Buying a Property in Latvia

The Country

Latvia is a relatively small country. At just over 64,500 = square kilometres it is roughly a quarter of the size of the United Kingdom and seven times as large as Cyprus. Latvia is the centre of the t= hree Baltic states and the mi= ddle also in terms of size. Since 1944 = Latvia = was occupied by Russia. Latvia became independent in = 1991, though 30% of the population remain of Russian extraction and over half is native Russian speaking.

The population is 2.3 million.

Latvia has a coastline of only about 530 km.

Riga, the capital city, has roots going back hundreds of years. It is a very attractive city in the Central European tradition. I= t is the largest city in the Baltic s= tates and over half the population of Latvia live within its borders. See below for details.

As you would expect from its location, t= he climate is hardly tropical. T= he summer temperatures are acceptable at about 20° Celsius but the winters= can be seriously cold. See = below for details of the temperature and rainfall patterns.

Latvia's economy recovered we= ll from the 1998 Russian financial crisis as the country gradually reoriented = its exports toward EU countries, lessening Latvia's trade dependency on = Russia.= The majority of companies and banks and most real estate have been privatized.<= span style=3D'mso-spacerun:yes'> Latvia officially joined the = World Trade Organization in February 1999. = EU membership, a top foreign policy goal, came in May 2004. The current account and inte= rnal government deficits remain major concerns, but the government's efforts to increase efficiency in revenue collection may lessen the budget deficit. A growing perception that ma= ny of Latvia'= s banks facilitate illicit activity could damage the country's = vibrant financial sector.

GDP per capita is roughly half that of t= he UK, roughly double that of countries such as Bulgaria or Turkey.

Latvia has seen a steady decl= ine in its population (10% in 10 years), mainly through emigration.<= /p>

The Republic of Latvia is a Parliamentary democracy. It h= as proved keen to embrace the West and, in May 2004, joined both NATO and the European Union.

Getting there

Riga is served by air by Lithuanian airlines, British Airways and Ryanair. A direct return ticket from Lond= on, departing 18th June 2005 is quoted at £230 by the British Airways. Single tickets are available on Ryanair for about £50.

Living in Latvia

As Estonia is a member of the European U= nion any citizen of a member state can enter the country without a visa in the s= ame way as they can enter, say, France or Spain. They can stay for up to 90 days in= any 6 month period. After 90 days t= hey need to obtain any residence document. This is a relatively painless procedure.

The language spoken is Latvian, though R= ussian is also widely spoken as there are many ex Russian settlers. English is also spoken by many peo= ple, particularly in Riga.

As you would expect with a country where= the GDP per capita is about half that of the UK the cost of living is considerably lower though, at least in Riga, more than half the cost.

The currency is the Lat (LVL). See below for an analysis of= the movement in exchange rates over the last few years.

Where are People Buying?

There has been a steady trickle of inter= est in foreigners buying property in Latvia. In the last year or so this has increased significantly, though the numbers in absolute terms are still sma= ll.

The main focus of activity by foreign bu= yers is as follows:

Riga

The main area of interest to the foreign= buyer is, without doubt, Riga. This is a beautiful and cosmopolit= an city though hampered somewhat by its geographical location and (particularly winter) climate. The old town= is in the Central European tradition and, superficially at least, has many similarities with areas of Pra= gue.

It has become a tourist destination, lar= gely because of its thriving nightlife.

It is also the centre of the Latvian eco= nomy.

Most people buying in Riga are buying historic properties in = the centre of the old town but, as these become more expensive and less availab= le, they are also looking to buy in some of the newer developments designed for= the emerging middle classes.

The Coast

The coast of Latvia, whilst fairly short, = has a number of seaside resorts that are blessed with good sandy beaches and a pleasant if foolish summer climate. These are not yet greatly in favour with the investor from outside t= he region and the weather in them is not such as to make them attractive to a person seeking their own holiday accommodation.

What is available and at what price?

There is always a huge range of prices i= n any property market. This one is = no exception. You need to rememb= er that, by and large, you get what you pay for. That is to say, a more expensive property is usually more expensive because it has some special quality abou= t it and, conversely, a very cheap property is usually very cheap because it has= a very poor location, it is built to a very low standard, it is in a bad stat= e of repair - or all three!

Prices have been rising rapidly. Some of our clients have seen grow= th of over 30% in the last year, though 20% would probably be more typical in Riga.

The table below attempts to show some ge= neral indication of prices as at January 2005.

Place & T= ype of Property	Low £	Mid £	High £
Riga – Centre - 1 bedroom apartment – 60m2		£67,000	£100,000
Riga – Centre - 2 bedroom apartment – 100m2		£80,000	£120,000
Riga – Suburbs - 3 bedroom villa – 175m2			£176,000
Countryside – Cottage – 45= m2	£27,000
Beach (Jurmala) – 3 bedroom house in central location			£170,000

Why are People Buying? – Latvia as a Place to Invest

Investment in Latvia has been driven by a n= umber of factors. Firstly, the econ= omy has been doing well. This has generated local wealth and that has generated demand for property. That demand looks like pressing pr= ices ever higher. Secondly, the La= tvian government appears to have brought inflation (previously running at nearly 1000% per annum) under control to the extent that it is now less than 3% per annum. The boom in the foreig= ners looking to Latvia as a place to invest in real estate coincided with that control of inflation. Thirdly, there has= been a realisation that of all of the Baltic states and Baltic capital cities, Latvia has the most cosmopolitan city, the one with the strongest Russian links and — thus — possibly the greatest potential for growth of the back= of an expanding Russian economy.

Some investors are also seeking to tap i= nto the increasing popularity of R= iga as a short duration holiday destination.&n= bsp; Since the arrival of Ryanair and cheap f= lights the growth in this market has been startling.

Property prices in <= st1:country-region w:st=3D"on">Latvia,= and in particular in Riga= , have been rising steadily at 20% or so per annum and look likely to continue to rise for a few years to come.

The Climate as a Factor in Investment

Most British people buying abroad are mo= tivated, in large measure, by the thought of a better climate. What is "better" depends= on your personal perspective. &nbs= p;

If the property is for retirement the bu= yers will want a climate that is acceptable all year round. If the property is a holiday home = the buyers will be looking for a climate that appeals to them at the time is wh= en they are most likely to use the property.&= nbsp; If the property is for investment and for letting to the holidaymaker they will be looking for a long rental season.

Maximum Temperature - Riga=

Minimum Temperature - Riga=

Rainfall - Riga<= /span>

Sunshine - Riga<= /span>

Growth of Gross Domestic Product as a Factor in Investment

A growing economy will produce more in t= he way of growth in the value of real estate than a stagnant or declining economy. The gross domestic p= roduct is one way of measuring that growth.

The Exchange Rate as a Factor in Investment

For us, one of the key indicators of any country where investment is likely to prove successful is either a stable exchange rate against other major currencies or a rate that is slowly impro= ving against other major currencies.

A common pattern for emerging market cou= ntries is that when they first get their independence the exchange-rate sinks rapi= dly, improves slowly and then stabilises or, if the country is doing well, slowly gains ground.

If the exchange rate is rising against t= he pound or the dollar the effect is that, in addition to benefiting from any increase in the value of the property you have bought, you also benefit from the increase in value of the currency.&nbs= p; The reverse is, of course, also true.

Tourism as a Factor in Investment

Estate Agents & Property Finders

Estate agents catering to the internatio= nal market are new. The market it= self has only really existed in any volume for the last two years, so you could = not expect anything else. Of cour= se, estate agency as a whole is relatively new in Latvia, dating really from Latvia's independence from the communist world which started in 1990.<= /p>

There are some good, reliable Latvia = and estate agents. There are also= some highly disreputable ones. The= re are also good, reliable overseas agents operating in Latvia. There are, unfortunately, also a l= arge number of people who have seen the explosion in the volume of sales and who have decided to get into the business for the quick buck. Many of them know nothing about ei= ther Latvia = or its real estate market. They are = simply salesmen.

You are much better dealing with a reput= able agent. Seek recommendations.<= /span>

Be wary of the estate agent who says tha= t his fees include his services in checking out the title of the property on your behalf. Some local agents off= er this service. It is dangerous= . Many agents, particularly the fore= ign agents, know little or nothing about the intricacies of Latvia title. They are not lawyers.<= span style=3D'mso-spacerun:yes'> They will understand nothing of the interaction between the Latvian and the English legal system. Even if their intentions are entir= ely above board and honest, will you really have the confidence that they will alert you to any problems when, if you do not proceed, they will lose their commission? Remember that the= Latvian estate agent's commission is typically five per cent and, in the case of a foreign agent, often 15% of the price of the property. That is several years' salary for = the average Latvian.

As a preliminary step, check out all of = the websites you can find to get an idea for the prices and types of property available. Remember that not = every agent will sell the same property at the same price.

If you are looking for property in one o= f the main skiing areas or on the Black Sea co= ast the combination of estate agents and sales direct from developers should fi= nd what you are looking for. On = the other hand, if you are looking for a 'different' property, possibly one inl= and or a project for restoration, you may well find it useful to recruit the services of a local property finding agent. See the main section of the book f= or an explanation of their function.

Mortgages

At the time of writing, mortgages to buy property in Latvia are a relatively new phenomenon. They are, however, increasingly available from banks and from develo= pers themselves. They are availabl= e for both houses and apartments.

Over the last year interest rates in Latvia = have fallen. They are likely to fa= ll further towards the European Union average as Latvia prepares for entry int= o the Union in 2007.&nbs= p; Thus it is likely that anyone contemplating taking a mortgage on a property still in the course of construction will be paying an interest rate lower than that currently available. Of course, this cannot be guaranteed.

Low to value ratios of up to 70% are available. = Normal interest rates are about 4.5%. The maximum term is usually 15 – 20 years. Mortgages are only available on a repayment basis (i.e. where both capital and interest are repaid by the end= of the mortgage term) and they must normally be paid off by the time you are 70. Obviously, the precise offerings vary from bank to bank.

Because mortgages are new the rules are evolving rapidly. Hardly a we= ek goes by without some new product or variation appearing in the marketplace. It is sensible t= o get independent advice about what is available and what might suit you best.

You need to make sure that the funds wil= l be available in time for the signing of the final contract. If you are unable to pay the money= at that stage you will lose the deposit that you have paid.

See the main section of this book as to whether the Latvia mortgage or a mortgage in the UK is more likely to meet your needs.

The Process of Buying

Legal advice is essential unless you tak= e the view that the amount you are investing is so small you can afford to write = it off.

Freedom to Buy

You can buy buildings or apartments in <= st1:country-region w:st=3D"on">Latvia.= Buying land requires permission fr= om the local municipality.

Alternatively, you can choose to buy the property (whether land, a building or an apartment) via a Latvian company.<= span style=3D'mso-spacerun:yes'> This has a number of tax and other consequences. For some people= it can significantly reduce their tax liabilities but for other people it can increase them substantially. = Take advice.

Initial Steps

Once you have found a property that you = want to party you will be expected to sign some form of contract. This will generally either be a Reservation Contract or a Preliminary Purchase Contract. See the main section of the book f= or an explanation of these concepts.

Note that the title Preliminary Purchase Contract is misleading. It is actually a full binding purchase contract.

We recommend that, wherever possible, you insist on signing a Reservation Contract rather than a Preliminary Purchase Contract at this stage if at all possible.

Searches and Enquiries

Once you have signed a Reservation Contr= act your lawyer should make various enquiries.= He should check that the contract is fair, that the seller has good title and the right to sell to you, that the area is zoned for residential building and that the building being undertaken enjoys all of the necessary planning and building consents. Depending on the circumstances of your case there could well be other inquiries that also need to be made.

In Latvia it is quite common for= work to be started, illegally, before all of these steps are in place. It is also quite common for proper= ty to have a title that is defective. Sometimes these problems are fatal and should put you off having any involvement in the purchase. = On other occasions the risks are minimal and, provided you go into the transac= tion with your eyes open, might not put you off buying if you really like the property.

The Main Dangers

The main problem tha= t we come across in Latvia are defective title and defective planning consents. As I have said elsewhere in = this book, this is common in the former Eastern Bloc countries because the owner= ship of private property was not an important issue for a very long period of ti= me.

There have also been quite a lot of prop= erty disputes, particularly where multiple members of a family are each claiming= to be the genuine owners of a valuable city centre property that has passed do= wn through the family for several generations.

Much historic property in the centre of = Riga remains in v= ery poor condition, though other properties have been renovated to a high standard.<= span style=3D'mso-spacerun:yes'> Some of the properties have not be= en touched for over 60 years. Do= not underestimate the cost and complexity of rectifying these problems.<= /span>

Your lawyer will report back to you as t= o the status of the property you are thinking of buying and any problems associat= ed with it.

The Contract

Once your lawyer has checked out the pro= perty and found that everything is in order you are ready to sign the Preliminary Purchase Contract. This commi= ts you and the seller to signing the full contract transferring ownership shortly afterwards or, if the property is still in construction, once the property = has been fully built.

The Preliminary Purchase Contract contai= ns most of the clauses you would expect to see in an English contract. These will include a description o= f the property, a statement of the legal title to the property, the price to be p= aid, how it is to be paid, the deadline for payment and any other deadlines applicable, what should happen in the event of breach of contract etc. Many Latvian contracts are badly drafted. This is because ther= e is really no history in Latvia of drafting contracts for the sale of land. The problem is exacerbated by the = fact that many contracts are drafted in English, which is clearly not the first language of the person doing the drafting.= As a result they are unclear or muddled. Specifications tend to be very "thin". The contrac= ts tend to be lacking in detail as to what happens if anything goes wrong.

At this point you will normally pay a de= posit 10% of the price of the property. In the case of a property under construction ("off plan") you will s= tart to make stage payments. The s= ize and number of these payments will vary from property to property. A typical scheme would provide for= an initial payment of 30% followed by two further payments of 30% as construct= ion progressed and followed by a final payment of 10% upon delivery. Occasionally schemes are found whe= re there is only one preliminary payment of, say, 30% with the balance being p= aid on delivery. This is obviousl= y very useful if you are taking a mortgage.

Signing the Contract of Transfer of Title

Once you are ready to take delivery of t= he house you will sign the Final Purchase Contract. This may be signed in front of a n= otary public, in the way described in the main section of this book, or you may simply present the contract signed by the parties to the Latvian Land Regis= try. It is at this point that the balance of the money is paid across to the seller.

You do not need to be present in Latvia = to sign this document as your lawyer can prepare a Power of Attorney under which you can appoint somebody else to sign on your behalf. This is a sensible thing to do as it saves the need for you to go to Latvia, often at short notice, to sign the final title.

Registration of Title

Once you have paid the balance of the pr= ice the seller will authorise you to register your ownership of the property in= the local title register. Once th= is has been done you -- or the local Latvian company that you have set up to own t= he property -- will be the full legal owner of the property in much the same w= ay as you would be in B= ritain.

It is likely to take from two to six wee= ks for the registered title deeds to be made available to you. How long will depend how busy the registry is in the place where you are buying. With the current explosion of dema= nd these periods are getting longer.

The Expenses of Buying

The main expenses of buying are as follo= ws:

Tax -- the equivalent of stamp duty -- 2= % of the price.

Notary's fees -- these will vary from ca= se to case but will typically not exceed £300.

Legal fees -- these will depend upon whe= ther you use a Latvian or an English lawyer.&nb= sp; The English lawyer's fees will inevitably be higher but you will be = able to sue them if they get it wrong and they will be able to give you lots of advice, particularly concerning the vital issues of who should own the prop= erty to minimise your tax and other problems, which the local Latvian lawyer wou= ld not be able to help you with. They will range from about £500 if you use a local Latvian lawyer to £1500 if you use a specialist English lawyer.

The fees of any esta= te agency or broker that you had instructed.

Fees to set up a com= pany, if you wish to do this. T= his is likely to cost about £500.

Conversions & Renovations

There are many properties on sale in Latvia, particularly in the rural areas, that need huge amounts of work. As yet there= is not much of a market for these properties.=

There are also properties requiring lots= of work in Riga.

The problems associated with the renovat= ion project can be huge. Not leas= t will be your probable inability to speak Latvian. If you are contemplating a renovat= ion project it is vital to get good advice right at the outset.

Building costs are low. A full restoration project is like= ly to cost about £250 per square metre.&nb= sp;

Skilled workers are in short supply as t= here is a great demand for their services at present time both for repair work a= nd for the large amount of new property that is under construction. This is despite the fact that, officially, Latvia has an unemployment rate of nearly 10%.

As is the case with many countries, it i= s very easy to find that once you have finished your project the cost of buying the property and the work you have undertaken is more than the value of the property as it stands. Keep c= ontrol

Renting out your Property

If you are renting out your property you should make sure that you use a proper rental contract. Your lawyer will be able to supply= you with a draft that you can change as necessary.

Renting on short term lets to tourists produces the least problems in terms of what you can do if the tenant does = not pay the rent or refuses to leave. &nb= sp; The law in La= tvia presents a reasonable balance between the interests of the landlord and the interests of the tenant. In general, it is not difficult to remove an unsuitable tenant.<= /p>

At the moment, we would expect to see a = net rental yield (i.e. net of all expenses apart from your finance costs and personal taxation) of about 5% on the coast and perhaps= 6 - 7% in Riga.&= nbsp; In the longer term I expect to see demand increase but also supply to increase. These may well canc= el each other out leaving yields more or less as they stand today. The one factor that it is likely to spoil this picture is the rapidly rising price of property. A person who bought an apartment f= or £100,000 and who rented out for £250 per week will be much happ= ier than the same person who spent £150,000 on the same property and will also rented out for £250 per week.&n= bsp; When thinking of your rental yield we always suggest that you work it out on the basis of current value, not purchase value as that will allow yo= u to compare the performance of your investment with opportunities elsewhere.

Visas and Residence Permits

Latvia is part of the European Union wit= h the result that any citizen of an EU country can visit with no more formality t= han you would expect when visiting, say, France or Spain. The visit can last for up to 90 da= ys in any six-month period. If you = wish to stay for longer than that you will have to apply for residence papers. These are not difficult to obtain.=

Taxes for Non-Resident Property Owners

Local Property Taxes

These are the equivalent of your English Council Tax or our old rates. Local property taxes in Latvia are very low. These fees are calculated by reference to the official value of the property, which is usu= ally somewhat different from (much less than) the real commercial value of the property. The local property = taxes are 1.5% of the assessed value of the property.

Management Charges

Management charges are not taxes but thi= s is a convenient point to think about them. If you live in an apartment complex or in a group of buildings that share a common facility (such as a swimming pool) you will have to pay a management charge to cover the cost of providing those common facilities. In the case of a block of apartmen= ts, those facilities will include the cleaning and electricity for the general areas, any gardening, the maintenance of pools, lifts, car parking areas et= c. Obviously the cost of the management charge will vary dramatically dependent upon the quality and number of facilities provided for you. £200 per year provides a lot= of facilities.

Income Taxes

A foreign investor can invest in properties in Latvia either directly, in hi= s own name, or through a local company.

Rental income – Company Owned Pr= operty

The basis of the taxable income of a company, investing in Latvian real propert= y is the gross income from the property less any tax-deductible expenses and depreciation. These expenses include any management costs, repairs, maintenance, insurance etc and interest on any loans used to buy the proper= ty. Depreciation is at a rate of 4% per annum. Real estate acquired f= or purpose of re-selling it is considered as "investment property" a= nd is non eligible for tax depreciation. It is also subject to annual revaluation to current market value.

The corporate tax rate is a flat rate of 15%. <= /p>

Rental income – Individually own= ed apartment

For non-residents, at present, there is = a 25% tax rate. This tax can = be set off against your UK<= /st1:place> tax liabilities on the same income.

Capital Gains Taxes

For an individual, these are treated as = part of your income. The gam= e is tax-free for a private individual who has owned a residential property for a period of at least one year.

For a company, the game is completed as = part of its income for tax purposes.

For a non resident foreign company that = sells land or buildings in Latvia there is a deduction of 2% from the price of the property that must be file= d as a payment of tax.

Wealth Taxes

None

Taxes for Resident Foreigners

This is beyond the scope of this book.

Double Taxation Treaty

The Double Taxation Treaty determines wh= at happens if, under local tax law and UK tax law, you are deemed to= be liable to pay tax in both countries.

The general principle behind all Double Taxation Treaties is that it is unfair that you have to pay the same tax tw= ice, so the rules are designed to help the two countries decide which of them sh= ould get what.

The treaties are long and complex. Seek advice as to their effe= ct in your case.