Whether to invest in Estonia's real estate market

  • 2002-08-08
  • Ain Kivisaar

Estonia's economy is growing fast overall and the property sector, though inclined to be conservative, is no exception.

Recently the real estate market has witnessed several different types of investment, including property purchased and built for corporate use, residential property bought by local private people for themselves or to be rented out, and property bought by private individuals from abroad.

Investors have also acquired stakes in real estate companies such as Pro Kapital or Arco Kapital's although this type of activity has slumped since Pro Kapital's stock exchange listing was suspended and the launch of Arco Kapital investment fund was postponed due to lack of interest from potential investors.

Although Arco Kapital chose the Rocca al Mare shopping center as its first investment and claimed it would provide a 21.5 percent internal rate of return, the project failed to gather the 50 million kroons (3.1 million euros) necessary for its launch.

Kawe Plaza is the one major modern office complex to have been sold in the last six months, the purchaser being Arador Ltd., a local company with Norwegian backing, which acquired the building for 100 million kroons after re-financing an existing loan.

The project promises about a 13 percent internal rate of return - above the 10 percent to 11 percent usually predicted by Estonian property contractors and well above the 8 percent or 9 percent rate of return in several other EU candidate countries. Estonia's rates are likely to decrease to about 9 percent in the next two years however.

The first quarter of 2002 brought the biggest real estate deal of the last several years, namely the sale of the Olympic Center in Tallinn worth 210 million kroons. The new owners will invest up to 1 billion kroons renovating and reconstructing the property, turning it into the largest contemporary leisure and entertainment center in Estonia with a hotel, night club, shopping center, yacht club, water park and ample office space.

The attention of foreign investors has been steadily drawn to modern malls and retail chains both in Tallinn and outside the capital. By the end of this year, construction of the largest 50,000- square-meter mall worth 600 million kroons on Tartu Road will probably kick off.

With other malls coming, the retail trade space market will be overloaded with offers for the first time.

Uus Maa analysts consider building cheap residential complexes or purchasing land lots are the most attractive investment option in the next two years. Almost 90 percent of apartments worth 11,500 kroons to 12,500 kroons per square meter are being sold in advance, during their construction.

Due to increased prices of old apartments, demand for residential areas less than 12,000 kroons per square meter and for houses below 1 million kroons is huge and fast sales are guaranteed, even despite tough competition. In particular seashore plots and office space close to Tallinn's main roads are still a good investment.

The three elements that influence the real estate market most of all are the general development of the economy, interest rates and loan packages offered by local banks, and the purchasing power of the local population. As to the first factor, analysts predict Estonia's gross domestic product will grow by between 4 percent and 5 percent in the next five years, and that growth could reach 6 percent or 7 percent once Estonia is in the EU.

Although the majority of local banks belong to Scandinavian banks whose interest rates rarely go above 5 percent in Estonia the average rate is 7.5 percent. But as the cost of loaning money makes little difference to Estonian banks reductions can be expected in future which will in turn enliven the property market.

The purchasing power of Estonia's population is growing by about 10 percent a year, thus surpassing inflation by at least two times. The Emor opinion research agency recently reported only 13 percent of Estonian households used mortgages to purchase real estate last year, which compares with 90 percent of Swedish households. Hence Estonia is likely to continue to grow for many years, and real estate prices will go up as the number of potential buyers increases.

Therefore all the fundamental indicators suggest long term continuous growth.