TALLINN - With the Estonian economy experiencing healthy growth and the average salary increasing 8 percent - 10 percent per year, several developers have started new projects in Tallinn's city center and in surrounding suburbs.
In terms of apartment rates in the Tallinn market, prices generally start at 700 euros per square meter in suburbs and end at 2,300 euros per square meter in the Old Town area. Average prices for new apartments in the city center are between 1,000 euros per square meter and 1,600 euros per square meter depending on the location, view and quality of the apartment.
Many developers prefer working on apartments for middle-class buyers, as they feel that the demand for this category of housing will be more constant and the associated risks lower. Their main target groups are young people and people who are currently living in the Soviet block-building districts.
Many people can take out loans from local banks, which are in turn owned by big Scandinavian banks, extending up to 30 years with interest rates starting from as low as 3.9 percent and down payment beginning at 10 percent. Some banks even offer clients the option of paying only the first three years' interest.
Today older apartments cost about 75 percent - 80 percent the price of the new apartments. Meanwhile, many specialists feel that these older apartments are overvalued and predict that their price tags will either fall slightly or remain the same. Many buyers prefer taking out a longer loan and choosing a slightly smaller new apartment to owning an apartment in an old Soviet building.
So far more than 75 percent of the apartments are sold before completion. In the best-case scenario this rate is 100 percent. One good example of high success was a project on Roosikrantsi Street led by Swedish developer Besqab, in which all of the 22 apartments were sold before completion.
Experts predict that the demand for new apartments will remain strong because the number of apartments that are coming on the market within the next two years is not expected to meet demand. They estimate that the market can absorb approximately 2,000 apartments per year over the next five years. This year 1,300 apartments are likely to be added to the market.
The demand for apartments is primarily local for two reasons. First, existing real estate continues to deteriorate, and second, the number of square meters per capita is half the European average.
Trends in the rental market also demand our attention as well. Apartments in new buildings in Tallinn's city center are now attracting tenants from older buildings where only the individual units are renovated while the rest of the building remains in disrepair.
Since most people prefer buying centrally located apartments, the demand for downtown rental apartments comes from foreigners.
In the future, as more and more new apartments are developed in the city center, it will be very difficult find rental options in older buildings.
Rental prices for new downtown apartments are generally 140 kroons (9 euros)-220 kroons per square meter, which represents a 7 percent - 10 percent yield. Experts say that city center apartments will have a capital appreciation of 5-8 percent a year over the next 5 years.
The demand for Old Town rental apartments remains high, reaching up to 1,300 euros per month. Rental prices for apartments in Tallinn's Old Town are 150 kroons - 250 kroons per square meter, which represents a 7 percent - 8 percent yield. It is expected that city-center apartments will have a capital appreciation of 6 percent - 9 percent a year over the next 5 years.
Hindrek Leppsalu is the managing
director of Ober Haus Real Estate Estonia.
