East Capital mall deal brings Lithuanian market into focus

The G09 Shopping Centre, recently bought by a Lithuanian investment manager, lies in what could be one of the most rebranded streets in real estate.

Which European thoroughfare connects the 19th-century Polish poet Adama Mickiewicza with Adolf Hitler, Joseph Stalin and Vladimir Lenin? The answer is Gedimino Avenue, in the heart of the Lithuanian capital, Vilnius (pictured), and now home to most of the country’s political and financial institutions

Following construction in 1836, the road was christened St George Avenue – Lithuania was a predominantly Catholic state at the time – remaining so until 1922 when the country fell under Polish rule and it was renamed in honor of Mickiewicza. Almost 20 years would pass until the Nazi occupation of Lithuania began in 1941, when it became Adolf Hitler Street. By 1945 Russia had retaken Lithuania and Joseph Stalin named the road after himself. After the war, and with the country under Soviet Union rule, it became Lenin Avenue, a title it retained until the fall of communism in 1990. Since then it has been named after Gediminas, the 14th-century grand duke of Lithuania.

Back to the present and last month one of Gedimino Avenue’s most famous properties, the G09 Shopping Centre, was sold by a real estate fund managed by Stockholm-based investment manager East Capital. The shopping center was initially acquired by the firm’s East Capital Baltic Property Fund II in 2012 before being extensively redeveloped and tenants such as H&M, Rimi and Studio 9 were brought in.

The asset’s price was not disclosed by either East Capital or the buyer, Vilnius-based real estate firm Lords LB Asset Management, but PERE has learned the deal represented one of Lithuania’s largest transactions this year, placing the price at around €30 million. While the price may have been on the smaller side in the context of European retail sales, the firm generated an internal rate of return above 15 percent, in line with its value-add approach to investing in the Baltics.

Since ECBPF II launched five years ago, it has produced returns of 58 percent for investors. Yet, as East Capital announced recently, if you factor in GO9’s return, the fund’s IRR reaches 71 percent. Lords LB Asset Management used capital from its own real estate vehicle, Lords LB Baltic Fund IV, which it launched in 2015. Since raising an initial €75 million from investors, the firm has acquired around €125 million of assets in other Baltic capitals such as Tallinn, Estonia. Fund IV is reportedly targeting a return of around 12 percent, similar to its recently fully-divested debut fund, which last year delivered 11 percent. Manfredas Darguzis, Fund IV’s manager, said the asset perfectly fit the vehicle’s strategy, which focuses on prime, centrally-located assets in Baltic capital cities, with potential for growth in the long-term.

Contrasting factors underpin the Lithuanian real estate market at the moment. Growth in the country has been predicted to reach 2.9 percent and 3.1 percent this year and next, respectively. This is comfortably ahead of the EU average of 1.7 percent for 2017 and 1.8 percent for next year. Yields in Vilnius, which are also at around 7 percent at present, again outpace its fellow Baltic capitals, as well as major cities in the Nordics. But, critics of the market suggest it has been hampered by a lack of supply of quality stock, deterring investment at scale.

Incidentally, the GO9 Shopping Centre’s back story is no less convoluted than the road it lies on. Built in 1893, the property initially served as a cinema and nightclub, before being used as a wine cellar and then the headquarters of the Lithuanian Communist Party. In 2006, it was transformed by Lithuanian architects Irma Kasetaite and Antanas Gvildys into its current neo-baroque guise.