with higher euro rates, but which then spiraled higher and higher as the central bank sought to defend the currency.

The government faces a very delicate balancing act. It needs to boost the economy but inflation remains very high. It cannot increase government spending due to the limits on debt and deficit spending set by the ERM II. Financial assistance from other countries will push the current account deficit higher, making the lat more vulnerable to speculative attacks.

Latvia’s current account deficit was at 22.9% of GDP in 2007 before falling to 15% of GDP in 2008, still one of the highest in Europe. As the economic debacle continues, the housing market will continue to slide for the next two to three years.