“Real estate developers have always complained about the low level of lending in Latvia. It is difficult to find another country where it is so low,” said Kārlis Cerbulis, head of the investment fund group NCH Riga office, in an interview with Delfi Bizness, adding that in the current economic situation, this is to our advantage.

Delfi Bizness met with him to continue to inform domestic real estate market participants, clarify the current mood of investors, and get an assessment of the economic situation, including whether a crisis is looming or not.

He does not hide that due to the war and other circumstances, Eastern Europe no longer seems as attractive to American investors as it once was.

Cerbulis formerly managed the Riga Stock Exchange but joined the NCH team in 1996. He also participates in the Association of Economists and is an angel investor.

Many young Delfi readers may not know what NCH is. Please briefly remind us of the most important areas in which you work.

NCH ​​has been in Latvia since the early 1990s; I joined in the spring of 1996 around the same time many others in the team joined. We are long-timers. To date, NCH has probably been one of the largest American-based investors in Latvia, but it is very likely that that is no longer the case. Hopefully, other bigger investors have arrived now.

NCH is fund group. The main investors are “institutional investors” – pension funds, university endowments and the like – with a long-term perspective and a need for relatively high returns.

In the 1990s, Eastern Europe, especially the Baltic states, lived their own lives that were not directly connected to the world economy. We were very early investors. For example, there was the banking crisis of 1995-1996 – we bought Latvian government securities. We were often the only ones participating in the auctions. I remember the return started at 42% or so, but inflation was much lower. Within half a year, however, the return fell – it was 19%, then below 10% and even lower. The situation in the country changed very quickly.

We have experienced a lot, invested a lot. The most visible investments have been, for example, in GroGlass, a high-tech company producing glass coatings. We sold it four years ago. We were a 50% investor in the Riga Plaza shopping centre.

Our most recent large project in Latvia is the Mežaparks project (Mežaparka residences) – 31 hectares. It was a post-Soviet military facility, an equipment repair factory surrounded by a farm and scrap metal. We have rejuvenated this location, and now it is part of Mežaparks.

Has the investment focus changed over time? If so, why?

It changed all the time; at first – in almost anything. We participated in privatisation and in the growth of companies; for example, we were the first major private investors (financial investors from the outside) in AAS Balta. Then, at some point, the focus shifted very much to real estate.

In 2007-2008, large agricultural funds were created in America, which could be invested in agriculture. In Latvia, we have invested in only one project in this sector – a joint project with the Danes in the pig farming business, Gaiženi.

In general, NCH has invested in agriculture throughout Eastern Europe, including Ukraine – several hundreds of thousands of hectares, which it also manages. And there are also large areas in Russia. You can imagine the challenges.

The Ukrainians are go-getters and continue to work. Some are based in our office. Fortunately, most of the farms were not in the war zone; about 20% were but now these areas have been liberated. Losses have been in the tens of millions of dollars. And the biggest loss is that it is very difficult to export grain. No matter how high the price of grain, if it cannot be exported, it has no value. I think they will be fine in the end. This year and the next must be endured.

The Russian situation is a political decision.

Scandinavians are known more than Americans for investing in rural territories, forests, and agriculture.

Yes, I don’t know of any Americans besides us. Forests are acquired through Scandinavian pension funds. I would have hoped that the locals would wake up sooner and realise that there is investment there. Thank God, they have started creating funds for forest investment now.

The train has not yet left the station, but the time to do so was probably a decade or more ago.

NCH still ​​appears to have a large real estate portfolio.

I’d say medium. We have some strategic facilities. This (Mežaparka residences) is our largest project. We have plots of land near the airport and a strategically very important place in Salaspils. We bought the land there a long time ago, even before anyone knew about Rail Baltica; hopefully, the project will move forward. Then we, or someone else, will be able to develop it as a serious modern logistics park. We have land in Dreiliņi and also in Olaine.

Currently, Dreiliņi is a “hot” area where many people want to develop something.

We were very early investors there. When we used to go there to look at and buy properties. We also walked around the area where the city later offered apartments. Where and when will someone do something here?! Look what is happening there now!

We were too early in some places, especially after the last crisis. In 2008-2009 we invested quite a lot because our experience showed that Latvia recovers more quickly after crises. We had the approach that the right moment to invest is shortly after a crisis when others are afraid to do so. Unfortunately, Latvia has only just recovered in the field of real estate. We had confidence then, but we had to wait much longer than we had planned.

What other areas seem promising to invest now?

Personally, I invest in startups. The risk is extremely high. There are institutional investors who invest directly in startups because average rates of return have been higher over the past twenty years. If you don’t invest there, you can lose because they could potentially grow significantly and rapidly. The problem with this industry is that there are very successful projects, but many will “die” or barely be able to return the investment. You must persevere, and you must not invest too much of your portfolio in this sector.

What else is promising? I fear all the time (for over 15 years now) about our demographic situation. However, it seems that Riga is still developing, and regional cities have also recovered quite well. They even lack living space – this is a positive thing for entrepreneurs.

But the biggest risk is the falling population. In Riga and around Riga and perhaps in the main regional cities, modern residential areas are a good investment. This will be in demand.

Is it better to invest here or outside of Latvia – everyone must evaluate that for themselves. No doubt, I like to invest where I can track progress myself.

You recently created a new mutual fund. Does this mean a move away from development projects to investment in ready-made buildings?

This is the first fund in NCH history to be established outside of American governance. It is an American fund, but we locals created it here, partly because of normalisation. This can also be applied to money rates (previously they were higher in loans, expected returns, government bonds, etc.).

This is not the most expensive place to attract capital; we still have significant accumulated capital, and we have a good reputation. We are used to local risks, but now – especially with the war, the many unknowns, the energy crisis this year and next year – Eastern Europe does not seem so attractive to America anymore. In addition, good investment returns can be expected in America now. If there is a dollar-based fund in Europe, there is also the Forex risk (currency fluctuations). And in the last half year, it will be dramatically negative for investors. If there is a euro fund that invests in euro projects, this risk no longer exists; investors do not require an additional return when taking the risk. This is why New York supported our initiative. This is a trial.

We talked about it with other investors a year ago, then inflation began, and then the war. And we are investing our (NCH and local management) funds, but we hope to return to the original idea of ​​approaching and attracting other investors in the next six months.

Fund activities have taken place in smaller volumes, more slowly than we thought a year ago, but they are happening.

Who can invest in this fund?

We will include only the largest investors as we have never been able to accept smaller investors in NCH history. These could be pension funds, very wealthy people (high net-worth individuals). We simply do not have the administrative capacity to manage smaller investors. And such funds are non-liquid, not suitable for smaller investors, because we do not promise that we can return the money at any given time. We will quite them only when the projects are complete.

The domestic market is small. What is the competition for investment opportunities? It seems that there are not many of them.

This is a global problem. It is also why there is such inflation: a lot of money was “printed” after the 2008-2009 crisis, and especially during the Covid-19 pandemic. At one point, that money began to circulate. Demand increases and inflation occurs.

And what about investors – are there many?

There can never be too many investors, especially in the Baltic states. We have approached quite a few, and almost all of them have shown conditional interest. But inflation rose, the war started, and it was not the right time to continue these conversations. I will know better in a year. We don’t need many investors, we just need a few.

Is it the right time to invest in real estate?

I’ll let you know in five years.

Is inflation the reason it is not the right time to reduce funds in this way?

That’s the problem with inflation – people don’t realise the cost of not investing. Will real estate save you from the effects of inflation? Partially, but it can’t be felt yet. But, oddly enough, we understand perfectly why because interest rates are rising at the same time. As they increase, the value of the property theoretically falls. However, if construction prices rise, so does the replacement value.

You mentioned forests. Should we invest in them?

I have always personally liked forests. I have invested in them, and NCH invested in forests in the past, but the new fund doesn’t plan for such investments.

If we talk about individuals, a part of their investment portfolio could be forests – it would be a good investment. I would even say, invest in a forest that you can walk through rather than in a forest fund.

You mentioned negative things – war, high inflation. Are we facing a crisis?

The crisis currently affects many companies on an individual level, but especially poorer people. Inflation hits those who have less first, it’s a cruel truth.

Is there a general crisis? do the statistics show it? Not really. The economy is holding up, and we saw that it was holding up last winter as well. Even restaurants have not completely disappeared.

However, we don’t really know how it will be this winter.

Did we know a year ago what it would be like now? A year ago, I was much more concerned. I knew that Russia would invade Ukraine, that it would be very bad. But my prediction that Ukraine could be overrun in a few weeks did not come true. So, my predictions are not 100% sure, thank God.

We never know how it will be, especially in Eastern Europe and particularly in the Baltics – we are always on the eve of some kind of crisis. We do not know how soon and how long the “eve” will be – long as in winter or just a couple of hours as in summer.

And historically there have always been and always will be crises. There will be major changes that are hard to predict now. We really don’t know what the winter will be like, what is happening with energy resources. What is important is not only what will happen in Latvia, but in all Europe. If resources start to run out, will it cause unrest, demand reduction of support for Ukraine?

I am pleasantly surprised that resource prices have “calmed down” now. Gas reserves in Germany are at 99%. We really don’t know how it is in Latvia because one person says one thing, another says another. If a big country begins to lack resources, it will “absorb” everything.

Overall, the war situation is much better than it could have been, and the energy situation is also better than it could have been. Inflation and rising interest rates will undoubtedly lead to some sort of recession. How deep it will be, I cannot say.

One good thing about Latvia, which I always complained about, and which all real estate developers complained about, is that we have very low lending levels. It is difficult to find another country with such a low level. Loans with variable rates, in particular, have become much more expensive. Many people have loans, but the country’s overall scores are low. The country itself has borrowed at an average level, but the corporate segment and individuals in general have not borrowed much.

Ralfs Jansons, head of the NCH real estate development company “Domuss”, joins the conversation:

I looked at how a crisis is described: a time when there is difficulty or danger; a time when difficult or important decisions must be made.

There has not been a moment in our lifetime when we have been threatened by war. I just read that there are three different scenarios possible in the energy sector, which account for about a third of all inflation. And no one knows whether it will be the best, average, or worst scenario, considering that the latest Bank of Latvia forecast is a very small minus for next year’s GDP. Earlier, the bank’s forecast was positive. No one knows what will happen.

The most important thing is that we can take comfort in the fact that it is safe here; NATO troops are here. Both Latvia’s external debt and internal borrowing are at a very low level. Rising lending rates are not the problem: the problem is inflation combined with several other things. If it was only interest rates, that would be irrelevant.

I agree with those who say that there will be no defined crisis, but many celebrations and purchases will have to be postponed. Everyone must decide for themselves whether to call it a crisis.

Discussion of the trends in the real estate market and the activities of “Domuss” to follow.


Author: Ingrīda Drazdovska, DELFI

Photo: Mārtiņš Purviņš, DELFI