Time for learning in Estonia’s commercial real estate market

TARTU - The Estonian commercial real estate market was affected by the global economic crisis like every other part of the economy. However, with the economy achieving very fast growth rates, banks regaining trust in real estate developers and increased trust in Estonia internationally, the real estate market is bouncing back as well – hopefully stronger and less speculative than before the banking crisis.

According to Siret Antsmae from Rime Real Estate, the Estonian commercial real estate market has hit its bottom and is expecting growth in the near future. “The reason lies within the demand for quality commercial real estate, slowly over-taking supply, as during the economic downturn new buildings were really not being built.”
Although commercial and office buildings usually are rented by the occupants, there is also increased interest in buying storage or production facilities. She also confirms that after the adoption of the euro, interest from foreign investors has also grown, especially for properties with a stable cash flow.

However, the size of Estonia is also affecting available properties. Tarvo Tamme, member of the board of Brem Real Estate (with over 250,000 m2 of commercial properties), confirms that competition in the “A+” office sector, commercial and storage properties are affected by a lack of available properties on the market.
Jelena Botskova from Newsec, a property investment firm, agreed that the key term defining commercial properties today is “deficit.”

“Starting from June this year, it has been difficult to find office real estate of over 200 m2, not only in high-quality buildings in Tallinn ‘City,’ but also in good class-B office buildings.” This is exacerbated by the fact that the fastest developing areas in the Estonian economy, like IT and communications, demand good office space. New shopping centers boast a 100 percent capacity. As no new big projects are on the horizon, this demand is pushing rent prices up. Hopefully this will lead to new properties being built.

The euro is one of the biggest game-changers. Ardi Roosmaa, director of the board at Uus Maa Property Advisors and Jaanus Laugus, member of the board at Uus Maa Real Estate, also highlighted how the market has been getting stronger since the end of 2010 thanks to the adoption of the euro. Interest from foreign investors grew significantly, with many companies re-locating their production units from Scandinavia to Estonia. This in turn boosted the Estonian commercial real estate market. Most direct investments come from Finland and Sweden. There are also many from the UK and Ireland, with a growing interest from Russia - although proportionately their interest is smaller. “Estonia offers all the business conditions at a comparable level to Scandinavia (all the way to economic security) at significantly lower prices. Since the adoption of the euro, trust in our market has grown considerably,” Roosmaa said.

Peep Sooman, member of the board of Pindi Real Estate/ERI and the director of the board of the Estonian Association of Real Estate Companies, says their business has come out of the crisis stronger than before. They now hold a huge portfolio of different properties, with around 650 commercial purpose properties in addition to other services. He explains that the euro has also had a negative side-effect – the overall rise of prices has reduced the buying power of people.

The commercial real estate market is also affected by negative international news about Estonia. According to Sooman, there are around 10 real estate companies that are strongest in Estonia, with 4-5 large companies with bigger portfolios. Sooman said most real estate companies had to make cuts during the recession and did not have the opportunity for strategic planning. His company came out bigger and stronger. “Fingers crossed, it seems that tough times are behind us,” he says.

According to Antsmae, business conditions in Estonia are good as both local and central governments support new companies that invest in Estonia. The one bottleneck, however, is the lack of qualified workers in some sectors due to the smallness of the country. She expects growth in the market in the coming years, but not to the level of the boom years. Botskova agrees, saying that the commercial real estate market is dependent on what is happening with the global economy.
Tamme, when asked about the coming trends in the market, says that companies that own real estate increasingly do not want to deal with managing it, distracting them from their main commercial interests. Therefore, Brem and others have started offering services to such businesses. “At the same time, commercial properties are concentrating in the hands of professional real estate companies. The time is behind us when every company [that had free capital] could buy real estate with the view of renting it or speculating with it.”

According to Roosmaa and Laugus, although the Estonian market is strengthened by good business conditions and high-tech communications, it is limited by its size. There is not enough space for large international institutional investors, but the market is developing. “There is still much work with professional development, as there is a limited number of international businesses, and the market developments are rather random. But even in this area, the economic crisis was a good learning opportunity for many.” Uus Maa, like many other companies, went through a “reality check” during the crisis whereby necessary changes had to be made, and there came a stronger focus to doing more knowledge-based business.