Supply overhang creates buyer's market

  • 2010-05-12
  • By Olya Schaefer

TALLINN - It seems that there is an agreement among experts, economists, the press and independent agents on the fact that the real estate market in Estonia still remains in recession. Commercial and residential properties have seen a huge drop in sales and rental prices since the crest of the price wave of 2007.

Neeme Liivlaid of Goodson & Red, a UK-based firm specializing in apartment rentals and management services for foreign owners of properties located in central Tallinn reports a drop by as much as 40 percent in rental prices in 2009.
There is a large range of opinions at this time about what such a massive price fall means, and what the implications are for the future of real estate in Estonia. Some insiders believe that the worst has passed and that the Estonian real estate market is already on the way to recovery. Tonu Toompark, an independent consultant with Adaur Grupp, a member of Estonian Association of Real Estate Companies, views today’s situation with optimism. “Actually, the economic situation is not bad.” he says. “There is more need for good advisory and know-how now than ever before. It is harder to sell [properties], but the need for information is huge.”

During Estonia’s real estate boom of 2005-2007 demand was so high that all properties sold at a premium. Today, customers are far more discerning and the overwhelming supply of rental properties and properties for sale built during the boom have combined to create a buyer’s market. Today’s economic situation has also affected the cost of labor and of building materials – both have fallen substantially. So building continues, and recent and cheaper-built properties that continue to come on the market have left a large amount of 2007 and 2008-built real estate unsold. They cannot compete in price.

Today, when considering a home or an investment, Estonian and foreign consumers are comparing alternatives and demanding more than they did a few years ago. When renting or purchasing property people spend more time researching their options; they have more criteria that a property must meet, and customers are far more aggressive about price negotiation.

However, Toompark sees the market recovering. “The beginning of 2009 was [like a] ‘dark night.’ Today, we can see the sun. [Then,] companies started to lower wages and fire people - nobody knew what tomorrow [would] bring. In the second half [of 2009] the sky was more clear. For example - the offer price [on] apartments fell by 15 percent in April 2009. During the last 6 months this price fell only 3.2 percent. That means that most of the price decrease [actually took place] during April - October 2009. And the number of transactions started to grow in the second quarter of 2009.”
Analysts at Goodson & Red share this optimism, placing high hopes on the euro. Although the Estonian kroon is pegged to the euro, the use of the actual currency and entrance into the eurozone is expected by many to bring in international investors and raise their confidence in Estonia. Liivlaid states that “consumer confidence is stable and getting better, and the amount of transactions is actually back to normal, [the seasonal] average. It appears low only in comparison to the boom figures [of 2007].”

Another indicator of improvement comes from the banks. The loan market has at this point recovered enough to resume advertising mortgage loans on television and billboards.

Not everyone involved in real estate is quite as optimistic. Aleksander Azanov of RE/MAX Professionals believes that the crisis is not over and that Estonian real estate has not yet seen the worst of the economic downturn’s effects. He points to the very large increases in fuel prices in Estonia last year, as well as the rise in the price of gold on the global market. These are indicators of inflation and of devaluation of currency, which is being printed in larger quantities than is prudent.
While the current climate may be advantageous for first time buyers, Azanov warns against hyperinflation and the possibility that people who purchase homes now may find themselves unable to afford payments if prices on everything else go up rapidly in the near future. “Eighty percent of our business is from referrals, so it’s important to provide good customer service. Our mission is to advise the customers. Most people look at [the] sales price [when making a decision to purchase or rent real estate,] but [customers] need to look at price vs. value.” 

That has been a common mistake worldwide. People frequently purchase “sale” or “good deal” items, including big-ticket items such as property, without understanding and assessing the actual value of the purchase. Rather than comparing price to value, consumers have priced real estate by comparing prices to other properties, or by noting a discount from an earlier, higher price.

Expectations for the future are hopeful and positive. When, exactly, will the good times come again is uncertain. 2011 is expected to be better than 2010 and 2009. Liivlaid, whose firm specializes in residential buy-to-let properties catering mostly to foreign investors, sees the coming of the euro as a “wild card,” with unpredictable side effects.  The large amount of housing currently available and the proportionately small amount of Estonian families capable of taking on a mortgage loan could, in his opinion, lead to speculation. But his overall projection for 2011 is good.  He believes that Estonia has already weathered the worst.

Toompark feels that “most probably the euro will not affect Estonian life directly, but it could become a cornerstone for the economy. And, if the economic situation is good, then life is going to be better.” He hopes that this includes the real estate market. Azanov expects a further fall in prices for a year or two, and then expects there to be a period of inflation in the real estate market.

The opinions among professionals vary. But a cautious optimism permeates discussions, and there continue to be new realtor firms starting up in Tallinn.