In 2003 Estonia's robust economy - 6.7 percent increase in GDP in the third quarter of 2002 - will continue to boost demand for residential and retail space, while the market for office space is expected to remain sluggish as the Baltic's smallest country looks to close the gap between itself and its Scandanavian neighbors.
Increases in real wages and declining interest rates have boosted the sale of new apartments and lots for private houses, while the invitation to join the European Union has sparked interest among foreign clients, mainly in Scandinavia, who are seeing this as a good time to buy.
Demand for new apartments and houses has been constant given that the average living space of Estonians is two times smaller than that of Europeans.
But until recently the possibilities of borrowing were limited, and nowadays the income of many families has reached the level where the cost of one square meter of new apartment space equals or is smaller than the monthly income of a household. Provided that interest rates remain low, this correlation is considered sufficient to spur demand for new living space. And since real wages are expected to rise probably in the near future the demand for new apartments will remain strong.
What's more, it also appeares that people are more willing to spend on a decent home than on luxury goods.
As a result of these forces prices for new apartments are expected to grow 5 percent - 10 percent next year, with approximately half of this rise coming on construction costs.
Meanwhile, prices for private plots will move in opposite directions depending upon location due to limited supply in Tallinn proper and a large supply of land around the capital that will be available on the market. Land in prime spots will go up by 8 percent - 10 percent, while land around Tallinn without any special features will plummet 15 percent - 20 percent as supply doubles over the next two years.
At the moment the prices of new apartments are 650 euros - 1,000 euros per square meter in suburbs and 950 euros - 1,700 euros per square meter in Tallinn. Meanwhile, older unrenovated apartments cost 450 euros - 600 euros per square meters in the suburbs and 550 euros - 900 euros downtown.
Prices for land plots in good areas are between 400 euros - 1,000 euros per square meter and 100 euros - 250 euros per square meter in less favorable areas.
Demand for Old Town apartments will stay strong this year and next, which will raise prices between 10 percent - 12 percent in 2003. Still, current supply in Old Town remains limited because of steep renovation costs and tough restrictions set by Estonia's heritage department.
Prices for unrenovated apartments in the Old Town Tallinn are between 800 euros - 1,000 euros per square meter while renovated apartments in modernized building go for 1,600 euros - 2,300 euros per square meter.
The market for office space will remain slow as banks are still hesitant to lend on "A-class" office development. Lenders still remember the difficulties in 1998 - 99, when a faltering economy and an overheated market combined to send rents plummeting. Vacancy rates for "A-class" office space sunk from 8 percent at the beginning of 2002 to 4 percent at the end. But with at least 35,000 square meters of new office space coming available by the end of 2003, vacancy rates may creep back up and rents are expected to remain at the same level of 13 euros - 15 euros per square meter even though construction prices are going up by 3 percent - 5 percent.
The retail market will continue to boom. If in 2002 some 82,000 square meters of new retail malls were completed, then another 133,000 are expected to be completed by the end of 2004. This will bring total retail space to approximately 400,000 square meters.
While impressive, proportionally this total remains low on a per capital basis and below the Scandinavian average. With 0.8 square meters of retail space per inhabitant at the end of 2004 Tallinn will have three times less retail space per capita than Helsinki or Stockholm.
Thus the low, 2 percent vacancy rate in Estonia's retail venues is expected to remain so in the future, even more so since most shopping centers are pre-leased before completion and retailers understand that expansion is the only way to survive on Estonia's small market.
New shopping centers are charging 12 euros - 18 euros per square meter for monthly rent, with food chains generally pay 9 euros - 11 euros per square month (sustained by tenants' average monthy sales of 200 euros per square meter per month). Rents are expected to grow 7 percent - 10 percent as demand will remain high.