A few weeks ago, the military conflict in Iran caused a new wave of anxiety in the financial markets. Just as housing activity began to pick up, global financial markets turned cautious again. The cost of money and risk margins – in other words, the premium lenders charge for the risk they assume – can change faster than any local real estate project. Simply put, financing terms can change in a matter of weeks, while projects typically take months to develop.
Real estate – local market, global risks
According to Jüri Preobraženski, head of real estate financing at Estateguru, while the Baltic markets are showing signs of recovery, the pace varies.
For example, in 2025, the number of new construction housing transactions increased by 89 percent in Vilnius, 37 percent in Riga, and approximately 23 percent in Tallinn. However, price changes were much more restrained: in Vilnius, newly built housing rose in price by 14%, in Tallinn – by 10%, and in Riga by only 2%. This reminds us that the real estate market is not homogeneous – different cities and segments move at their own pace.
“At the same time, it is important to understand that geopolitical conflicts usually do not have a direct impact on a specific housing transaction in the local market. For example, the military actions that began in Iran do not directly change the housing market in Vilnius. However, they change the broader economic conditions: when electricity prices jump, fears increase that higher inflation may persist longer than expected. In this case, interest rate cuts may be delayed, and in some scenarios, they are even considered to increase them in order to control them. price growth”, comments J. Preobraženski.
History shows that such processes can have a significant impact on financing conditions. in 1973 the oil crisis also began as a geopolitical conflict in the Middle East, but soon turned into an economic shock: oil prices skyrocketed, inflation accelerated, and central banks were forced to raise interest rates. At that time, the real estate market did not collapse immediately, but financing quickly became more expensive and more selective. As a result, a number of projects have run into difficulties, not because demand has disappeared, but because financing conditions have changed.
Is more equity always safer?
According to the interviewee, when the price of money rises, banks are more cautious in evaluating real estate developers’ projects. This does not necessarily mean an outright refusal to provide funding. More often, the situation becomes “yes, but…”, in which additional conditions for the business appear: higher pre-sales or a larger equity contribution from the developer are required. The project may still receive funding, but the process becomes slower and less flexible.
The debate about whether to finance projects with more debt or equity often misses the core issue today. At first glance, a more conservative structure – a higher proportion of equity capital – seems safer, as it reduces the risk of refinancing and increases the resilience of the project to financial shocks. This logic is often correct, especially when the main risk is reflected in the cost of capital – interest rates and lending margins.
Today, however, another form of risk is becoming more and more common – time. When the global economic environment becomes tense, banks and investors start to evaluate projects more cautiously, and decision-making takes longer. “This is where a certain illusion arises – equity may seem like a safer option, because it does not require refinancing, and its price does not change like debt. However, it remains frozen in the project. If the project schedule moves, this capital remains tied to the project for a longer period of time, although at that time it could generate returns in other investments,” mentions J. Preobraženski.
The cost of lost time
Let’s say that the developers plan to achieve a 1.4 times return on equity within two years, which would mean about 40 percent. profit. However, if the project takes 30 months to complete, a significant portion of the annual return disappears. A delay of just half a year can reduce annual returns by around four percentage points. This difference is not due to the market downturn, but simply to the time that can be lost due to various reasons: lower pre-sales, longer bank decisions or prolonged negotiations with contractors or buyers.
“Therefore, sometimes the most dangerous capital is not the one that costs the most. The most dangerous can be the one that is committed to projects at a time when the economic environment is changing very quickly,” says the interviewer.
Why is flexibility becoming the most important strategy?
In such a situation, according to him, the most important thing is not pessimism or stopping projects. Much more important is a flexible financing and project implementation plan. This means that decisions should not be made too early – it is important to maintain the ability to adjust them as circumstances change. According to J. Preobraženski, it is worthwhile to include a larger amount of equity capital in the project only when the demand is already clearly visible, the main cost risks are under control, and the project implementation becomes less sensitive to external shocks.
“In summary, it can be said that the biggest trap in a recovering market is not optimism itself. The danger lies in the belief that market recovery naturally also means stability. The Baltic real estate market may show signs of recovery, but the international situation does not yet promise stability. Therefore, the main question remains – will entrepreneurs be able to adapt to these changes without committing capital to specific projects and their development too early,” says J. Preobraženski.
