Is competition severe on the real estate market?
I do not pay too much attention to the competition. I do what I think needs to be done. I try to do a very good job and I try to put out a very good product. Everybody is welcome to be in this business. One certainly needs to be aware of what the competitor is doing, but I do not benchmark myself or try to compete with them. Today, the competition is more severe than it was four years ago. Back then, the competition was more insider-based. As more money has been invested into this country, the market has become more transparent, and transparency is good for the market, as is competition.
We select certain markets that we feel are interesting, such as retail, hotel and office development and start building and investing if there is demand and the returns are right. If the competition creates an oversupply of building, then we're obviously waiting. For example, when we had started apartments and residential development in the Old Town and competitors came, most with much more money that we had at that time, we shifted our focus.
Are real estate prices similar in the three Baltic states?
The prices in Latvia and Estonia are relatively the same. They tend to be a little bit higher in Latvia right now because Latvia is not going through the same credit and liquidity crisis that Estonia has been painfully aware of over the last year. There is also a lack of real supply in Latvia and the prices tend to stay a bit artificially inflated, whereas in Estonia, there has been sufficient supply for the last three years.
Prices in Riga will stabilize as more product comes to market. The Estonian market tends to be a little more efficient and it has been ahead of the Latvian market for a number of years both in terms of bank financing and investor interest. But I think that curve is changing significantly, and within a short period of time, a shift will take place, where more focus, attention and opportunity will be in Riga than Tallinn. The Latvian market is bigger, a bit like a center, and certainly has great potential.
Has Ober Haus thought of merging with another real estate company?
There is no reason to merge with another company in a service business unless that company brings something to the table that you do not have. Why should I pay somebody for an asset when that asset is people? I can always hire people.
We are always looking for good people and lately we brought a package of brokers over from one of our competitors. But for two similar companies doing the same business to merge just indicates that both companies are having trouble. Together, this would mean double trouble. That is not the answer for solving problems.
Alternatively, we have restructured some of our salary programs to meet the slow down of the market. We are putting people on full commission.
Pindi Real Estate analysts said that Estonians take a remarkably higher commission rate than agents abroad. Is this rational?
Commission rates in Europe and the United Kingdom are about 2 percent per transaction cost, which is significantly lower than here. However, those are marketplaces with efficient financing structures where everything works mechanically.
Obviously the cost of that transaction increases as things take longer to do and the market becomes more difficult. As the cost of running the business is relatively the same and the prices here are one-fifth or one-eighth of what they are in Western Europe, the commission rate has to be adjusted in order to operate.
Are real estate prices going to decline during the market slow-down?
They actually have no choice but to decline. What you are going to see is investors making much lower bids for property than before. In order to conduct those transactions, some have to lower prices. The decline of prime property could be no more than 5 percent. In outlying areas of lower grade, the prices of that property could decline 20 to 30 percent in some cases.