Buying a Property in Lithuania

The Country

Lithuania is another relative= ly small country, though the largest of the Baltic states in terms of area. At just over 65,000 square kilomet= res it is roughly a quarter of the size of the United Kingdom and seven time= s as large as Cyprus. Lithuania is the most souther= ly of the three Baltic states. Since 1940 Lithuania was occupied by Russia.= Lithuania declared independen= ce in 1990 (the first of the Baltic states to do so) but this= was nor recognised until 1991.

The population is the largest in the Baltic states at 3.5 mil= lion.

Lithuania has a coastline of = only about 100 km.

Most of = Lithuania comprises farm land= .

Vilnius, the capital city, has roots going back hundreds of years. It is a very attractive historic c= ity – probably the prettiest in the Baltic states – in the Central European tradition. It is also a modern, sophisticated city. See below for mor= e 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.

Lithuania, the Baltic state t= hat has conducted the most trade with Russia, has slowly rebounded = from the 1998 Russian financial crisis. Unemployment dropped from 11% in 2003 to= 8% in 2004. Growing domestic consumption and increased investment have further= ed recovery. Trade has been increasingly oriented toward the West. Lithuania gained membership in the World Trade Organization in May 2004. Privatization of the large, state-owned utilities, particularly in the energy sector, is nearing completion. Overall, more than 80% of enterprises have been privatized. Foreign government and business su= pport have helped in the transition from the old command economy to a market econ= omy.

Economic growth is, arguably, the highes= t in Europe (8.9% in 2003, 6.6% in 2004).<= /p>

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

Lithuania has seen a steady d= ecline in its population (7% in 10 years), mainly through emigration.

The Republic of Lithuania 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

Vilnius is served by air by Lithuanian airlines and British Airways. A direct return ticket from London, departing= 18^th June 2005<= /st1:date> is quoted at £180 by the British Airways.

Living in Lithuania

As Lithuania is a member of the European= Union 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 Lithuanian, though Russian is also widely spoken.

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 Lita (LTL). See below for an analysis of the movement in exchange rates over the last few years.<= /span>

Where are People Buying?

The only real place where there is any activities by the foreign buyer is in Vilnius, the capi= tal city.

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 20% in the last year.

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

Place & T= ype of Property	Low £	Mid £	High £
Vilnius – Historic – 1 bedroom apartment – 60m2		£45,000	£58,000
Vilnius – Historic – 2 bedroom apartment – 100m2<= /p>		£80,000	£130,000
Vilnius – Historic – 2 bedroom apartment – 156m2<= /p>			£250,000
Vilnius - Suburb – 3 bedroom villa – 160m2			£350,000

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

The driving force behind the explosion of investment in Lithua= nia (and, in particular, of Vilniu= s) has been the huge success of the local economy coupled with the defeat of t= he rampant inflation that characterised the immediate post-Soviet era. This, together with the belief that entry to the European Union would increase prices and opportunities has led= to the high levels of growth seen over the last few years.

Some of the investors are professional investors. Increasingly, howe= ver, we see the amateur investor who is enthused by the potential returns and who also considers only as an attractive place to have a pied a terre for occasional holiday= use.

The Climate as a Factor in Investment

Most British people buying abroad are motivated, 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 - Vilnius

Minimum Temperature - Vilnius

Rainfall - Vilnius

Sunshine - Vilnius

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 Lithuania, dating really from= Lithuania's independence from the communist world which started in 1990.<= /p>

There are some good, reliable Lithuania and estate agents. There are also= some highly disreputable ones. The= re are also good, reliable overseas agents operating in Lithuania. 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 Lithuania 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 Lithuania title. They are not lawyers.<= span style=3D'mso-spacerun:yes'> They will understand nothing of the interaction between the Lithuanian 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= Lithuanian 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 Lithuanian.

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 Lithuani= a are only available for rersidents of Lithuania.

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 freely buy land, buildings or apartments in Lithua= nia.

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 Lithuania 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 Lithu= ania are defective title and defective planning consents. This is true of most of the old Ea= stern Bloc countries.

Many older properties, whilst very attra= ctive, are also in a very poor state of repair.&n= bsp; You should not underestimate the cost and complexity of restoring th= ese.

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 Lithuanian contracts are badly drafted. This is because ther= e is really no history in Lithuania 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 is signed in front of a notary public, in the way described in the main section of this book. It is at this point that the balan= ce of the money is paid across to the seller.

You do not need to be present in Lithuania to sign this document as your lawyer can prepare a Power of Attorney under whi= ch 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 Lithuania, 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 Lithuanian company that you have set up to own the property -- will be the full legal owner of the property in much the sa= me way as you would be in Britain.

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 R= 11; varies – say, 1% of the price.

Estate agents' fees, if these are not pa= id by the seller, -- typically 5% of the price if you are using a local Lithuanian agent.

Notary's fees -- these will vary from ca= se to case but will typically not exceed £100.

Legal fees -- these will depend upon whe= ther you use a Lithuanian or an English lawyer.= 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 Lithuanian lawyer = would not be able to help you with. They will range from about £350 if you use a local Lithuanian lawyer to £1500 if you use a specialist English lawyer.

Fees to set up a company -- if you are b= uying a piece of land or a house on a piece of land (but not an apartment) you wi= ll need to set up a Lithuanian company. This is likely to cost £500.

Conversions & Renovations

There are many properties on sale in Lithuania, particularly in the rural areas, that need huge amounts of work. As yet there= is not much of a market for these properties.= The problems associated with the renovation project can be huge. Not least will be your probable inability to speak Lithuanian. If you are contemplating a renovation project it is vital to get good advice r= ight at the outset.

There are also such properties in Vilnius.

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

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. In general terms, landlord and tenant law in the Baltic states it is a fair balance between= the interests of the landlord and the interests of that and so you do not have = to be fearful about tenants becoming immovable even if, for example, they do n= ot pay the rent.

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% to 8% in Vilnius. In the longer term I expect to see demand increase but also supply to increase. These may well cancel each other o= ut 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 £130,000 and who rented out for £250 per week will be much happ= ier than the same person who spent £200,000 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

Lithuania is a member of the European Union. As a result, = any citizen of a member state of the European Union can travel freely to Lithuania in the same way that they can travel, for example, to France or Spain. If they wish to remain in the coun= try for more than 90 days they should seek 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 Lithuania are very low. They are assess= ed on the basis of the official tax value of your property which, in itself, is normally only about half the true value of your property. The normal rate of local property = tax is 1% of the official value.

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 Lithuania either directly, in= his own name, or through a local company.

Rental income – Company owned pr= operty

The basis of the taxable income of a company, investing in Lithuanian real prop= erty 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.

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

Rental income – Individually own= ed property

For non-residents, tax is payable on the income you derive in Lithuania or from real estate located in Lithuania. The rate of tax depends upon the n= ature of the income. Tax on rental = income is at 20%. This can be set off against your UK tax liabilities on the same income.

Capital Gains Taxes

These are treated as part of your income= . For a non resident there is = taxed at 10% on the capital gain arising from the sale all real estate, however l= ong that real estate has been owned for. For a resident of the game is tax-free provided = only one piece of real estate is sold in the year.

Wealth Taxes

None

Inheritance Taxes

There is a general inheritance or gift tax. For most people it will = be 10%. Gifts as between parents= and children or spouses are exempt from tax.

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.