Companies keep an eye out for downtown offices

  • 2006-05-10
  • By Kairi Kurm

GLASS HORIZON: Kawa Plaza, completed in 1998, remains one of the sleekest buildings in the downtown area.

TALLINN - The supply of office space is very low in Tallinn, forcing companies to book their new offices months or even years in advance. And the city's increased construction costs, lack of available land and growing rental levels aren't helping the situation. "Few office buildings are being built because residential developments are more attractive than renting office spaces. Unlike offices, flats are sold at once and bring in fast profit," said Hindrek Leppsalu, the manager of Ober-Haus Real Estate.

However, a growing number of companies want to purchase offices in order to reduce their rental overheads by replacing them with monthly loan repayments. This trend also attracts companies that are not planning to expand but are looking to invest. In many cases, the monthly loan repayments are as high as the rent itself. Besides, lending conditions are quite favorable at the moment at a competitive 3.5 percent to 4.5 percent interest. "In the future, I believe that developers will offer more offices for sale. There's a demand for that," said Leppsalu. There are currently about 217,000 square meters of office space in downtown Tallinn, 128,000 of which are "A class" office stock. Another 8,000 square meters will be added this year. "As we have a shortage of A class office space in Tallinn, I would say that another 20,000 's 25,000 square meters could be added to the market," said Leppsalu.

Vacancy in most office buildings has dropped below one percent, which has resulted in available space being open for only a short time. Although office buildings with a vacancy rate of about 20 percent do exist, they are rare, according to Arco Vara real estate agency. But yields 's what an investor regains from the purchasing price in rental revenues - are not as high as they were a few years ago, dropping from 18 percent to 7 percent. Developers are struggling to profit mainly due to Tallinn's lack of property, increasing land prices and construction prices. Besides, rental prices have not increased substantially. "The yield is about 8-9 percent at a developing stage, and 6.5-7.5 percent on the aftermarket," said Leppsalu. The Danish investor Baltic Property Trust bought two office buildings last year at yields of 9-10 percent. "There are few deals with 10 percent yields nowadays. Even warehouses bring in only 8-8.5 percent," said Leppsalu.

According to a report by Ober-Haus, rents have been stable in Estonia for the last seven years. During the first half of 2006, due to limited supply, rents have gone up by 10 to 15 percent to 13.5 to 16 euros per square meter. Typical service charges are 2.5-3.5 euros/sqm. Rents for class B office space range from 8 to 11 EUR/sqm and have increased by 5-10 percent during the last year.

NEW OFFICE PROJECTS IN TALLINN:

Tallinn twin towers, Tartu St., Tornimae 3-5-7
Area: 7500 m2
Price: 200-250 kr/m2 (rent)
Completion date: November 2006

Foorum, Hobujaama
Area: 5000 m2
Price: 180-240 kr/m2 (rent)
Completion date: November, 2006

Katusepapi 8
Area: 2900 m2
Price: 17,000-21,000 kr/m2 (sale)
Completion date: 2006

Parnu St. 139e
Area: 6000 m2
Price: 160-170 kr/m2 (rent), 17,000-20,000 kr/m2 (sale)
Completion date: May 2006

Liimi 1b
Area: 2500 m2
Price: 130 kr/m2 (rent)
Completion date: February 2006

Fahle Maja, Tartu St. 84a
Area: 3000 m2
Price: 17 000-20 000 kr/m2 (sale)
Completion date: October 2006

Ulemiste Arimaja, Peterburi tee 2f
Area: 5500 m2
Price: 160-180 kr/m2 (rent)
Completion date: Spring 2006

Source: Arco Vara
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