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Baltic Journal of Real Estate Economics and Construction Management
ISSN: 2255-9671 (online)
2022, 10, 171–199
https://doi.org/10.2478/bjreecm-2022-0012
https://content.sciendo.com
171
©2022 Author(s). This is an open access article licensed under the Creative Commons Attribution License
http://creativecommons.org/licenses/by/4.0.
THE REAL ESTATE MARKET AND ITS INFLUENCING
FACTORS FOR SUSTAINABLE REAL ESTATE
DEVELOPMENT: A CASE OF LATVIA
Linda KAUSKALE, Janis ZVIRGZDINS*, Ineta GEIPELE
Institute of the Civil Engineering and Real Estate Economics,
Riga Technical University, Riga, Latvia
*Corresponding author’s e-mail: Janis.Zvirgzdins_1@rtu.lv
Abstract. The tendencies of the development of real estate market could affect
the tendencies within the real estate development. The development of the real
estate market could be influenced by the variety of factors, depending on the
economic system of the country and other factors. The aim of the research is to
analyse the tendencies in the Latvian real estate market, by paying particular
attention to its influencing factors and sustainable real estate development. The
literature review, comparative, historical, statistical analysis, observation and
logical access methods have been used in the research. The research provides an
interdisciplinary view on the topic. Particular attention is paid to the case of
Latvia. The research can be used to promote the importance of sustainability and
sustainable development using different forms, mostly economic and
environmental ones. Changes within the economic dimension, including changes
of real estate market prices, and other significant aspects of real estate
development can influence the sustainability of the real estate market in general
and may affect the financial results of market participants. Thus, the research can
also be useful for real estate developers for a planned, balanced and financially
successful entrepreneurship in the changing environment.
Keywords: Civil engineering, international overview, planning, real estate
development, real estate industry, real estate market, regulations, sustainability,
sustainable construction, sustainable development.
INTRODUCTION
Sustainable development of the real estate market is important for its balanced
and stable development (Kauskale, 2018) and could be important for all market
participants. Sustainable development of the real estate market includes economic,
social, environmental and other dimensions (Kauskale, 2018). The better the social,
economic and environmental parameters of the real estate market and its
development, the more sustainable the market. Real estate market consists of many
buildings that can be characterised by different structures, layouts, heating and
water supply systems and other components.
Housing is one of the primary necessities for every human (Vanags, 2010), and
it is important to know the tendencies within the real estate market and construction
industry. These issues are also important for real estate developers for planning the
entrepreneurial activities.
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Under rapidly changing conditions of economic environment, the financial
indicators and results of market participants are changing, and the industry and its
sectors may face a number of challenges. For instance, in the period of 2008–2009
many entrepreneurs in Latvia faced a rapid and significant economic recession. This
slowdown also significantly influenced the development of real estate market, the
level of prices and the level of profitability. The research problem is that in different
periods the market and market participants can face different challenges and market
participants should be prepared for them. At the same time, the real estate market
and the construction sector have a major social, economic and environmental role
for the country (Kauskale, 2018).
In order to understand the current tendencies of the development of the real
estate market, it is necessary to make an actual overview that can be useful for the
understanding of the development of the real estate market in the context of
sustainable development, as well as for market participants.
The aim of the research is to analyse the tendencies in the Latvian real estate
market by paying particular attention to its influencing factors and sustainable real
estate development.
Within the research, the following tasks have been set:
• To analyse the development tendencies of the real estate market and
construction industry in Latvia;
• To investigate factors that influence sustainable development of real estate
market and construction industry.
The following research questions have been formulated:
1. What are the main development tendencies of the Latvian real estate market
in general and the Latvian enterprises in particular?
2. What challenges related to the constructed buildings can be faced by market
participants from different points of view, including environmental aspects?
The present research is the end result of the scientific research through a
bibliographic review prism. The research includes introduction, literature review,
materials and methods, results, discussion and conclusion sections. It
methodologically focuses on the factors related to the sustainable development of
real estate market, by placing the economic emphasis on the investigation of the
selected indicators. The literature review, comparative, historical, statistical
analysis, observation and logical access methods have been used in the research.
The scientific novelty of the research is the integrated approach to the analysis of
the sustainable development of the real estate market and its actual analysis for the
case of Latvia. The research covers interdisciplinary aspects, as well as the
contemporary external and internal factors that influence the development of the
real estate market, including also topical issues related to the real estate
development.
It has been found that currently the real estate market in Latvia has growing
tendencies, and the financial results of the real estate activities and construction
industry in the period of 2013–2021 showed positive financial performance. The
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certification of buildings in Latvia continues; therefore, the issues of sustainability
and quality of buildings are still topical.
1. LITERATURE REVIEW
Real estate market assessment opportunities and issues related to the
sustainable development of construction projects and construction industry have
been previously analysed (Kauskale, 2018; Kauskale & Geipele, 2019; Geipele &
Kauskale, 2013; Kauskale & Geipele, 2017; Tupenaite et al., 2017; Tupenaite et al.,
2021; Kauskale et al., 2017a; Tupenaite et al, 2018; Kauskale et al., 2017b).
Construction objects that are built for sale or rent later appear on the real estate
market. The market is:
1. “A meeting together of people for the purpose of trade by private purchase
and sale and usually not by auction” (Def. 1a);
2. “Specified category of potential buyers” (Def. 4a);
3. “The area of economic activity in which buyers and sellers come together
and the forces of supply and demand affect prices” (Def. 4d) (Merriam-
Webster Dictionary, 2021).
In the course of the analysis of economic processes in the real estate market, it
is important to get familiar with the main principles of the economic system in the
country. “An economic system is a means by which societies or governments
organize and distribute available resources, services, and goods across a geographic
region or country” (CFI Education Inc.). For instance, Ahlborn & Schweickert
(2019) used an established macroeconomic cluster approach for the identification
of economic systems in a worldwide sample of 115 developing and industrialized
countries.
The mixed market economy system is of high importance nowadays:
1. “Most countries across the world operate in a mixed economy. There are
elements of a market-based system that includes free markets, free trade
and private enterprises, and there are also elements of public ownership,
taxation, and regulation” (BoyceWire, 2022);
2. The mixed economic system is defined as “an economic system that
combines the elements of a market economy and the elements of a planned
economy” (CFI Education Inc., 2022b).
Previous studies showed that real estate market could be affected by PESTEL
(political, economic, social, environmental, technological and legal) factors
(Kauskale, 2018; Grizans, 2015). The construction sector is also indirectly
influenced by these factors (Ahmadov, 2022).
According to Washington State University (Ahlborn & Schweickert, 2019),
environmental factors in PESTEL are related to such parameters as “an increasing
scarcity of raw materials, pollution targets, doing business as an ethical and
sustainable company, and carbon footprint targets”.
For instance, the changes in laws and regulations and the changes in the external
environment could influence the work and activities of the real estate developers.
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As stated previously (Kauskale, 2018), definitions of “development” include also
the following: “the process in which someone or something grows or changes and
becomes more advanced (Def.1)”; “the state of being developed (a project in
development)” (Def.2); “a tract of land that has been made available or usable: a
developed tract of land; especially one with houses built on it” (Def.3) (Merriam-
Webster Dictionary, 2021). Development of construction projects (real estate
development) is highly connected to the development of the real estate market and
tendencies within aggregate demand and aggregate supply for real estate in mixed
market economies.
Factors affecting aggregate supply and aggregate demand on the real estate
market, influencing real estate prices in Latvia, were identified previously: factors
affecting demand included inhabitant income, current living conditions, level of
education, life experience, future expectations of potential buyers, taxes (real estate
tax, income tax, etc.), growth of gross domestic product (GDP) and other factors
(Binovska et al., 2018). Factors affecting supply included the level of real estate
prices, profitability of the industry, yield in the sector, capitalization rates, costs of
construction materials, energy prices, design costs, construction technologies,
taxes, level of wages in the sector, quantitative changes in labour, accessibility of
land, land acquisition costs, increase or decrease in the income of market
participants, future forecasts of market participants and other factors (Binovska et
al., 2018).
These indicators could be important for Latvia, as the Latvian economy is a
mixed market economy, and both market principles are significant – changes in
aggregate supply and aggregate demand in the economy and real estate market, and
regulations.
For instance, according to the research by Benli (2021), macroeconomic factors
determined for the research were population, growth rate of GDP, and population
rate of the countries. In the research by Kloviene (2012), the following economic
factors were chosen for the analysis: economic constraints, competition, and
technological advancement. For example, the research of Kaldaru & Parts (2008)
included GDP per capita growth and broader notions of human development and
sustainability; the authors (Kaldaru & Parts, 2008) also mentioned that, if the
economic growth were the most important goal of society, social aspects of
development could be considered less significant and remain on the background.
Possible changes in the real estate market and different economic
interconnections were previously analysed by different scientists. For example, the
relationships between property prices, sustainability levels and socio-economic
indicators were investigated by Fuerst & Haddad (2020). According to Fabozzi &
Xiao (2017), the interaction of the trading behaviour of market participants in the
housing and rental markets could result in a boom and bust in both markets. Issues
regarding the sustainability of real estate market of China and its general economy,
including supply and demand issues, were analysed by Xie et al. (2011).
Changes within financial regulation and monetary policy are also significant
for the market development and its participants. For example, according to the
research by Zhang & Pan (2021), the monetary policy has a good effect on the real
estate market in China in the low-speed growth period.
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The analysis of real estate market and its influencing factors and regulations in
the context of the sustainable development can be relevant for the development of
the construction sector, including entrepreneurship within it, and including several
construction activities within civil engineering, as sustainability technically and
financially is also an important requirement for civil engineering infrastructures
(Rackwitz et al., 2005).
For instance, civil engineering can be analysed from broader or more specific
points of view. Civil engineering includes the planning, design, and building of
roads, bridges, harbours, and public buildings (Collins Dictionary, 2021), and
construction engineering management involves the application of scientific and
technical knowledge to infrastructure construction projects (Burger, 2020).
Sustainable development of the real estate market and construction industry is
also related to the issues of more efficient planning of resources, which is
particularly important for the sustainable development in general and highlights the
topicality of the research. Building material is any material that can be used for
construction purposes, and it commonly includes wood, concrete, steel, cement,
aggregates, clay, bricks, metal, and much more – currently engineers have learned
to mix and match different materials to come up with higher quality hybrid
structures (Pro Crew Software, 2021). Sustainability can also be defined as the wish
to perform activities without depletion of resources or making any harmful effect
on the environment (UN Documents, 2021), and in order to achieve the
sustainability in the field of construction, the building and the built environment
should have some important criteria, which can include an enhancement of
biodiversity, support to the community, effective use of resources, reduction of
pollution, creating healthy environment and process management (The Constructor,
2021).
Several components of socio-economic and environmental dimensions of
sustainable development, which are globally important, are presented in Table 1.
Table 1. Socio-Economic and Environmental Aspects and Criteria of Sustainable
Development according to Agenda 21 (developed by the authors based on Agenda
21, 1992 (UN Documents, 2021), as cited in Kauskale (2018))
Dimension
Criteria
Socio
-economic
-
International Cooperation to Accelerate Sustainable
Development in Developing
Countries and Related Domestic
Polic
y Data
-
Combating Poverty
-
Changing Consumption Patterns
-
Demographic Dynamics and Sustainability
-
Protecting and Promoting Human Health
-
Promoting Sustainable Human Settlement Development
-
Integrating Environment and Development in Decision-
Making Data
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Environmental
(conservation
and management
of resources for
sustainable
development)
-
Conservation and Management of Resources for Development
-
Protection of the Atmosphere Data
-
Integrated Approach to the Planning and Management of
Land Resource Data
-
Combating Deforestation
-
Managing Fragile Ecosystems: Combating Desertification and
Drought
-
Promoting Sustainable Agriculture and Rural Development
-
Conservation of Biological Diversity
-
Environmentally Sound Management of Biotechnology
-
Environmentally Sound Management of Toxic Chemicals,
Including Prevention of Illegal International Traffic in Toxic
and Dangerous Products
-
Environmentally Sound Management of Hazardous Waste,
Including Prevention of Il
legal International Traffic in
Hazardous Waste
-
Environmentally Sound Management of Solid Waste and
Sewage
-related Issues
-
Safe and Environmentally Sound Management of Radioactive
Waste
For the past decades due to raising influence of climate change, overpopulation,
deforestation, resource depletion, urbanization, pollution and other global issues,
the concept of circular economy has gained popularity in scientific areas, as it can
contribute to resolving the global issues (Zvirgzdins et al., 2019).
Interconnection between costs and quality is important both for the construction
of buildings and civil engineering and these aspects can also affect the final decision
for investment, development, tenders. Developers make decisions regarding
investment, and investment tendencies in a country and especially in a region have
a crucial role in the creation of the sustainable environment. According to Glickman
(2014), a basic element for a functioning real estate market is a system that records
property ownership, which should include a survey methodology along with a
process for recording the title. Garcia-Teruel (2019) mentioned that several hazards
had been detected that made investments in equity crowdfunding less secure.
According to Al Refai et al. (2021), there is a linkage between real estate and stock
markets in Qatar, and many effects between several indicators of development of
economy and real estate market were observed in the long term. According to
Muldoon-Smith & Greenhalgh (2019), the aim of legislation in the energy sector
according to their research was to reduce fossil fuel consumption. However, the
authors mention that the impact of energy policy on global real estate assets could
differ (Muldoon-Smith & Greenhalgh, 2019).
The issues of green and sustainable buildings are also of great significance. The
results of the research by Dell’Anna & Bottero (2021) confirmed that a green
premium (which is an aspect of sustainable construction/sustainable real estate
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development) existed – the impact of Green Mark as a green building certification
system in Singapore applied to real estate had a positive influence on the prices of
apartments. For instance, the findings of Hao et al. (2019) revealed four strategies
to effectively promote the economic performance of construction waste reduction.
Ten methodological steps in the Strategic Environmental Analysis are as follows
(Dalal-Clayton & Sadler, 1999):
• Steps 1–4: Society – environment context analysis and impact assessment;
• Steps 5–6: Environmental problem analysis;
• Steps 7–8: Environmental opportunity analysis;
• Steps 9–10: Formulation of a sustainable development policy plan with
action fields and follow-up strategy.
For instance, technological aspects of construction are mentioned in the
handbook “Design, Construction and Management of Wooden Public Buildings”
(Tupenaite et al., 2020). One of the significant aspects could be revealed as the
quality of life, for example, in a building. Several aspects of the quality of life were
analysed previously (Kauskale & Geipele, 2015a). Also, the circular economy can
affect not only the environment of a particular country, but also can have a positive
impact across borders with a direct influence on the quality of life and living
environment of many people that, in turn, can directly link economies (Zvirgzdins
et al., 2018).
For instance, the activities and sequence of actions when managing changes for
real estate transaction entities could be the following (Lapigin & Lapigin, 2009):
1. Analysis of external factors;
2. Analysis of the internal situation in a company;
3. Development of solution programs of changes;
4. Choice of the most appropriate solution;
5. Implementation of necessary activities;
6. Control of the implementation process of activities;
7. Analysis of the achieved results.
One of the definitions of real estate management is “…the business of
managing land and buildings, including activities such as keeping buildings in good
condition and organizing the renting of property” (Cambridge Dictionary, 2021a),
and risk planning could be referred to as one of the tasks within management.
Property management, in turn, implies “…control, oversight, and operation of real
estate, personal property, equipment, or other assets belonging to another” (Legal
Dictionary, 2021). According to Schulte & Schäfers (2000), real estate management
includes the following components:
1. General aspects:
Strategy related aspects
• Portfolio management;
• Corporate real estate management;
• Public real estate management;
Function-specific aspects
• Real estate analysis;
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• Real estate appraisal;
• Real estate investments;
• Real estate finance;
• Real estate marketing;
Phase-oriented aspects
• Project development;
• Construction project management;
• Facilities management;
2. Interdisciplinary aspects which include areas of economics, law, spatial
planning, architecture and engineering;
3. Institutional aspects which include real estate developers, real estate
investors, construction companies, real estate financial institutions, real estate
service providers, real estate users and other aspects;
4. Typological aspects which include commercial, residential, industrial,
special real estate aspects. Industrial real estate is often considered to be commercial
real estate.
Different risks can be faced in the external environment. Risk can be defined
as a qualitative or quantitative measure or quantification of the potential for harm,
loss or negative change of a condition in a physical or procedural system that
combines the likelihood and severity of an event or scenario with a negative effect
on the health, environment or property due to a hazard or procedural failure
(Michalopoulos et al., 2008).
According to Karim et al. (2012), risk categories with related factors can be
classified as follows:
• Construction (land acquisition, shortage of equipment, shortage of material,
late deliveries of material, poor quality of workmanship, site safety,
insolvency of subcontractors, inadequate planning, weather, insolvency of
suppliers);
• Politics and contract provision (change in law and regulation, delay in
project approval and permit, inconsistency in government politics,
excessive contract variation, poor supervision, bureaucracy, compliance
with governmental laws and regulations);
• Finance (delay in payments, cash flow difficulties, lack of financial
resources);
• Design (improper design, change of scope);
• Environment (pollution, ecological damage, compliance with laws and
regulations related to environmental issues).
Some of the incidental risks associated with poor project management
performance are as follows:
• Unclear or unattainable project objectives;
• Poor scoping;
• Poor estimation;
• Budget based on incomplete data;
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• Contractual problems;
• Insurance problems;
• Delays;
• Quality concerns;
• Insufficient time for testing (European Commission, 2021a).
Additionally, Hines (2011) mentions business risk, financial risk, liquidity risk,
inflation risk, management risk, interest rate risk, legislative risk, environmental
risk. Peiser & Frei (2005) mention acquisition risks, entitlement risks, site risks,
financial risks, construction risks, market full lease-up risks, operating risks,
ongoing lease-up risks and ongoing operating risks. Systemic risk, selective risk,
credit risk, regional risk, industry risk, enterprise risk and innovation risk can also
be important (Lapigin & Lapigin, 2009). Wofford & Clauretie (1992) consider the
following risks to be significant: financial, illiquidity, required equity capital,
depreciation of values, real estate cycles, management burden, government
controls, legal complexity and lack of information and education. All the mentioned
aspects prove that there is a variety of risks that can be faced by the entrepreneurs
operating within the construction industry and real estate market. At the same time,
according to Schäfer & Conzen (2016), power fields of the real estate management
can be found on different levels (object, portfolio and investment), and can include
different areas and activities, and the research and reporting should be done at all
levels. For instance, reporting can be performed by the manager responsible for an
activity or task at the enterprise.
The conceptual framework of the theoretical aspects includes the main
assumptions of sustainability and its dimensions, socio-economic and
environmental aspects and criteria of sustainable development according to the
Agenda 21, interconnection between regulations and related results, system of the
analysis of sustainable construction and related environment, the model of
interconnection of sustainable development of the real estate market, construction
and macroeconomic development, entrepreneurial aspects, selected economic
indicators, possible risks, other questions.
The possible process of the investigation of the economic aspects of the
development of the real estate market and the influencing environment can include
macroeconomic analysis (for example, indicators of GDP, GDP per capita, GDP
per employed person, employment, inflation, other indicators), regional analysis
(for example, development of regions and districts, analysis of urban/rural
differences, GDP per region, transactions within regions and other indicators),
analysis of real estate market (for example, real estate prices and their changes,
changes in aggregate supply and aggregate demand for real estate, including land,
number of purchase and rent agreements and other indicators) and analysis of the
development of the construction industry (for example, registration of buildings in
the land register, other indicators). The opportunities of the analysis of the real
estate market and construction industry can include the analysis of macro
environment, its external and internal risks and general tendencies, analysis of
industry – analysis of real estate activities and tendencies within the construction
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industry, and analysis of companies – financial analysis of companies and analysis
of influencing external and internal factors.
2. MATERIALS AND METHODS
The methodological framework of the research is based on the materials and
methods that are presented in this part. Methodological aspects of the assessment
of sustainable development of real estate market include different parameters that
were investigated previously (Kauskale, 2018; Kauskale & Geipele, 2019;
Tupenaite et al., 2017).
The model of interconnection between regulations and factors influencing
sustainable development and sustainable construction is presented in Fig. 1.
Fig. 1. The model of interconnection between regulations and factors influencing
sustainable development and sustainable construction (developed by the authors).
Legal aspects are also closely related to planning. Planning of territorial
development in general and planning of the development of the real estate market
in particular can affect its sustainability. The system of the analysis of sustainable
construction and the related environment at several levels is presented in Fig. 2.
Changes in the price level are of significance, as they can influence the
profitability of entrepreneurs. Both tendencies and changes related to aggregate
supply and aggregate demand for real estate units and the factors that are
influencing the prices of real estate, as well as other factors are important for the
analysis of sustainable development of the real estate market. From the perspective
of aggregate supply and market value of real estate, the utility and scarcity are
important (Appraisal Institute, 2008); and from the perspective of aggregate
demand – desire and effective purchasing power are significant (Appraisal Institute,
2008). The House Price Index (HPI) is particularly important for this research as it
measures price changes in the residential property market. The HPI “captures price
changes of all kinds of residential properties purchased by households (flats,
detached houses, terraced houses, etc.), both new and existing; only market prices
are considered, self-build dwellings are therefore excluded; however, the land
component of the residential property is included in index...” (European
Commission, 2021b). Prices of real estate can be influenced by the demand for real
estate from local and foreign buyers (local and foreign demand for real estate), but
Regulations and factors
influencing sustainable
development
Regulations and
input
Sustainable
construction
Results and
output
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in the research, especially in the practical part of it, such effects are investigated
together.
Fig. 2. The system of the analysis of the sustainable construction and the related
environment (Source: developed by the authors based on (Kauskale, 2018)). Note:
PESTEL – political, economic, social, technological, environmental, legal.
The concept of sustainable development of real estate market includes
generalized criteria, indicators, definitions, models and influencing factors of
sustainable development of real estate market (Kauskale, 2018). For example, the
detailed direct-indirect action environment model includes competitors, customers,
suppliers, stakeholders; social, economic, technological, political factors and
international dimension (Kask, 2010).
Buildings are necessary for any entrepreneurship, and their quality affects
numerous aspects. The use of ecological engineering approaches and application of
improved environmental policies may mitigate some past impacts, and could
potentially create new development projects with higher ecological benefits
(Kaveckis, 2017). According to Kaveckis (2017), although different “green city”
initiatives exist, the big number of them uses complex indices and could have a
subjective judgment.
Aspects related to green buildings were investigated previously (Kauskale,
2018).
Sustainable use of resources becomes more important (Bran et al., 2021). To
achieve good construction results also in the environmental sphere, quality
monitoring is significant. Quality monitoring ensures that processes and systems
are developed so that the deliverables are of superior or at least acceptable quality
(Kubba, 2010a). According to Kubba (2010a), the term “green building” is
relatively new and a precise definition can hardly be captured (Kubba, 2010a);
green building strategies are mainly related to land use, building design,
construction, and operation and in aggregate can help minimize or mitigate the
National level
Regulations and
policies
Macroeconomic
tendencies, analysis
of PESTEL factors
Regional level
Regio nal
development, related
regu latio ns
Development of
infrastructure
Local level
Analysis o f socio-
economic aspects and
entrepreneurial
environment
Analysis of economic
results of projects and
the entrepreneurial
activity
Analysis of the quality of
real estate objects
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impact of the building on the environment (Kubba, 2010b). There are many options
regarding green or sustainable buildings. Also, one of the tendencies in public
buildings is the usage of timber (Kauskale & Geipele, 2015a). Currently, the main
advantages of wood are the impact of use of wooden building elements on reducing
climate change and sustainability. Traditional wooden building systems continue
their existence today and they are being improved using new technologies (Viļuma,
2020). Also, prefabricated wooden buildings are part of contemporary architecture,
and architecturally complex buildings that are up to eighteen-storey high can be
built from wooden structures (Viļuma, 2020). The model of interconnection of
sustainable development of the real estate market, construction and macroeconomic
development is presented in Fig. 3.
Fig. 3. The model of interconnection of sustainable development of the real estate
market, construction and macroeconomic development (developed by the authors,
based on (Kauskale, 2018)).
Fig. 3 shows the interconnection and role of sustainable development of the real
estate market, construction and macroeconomics. In case there is a lack of
sustainability at least at one level, it could influence the sustainability at other
levels.
The conceptual framework of the practical research includes the following
economic indicators:
Sustainability of macroeconomic development
International aspects Regulations and
policies
General tendencies of
development and
tendencies within
particular sectors
Activities of
households
Sustainable development of the real estate market (market of finished construction products)
Influencing
regulations and
policies
Economic Dimension:
Factors influencing
aggregate supply and
aggregate demand
Social Dimension:
Socio-economic and
demographic factors
Environmental
Dimension:
Availability and
usage of resources
Sustainable construction
Factors influencing the supply of sustainable
buildings (sustainable construction) Factors influencing the demand of sustainable
buildings (sustainable construction)
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• Macroeconomic indicators and their projections (from 2019 to 2023);
• House price index in the Baltic States (2010–2020);
• House price index in Latvia (2015Q1–2021Q3);
• Financial result after taxes for non-financial merchants (sectors:
construction of buildings (F41), civil engineering (F42), specialized
construction activities (F43) and real estate activities (L68)) in the particular
sectors related to the research question by economic activity from 2010 to
2020, and from 2021Q1 to 2021Q3 (profit or loss);
• The number of building permits granted and expected space in the statistical
regions and cities under state jurisdiction by quarter; two- and more
dwelling building (2020Q4–2021Q3);
• Housing stock in statistical regions at the end of 2019 in Latvia – total area,
and total area per permanent resident;
• The number of purchase agreements in Riga and Riga region (2015–2021).
The methodological framework describes the possible structure of the analysis
in the complex manner and includes the real estate market influencing factors. The
literature review, comparative, historical, statistical analysis, observation and
logical access methods have been used in the research. Construction industry in
Latvia consists of construction of buildings, civil engineering and specialized
construction activities; real estate activities have a classification “L68”,
construction – “F43” (Ltd. Lursoft IT, 2022). Additionally, indicators of financial
analysis of the merchants also include the liquidity, profitability, and share of
liabilities in the balance sheet (Central Statistical Bureau of Latvia, 2022). Liquidity
is the fact of being available in the form of money, rather than investments or
property, or of being able to be changed into money easily (Cambridge University
Press, 2021). Both construction sector and sector of real estate activities are
included in the methodological framework of the current research. The main
emphasis in the research is made on the sustainable development of the real estate
market, with particular attention in the practical part to its economic dimension, i.e.
to the several factors influencing aggregate supply and aggregate demand of real
estate units, which can be influenced by different regulations (see Figs. 1 and 2).
Rent market can be a separate area of the research; however, a large number of
objects can also be rented or leased out, so the conducted research indirectly is also
related to this area.
In this part, more detailed analysis with more possible areas of analysis was
presented. The practical part of the research analyses the development of the real
estate market and construction sector in Latvia. The practical part of the research
has mostly economic focus. General macroeconomic tendencies, regional
development in relation to real estate, analysis of economic aspects within the
industry were chosen for the practical analysis. Modifications in case of application
of the proposed theoretical basis and, thus, of the approach according to a situation
or a particular case are possible and can be necessary. In traditional or command
economies, principles of the free-market economy can remain as a secondary factor,
or can have just minimal influence or no influence at all. The methodological
framework can differ by countries, depending on approaches to the economic
regulations. For instance, according to the previous research (Vanags, 2010),
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PESTEL factors can also be weighted and assessed, and the weight of the main
factors can internationally differ. Publicly available information from the European
Statistical Database Eurostat, Central Statistical Bureau of Latvia and the State
Unified Computerized Land Register on the dates of completion of the research was
used in the research. Practical analysis covers the data from 2010 and the latest
periods.
3. RESULTS
National economy is “the economy of a nation”, or specifically: “the economy
of a nation as a whole that is an economic unit and is usually held to have a unique
existence greater than the sum of the individual units within it” (Merriam-Webster
Dictionary, 2021). Analysis of the macroeconomic indicators can include the
analysis of the following indicators: GDP, consumer price index, GNP (gross
national product), employment rate, inflation, as well as indicators related to the
international trade and other. Several projections revised in March 2022 for the
development of Latvia’s Stability Program 2022–2025 are shown in Table 2.
Table 2. Projections Revised in March 2022 for the Development of Latvia’s
Stability Program 2022–2025, data on the selected indicators (The Ministry of
Finance of the Republic of Latvia, 2022)
Parameter / Year 2021 2022 2023 2024
2025
Forecasts
-
GDP at constant prices (euro, mln, and
growth, %)
27 904 2.1 2.5 3.3 3.4
-Consumer price index (year over year, %)
3.3 8.5 3.5 2.5 2.0
-Average monthly gross wage (euro and
growth at current prices, %)
1277 6.0 5.7 5.3 5.0
-
Employment (thsd, and growth rate, %) 864 1.3 0.4 0.0 0.0
According to Table 2, GDP at constant prices and the consumer price index are
expected to grow. An increase in population, federal government expenditure,
import rate, and export rate can lead to an increase in GDP, while the foreign direct
investment, exchange rate and oil revenue can reduce GDP (Agu et al., 2022). The
increase in macroeconomic indicators can positively affect the development of the
real estate market until the housing is affordable. In 2022, the growth rates of import
and export at constant prices in Latvia are forecasted to be negative (The Ministry
of Finance of the Republic of Latvia, 2022), but, for instance, in 2024–2025 the
forecasts show good growing tendencies. Change in the price level is one of the
most important indicators for entrepreneurs and buyers of real estate. Change in the
house price index 2010–2020 in Estonia, Latvia and Lithuania is shown in Fig. 4.
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Fig. 4. House price index – annual data for 2010–2020 – annual average index–
total, in Estonia, Latvia and Lithuania (2015 = 100) (developed by the authors based
on European Statistics Database Eurostat).
According to Fig. 4, the house price index and house prices have also started to
increase since 2010. Fig. 5 shows the house price index in Latvia in the period of
2015Q1–2021Q3.
Fig. 5. House price index in the period of 2015Q1–2021Q3 in Latvia (2015 = 100),
quarterly index (developed by the authors based on European Statistics Database
Eurostat).
According to Fig. 5, the house price index (2015=100) for existing dwellings
in 2021Q3 was higher than for new dwellings by 23.55 points. The real estate prices
were growing in the research period. In 2021Q1–2021Q3 the house price index for
new dwellings grew more than for the existing dwellings. According to Deloitte
Touche Tohmatsu Limited (2022), as the effects of COVID-19 are felt around the
world, real estate companies were impacted in different ways that largely depended
on region and asset class.
For instance, the statistical indicators of the Latvian real estate market
according to the Real Estate Appraisal Department of the State Land Service are
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
House price index (2015=100)
Estonia Latvia Lithuania
0
20
40
60
80
100
120
140
160
180
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3
2016Q4
2017Q1
2017Q2
2017Q3
2017Q4
2018Q1
2018Q2
2018Q3
2018Q4
2019Q1
2019Q2
2019Q3
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4
2021Q1
2021Q2
2021Q3
House price index (2015 = 100)
Purchases of new dwellings Purchases of existing dwellings
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made of apartment transaction prices, transaction prices of individual residential
houses, individual building land transaction prices, commercial land transaction
prices, land transaction prices for construction companies, agricultural land
transaction prices, forest land transaction prices, distribution of transactions
according to the purpose of use of the real estate of the transaction object and
distribution of transactions by the object of transaction and other indicators. At the
same time, other risk that can be faced in the market is the real estate market
overheating. Possible causes of a housing “bubble” can be the following (Emmons,
2019):
• Rapid growth of mortgage lending;
• Expectations of rapid house price gains;
• Rising construction costs.
On the one hand, rising construction costs can make the real estate units less
affordable, but if these three parameters rapidly grow together at the same time, the
risk of housing “bubble” can be very high. Financial results after taxes of non-
financial merchants by economic activity (NACE Rev.2) in Latvia are shown in
Fig. 6.
Fig. 6. Financial results after taxes of non-financial merchants by economic activity
(NACE Rev.2) from 2010 to 2020 (profit or losses, euro, thsd) (developed by the
authors based on European Statistics Database Eurostat).
The level of profit in real estate activities had a significant rise in the period of
2017–2020 in comparison with the period of 2010–2016. The sharply negative
results in profit in the sector of real estate activities in numeric values were observed
in 2010. Financial results after taxes of non-financial merchants by economic
activity (NACE Rev.2) from 2021Q1 to 2021Q3 in Latvia are shown in Fig. 7.
-400000
-200000
0
200000
400000
600000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Financial results after taxes
,
euro, thsd
F41 Construction of buildings F42 Civil engineering
F43 Specialised construction activities L68 Real estate activities
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Fig. 7. Financial results after taxes of non-financial merchants by economic activity
(NACE Rev.2) and time period from 2021Q1 to 2021Q3 in Latvia (profit or losses,
euro, thsd) (developed by the authors based on European Statistics Database
Eurostat).
In Fig. 7, negative indicators in civil engineering and some other activities are
observed in the 2021Q1, which is specific for the industry. However, indicators are
positive in general; the best financial results in terms of profit in the period of
2021Q1–2021Q3 were observed in the sector of real estate activities.
There was a small decrease in the level of the achieved profit in 2021Q3 in
comparison with 2021Q2. Civil engineering activities had negative profit indicators
in the first quarter of 2020 and 2021 (Central Statistical Bureau of Latvia, 2021).
The budget balance of companies and households should be positive in general in
the longer term, financial risks should be minimized. “Balance” (noun) is a physical
equilibrium (Def.1a) (Merriam-Webster Dictionary, 2021); and a situation in which
different elements are equal or in the correct proportions (Def.1) (Oxford Advanced
Learner’s Dictionary, 2021). “Balance” (verb) means to arrange a system that
relates to money so that the amount of money spent is not more than the amount
received (Def.B2) (Cambridge Dictionary, 2021b). To achieve balanced
development, regulations related to regional development should also be planned
in advance and according to the situation. The number of building permits granted
in statistical regions and cities under state jurisdiction by quarter for two- and more
dwelling buildings in Latvia is shown in Fig. 8.
According to Fig. 8, the number of building permits granted for two- and more
dwelling buildings in the period of 2020Q4–2021Q3 was high in Riga and Pieriga
regions, followed by Kurzeme, Zemgale, Vidzeme and Latgale regions, where
number of building permits granted was considerably lower. The historical data on
the expected floor space in statistical regions and cities under state jurisdiction by
quarter for two- and more dwelling buildings in Latvia are shown in Fig. 9.
-40000.0
-20000.0
0.0
20000.0
40000.0
60000.0
F41 Construction of
buildings
F42 Civil
engineering
F43 Specialised
construction
activities
L68 Real estate
activities
Financial results after taxes
,
euro, thsd
2021Q1 2021Q2 2021Q3
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Fig. 8. The number of building permits granted in statistical regions and cities under
state jurisdiction by quarter; two- and more dwelling buildings in the period of
2020Q4–2021Q3 (developed by the authors based on European Statistics Database
Eurostat).
Fig. 9. Expected floor space in statistical regions and cities under state jurisdiction
by quarter; two and more dwelling buildings in the period of 2020Q4–2021Q3, m2,
thsd (developed by the authors based on European Statistics Database Eurostat).
According to Fig. 9, the expected floor space in the period of 2020Q4–2021Q3
had the highest indicators in Riga, Pieriga, Vidzeme, and Kurzeme regions; the
expected indicators in the period of 2020Q4–2021Q3 in Latgale and Zemgale
regions had lower values in comparison with Riga, Pieriga, Vidzeme and Kurzeme
regions, as the most active development of building construction was in the regions
of Riga and Pieriga. Figures 8 and 9 show that Riga and Pieriga regions are expected
to grow, which highlights the continuation of the process of urbanization, and this
is an important aspect of territorial development. For instance, in emerging
economies foreign direct investments have been recognised as a major influencing
factor of urban development (Kim, 2020).
Planning and regulations have the importance for the development of
construction industry. In 1983, the concept of spatial planning was defined as
73
130
5
25
63
33
110
1320
0
20
40
60
80
100
120
140
Riga region Pieriga region Vidzeme
region
Kurzeme
region
Zemgale
region
Latgale region
Total New construction
The number of building permits
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follows: “Regional/spatial planning gives geographical expression to the economic,
social, cultural and ecological policies of society” (Council of Europe, 1983), which
is one of the important statements. For example, the German multi-level system of
spatially relevant policies includes elements of spatial planning, regional policy,
agricultural policy, environmental policy and transport policy (European Spatial
Development Concept), federal (framework legislation and principles), state (for
land issues, state development plan and programs), region (regional planning) and
municipality (municipal development planning, land-use planning) levels
(Blotevogel et al., 2014), which highlights the importance and interconnection
between planning and other related fields and sectors. For instance, transport
infrastructure, accessibility, and spillover effects on the Portuguese real estate
market from 2000 to 2018 were analysed by Januário et al. (2021). Although the
results yielded by the cross-regression model were not consistent across all twenty-
three regions, they were showing both positive and negative effects of investments
in road infrastructure on real estate values. Housing stock in statistical regions at
the end of 2019 in Latvia is shown in Fig. 10.
(a) (b)
Fig. 10. Housing stock in statistical regions at the end of 2019, Latvia: a) Total area
per permanent resident, m²; b) Total area, m², thsd (developed by the authors based
on European Statistics Database Eurostat, 2022).
Housing stock in statistical regions as a total area per permanent resident
(Fig. 10b) can also be considered a social characteristic. The highest indicators in
the total area per permanent resident at the end of 2019 were observed in Riga
region.
According to Kucharska-Stasiak (2004), the specific characteristics of the real
estate market are derived from the property characteristics and can include inter
alia:
• The local characteristics of property;
• Non-homogeneity of real estate market;
• Rareness of conclusions of transactions;
• Property value as it is vulnerable to changes occurring in the external
surrounding environment;
• Speculative behaviours and other factors.
19967 19263
8310 9833 897010864
0
5000
10000
15000
20000
25000
Total area, m², thsd
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The number of purchase agreements (rareness of conclusion of transactions) in
Riga (Riga City Vidzeme Suburb Court) and Riga District (Riga District Court)
from 2015 to 2021 is shown in Fig. 11.
Fig. 11. The number of purchase agreements in Riga (Riga City Vidzeme Suburb
Court) and Riga District (Riga District Court) from 2015 to 2021 (developed by the
authors based on the State Unified Computerized Land Register). Note: Riga
District = Pieriga.
According to Fig. 11, the real estate market continues its development, and it
can positively affect the construction of buildings and demand for real estate.
As of 27 July 2022, there were 15 LEED (“Leadership in Energy and
Environmental Design” building certification program; GBIG) buildings: three
platinum certified, one platinum recertification, two gold certified, nine registered
LEED buildings in Latvia; nine of them were registered or certified in 2019–2022,
others – in 2016, as well as there were 47 BREEAM (“Building Research
Establishment Environmental Assessment Method” building certification program)
building certifications in Latvia (GBIG). At the same time, the number of total
certified green buildings in Latvia rose from 9 in 2018 (Kauskale, 2018) to 62 in
2022 (GBIG). On 11 June 2018, there were seven BREEAM and two LEED
certified buildings in Latvia (Kauskale, 2018).
In November 2013, the roof of one store collapsed in one micro-district of Riga
(LSM.lv, 2022). The Construction Law was updated in Latvia in 2014, by
introducing amendments to it (Construction Law, 2013). Previously, the main
problems of the development of sustainable and green buildings in Latvia were the
lack of information and financial resources (Kauskale, 2018). Total construction
costs (that included remuneration of workers, maintenance and operational costs of
machinery and equipment, and building materials) in the first half of 2021 in Latvia
were growing (Central Statistical Bureau of Latvia, 2021), i.e., currently real estate
developers could also face some financial challenges in this context. Sustainable
Construction Council operates in Latvia. Also, there is a nomination of the most
sustainable building in Latvia.
13480
15249 15041
14275
14982
13734
15645
7147
8755
8871
8192 8107 8513
10122
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
2015 2016 2017 2018 2019 2020 2021
The number of real estate
purchase agreements
Riga City Vidzeme Suburb Court Riga District Court
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4. DISCUSSION
The following regulations can also be important for the development of the
economy and its sectors from economic and environmental points of view – Latvia
2030 – Sustainable Development Strategy of Latvia (Cross-Sectoral Coordination
Centre), National Development Plan of Latvia for 2021–2027 (Cross-Sectoral
Coordination Centre, 2022a), Guidelines on National Industrial Policy (Ministry of
Economics of the Republic of Latvia, 2022a), Latvia’s National Energy and Climate
Plan for 2021–2030 (Ministry of Economics of the Republic of Latvia, 2022b), the
procedural order of construction governed by Cabinet Regulation No. 500 of 19
August 2014 “General Construction Regulations” (Ministry of Economics of the
Republic of Latvia, 2022c).
Nowadays all aspects of sustainability of buildings, including economic
aspects, are important. Sustainable development is inconceivable without a healthy
real estate market (Tupenaite et al., 2017). At the same time, a housing project can
be referred to as sustainable only when all the dimensions of sustainability
(environmental, economic, and social) are included, and appropriate solutions in
the project were found and implemented (Tupenaite et al., 2017).
Economic aspects, such as changes in real estate market prices and other
aspects can influence the development of the real estate market and may affect
market participants. Contemporary problems of real estate management can also
affect the economic performance of the companies. According to the recent research
(Tupenaite et al., 2021), the most significant indicator in the economic and
technological dimension in real estate development was the cost of the project,
followed by the duration of the project and the length of the installation of the
structure; in the social dimension the most important was the fire resistance of the
building, followed by the indoor microclimate, comfort, the location of the building,
its accessibility (Tupenaite et al., 2021). The processes and costs occurring in the
building upon completion of the building are also important as it is the longest
period in the life cycle of building.
Regarding the ecological or environmental aspects, results of the previous
research (Kauskale, 2018) have demonstrated both the advantages and the need for
the green building construction activities. At the same time, they have shown
difficulties that are related to these activities, as the large amount of information,
knowledge, practical experience and financial resources are required at the
beginning of the construction project. Regarding ecological dimension, the
utilization of wooden waste materials has been recently analysed in the form of
wood powders and wood fibres in cement mortars to re-generate the waste wood
into value added construction materials (Ince et al., 2021), which also, for example,
could contribute to the sustainable development through recycling of natural
resources.
Regulations in general, as well as regulations regarding ecological
(environmental) dimension, planning issues in different locations and areas can
differ. For instance, a formal neighbourhood planning process is often focused at
three planning levels (national, regional and local) (Kalinka et al., 2020). Also,
tourism and other human activities can be dependent on coastal ecosystem services,
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and can act at the technical and policy level in order to reach a compromise, which
preserves natural resources in the long term (Drius et al., 2019). Growth of coastal
economies can have an impact on a large number of industries, including food,
tourism, healthcare, higher education and science sectors, and numerous examples
have also shown the significance of cooperation among different sectors (Pudzis et
al., 2019). The example of India demonstrates that the historical and institutional
factors were significant in the development of informal settlements which, for
example, according to the research, in Mumbai, resulted in high cost of living (Ren,
2012). Cost of living can include rent prices as well as other parameters (The Mayve
Group, 2022). Investments in real estate market and construction industry can be
one of the solutions for solving regional development problems (Kauskale &
Geipele, 2014).
For example, according to the research “Institutional Quality and Human
Capital Development in Africa” by Ouedraogo et al. (2022), from the political and
legal points of view, government effectiveness, control of corruption and political
stability were identified as one of the most important dimensions. According to
Junttila & Vataja (2018), the inclusion of the uncertainty of the economic policy
can help predict future real economic activity, and this can be relevant during
normal times (rather than during the periods of crisis). For instance, based on
transaction data, the regression discontinuity design was used to evaluate the
housing purchase restriction policy in Langfang (Li et al., 2020). According to the
research by Akbari & Krystyniak (2021), the government’s interventions in the real
estate market spilled over to the stock market and mutual funds. The evidence of
Poland regarding disequilibrium in the real estate market was analysed by
Brzezicka et al. (2018), and the authors highlighted that it was important to think
about this possible challenge in advance. For instance, for a detailed analysis of the
market, such real estate market indicators as house price index for new and existing
dwellings, number of real estate purchase agreements, number of registered
buildings in the Land Register, number of registered rent activities, number of
enhanced mortgages, non-financial investments in construction and real estate,
number of commercial companies within the industry, deposit and credit rates in
credit institutions, economic profitability in construction and real estate operations,
gross rental yields and other indicators were analysed previously (Kauskale &
Geipele, 2016) and these indicators could be of great significance for the
entrepreneurship related to real estate.
CONCLUSIONS
Theoretical and practical aspects of sustainable development of real estate
market and construction industry in Latvia and their influencing factors have been
analysed in the research. The main influencing factors are the changes in real estate
supply and demand which, in turn, can be influenced by a variety of factors.
Changes in aggregate supply and aggregate demand of the real estate market can
result in changes in real estate prices, and regulations influencing construction
industry and real estate market could be of high importance in setting the direction
of development of the construction industry towards sustainability. Both internal
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and external factors can affect the aspects and dimensions of sustainable
construction and development of the real estate market in general. Sustainable
development of real estate market and construction industry can provide positive
results for these sectors in economic and other dimensions.
The real estate market in Latvia has growing tendencies, and financial results
of entrepreneurs in real estate activities and construction industry showed positive
trends in the period of 2013–2021. At the same time, there is a relatively large
difference in the development of the real estate market and construction industry
among regions of Latvia. The certification of buildings in Latvia continues and
shows growing tendencies; aspects of sustainability and quality of buildings are
topical.
The research results can be used in the identification and promotion of
sustainability mostly through economic form in mixed market economies, by using
the analysis of the economic parameters and the economic results as the final result
of processes in the real estate market. The methodological aspects can help explore
the issue through economic, social, environmental and other dimensions. The future
research direction can be related to a more detailed analysis of the development of
real estate market and construction industry and to a more detailed analysis of the
regulations affecting sustainable development and environmentally-friendly
buildings in Latvia.
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ACKNOWLEDGEMENT
This research has been supported by the EU Erasmus+ project “Circular Economy in Wooden
Construction” (Wood in Circle). Project No: KA203-8443DA0D. Project code: 2020-1-LT01-
KA203-077939; and EU Erasmus+ project “Design and Construction of Environmental High-
Performance Hybrid Engineered Timber Buildings” (HybridTim). Project No: KA203-ACD02B26.
Project code: 2020-1-DK01-KA203-075045.
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AUTHORS’ SHORT BIOGRAPHY
Linda Kauskale, Dr. oec. She received her Doctoral degree from Riga Technical University, Riga,
Latvia. She is a Researcher at the Institute of Civil Engineering and Real Estate Economics, Faculty
of Engineering Economics and Management, Riga Technical University. She is the author of several
scientific publications; she has also participated in international scientific conferences, seminars,
projects. Her main research interests are sustainable development of the real estate market and
construction industry. She has practical experience in the real estate sector and had received several
awards.
E-mail: Linda.Kauskale_1@inbox.lv
ORCID iD: http://orcid.org/0000-0002-0280-2977
Janis Zvirgzdins, Researcher, Mg. oec. He is a Researcher and a PhD student within the Institute
of Civil Engineering and Real Estate Economics, Faculty of Engineering Economics and
Management, Riga Technical University. Janis Zvirgzdins obtained the degree of Bachelor of
Electrical Science in 2015. In 2018, he obtained the Professional Master’s degree in Urban and
Regional Engineering Economics and earned the qualification of Economist. His main research
areas are circular economy, green economy, sustainability, sustainable development, urban
environment, renewable and nuclear energy and real estate management. He received the Award in
Final Paper Competition of the Latvian Association of Power Engineers and Energy Constructors in
2015. Currently, Janis Zvirgzdins is a Researcher in project “PROGRESS” of Interreg Europe
programme.
E-mail: Janis.Zvirgzdins_1@rtu.lv
ORCID iD: http://orcid.org/0000-0001-6677-0145
Ineta Geipele, Professor, Dr.oec. is an internationally recognized and respected expert of economics
and management science. For more than ten years, she has been a Professor, Director of the Institute
of Civil Construction and Real Estate Economics and the Head of the Department of Civil
Construction and Real Estate Economics and Management at Riga Technical University. She is the
author of numerous scientific publications and a regular participant of international scientific
conferences, congresses, seminars and projects.
E-mail: Ineta.Geipele@rtu.lv
ORCID iD: http://orcid.org/0000-0002-2963-087X
