Baltic real estate experts have had to admit that international retail firms, when moving into the Baltic market, prefer Tallinn to begin with. The most flexible mechanisms for expanding existing retail space operate here, and rental methods are varied, commented the head of the Latvian real estate bureau Re & Solution, Raitis Nesports. According to him, Estonia has also become the most attractive place for international real estate funds to develop quality office space. And since it is in short supply here, large local and foreign firms capable of investing big money set the tone in the most centrally located places. Those who are smaller are forced to move to the periphery. And their persistent interest is pushing up that market segment that was previously ignored.
The wish to live better
A real explosion in real estate took place in Estonia in the middle of last year, when housing loans, as well as apartment prices associated with them, rose almost 60% in a short period of time. Their rise was largely stimulated by optimistic conclusions of experts who positively assessed the prospects opening up for the economy of the small country after joining the European Union.
First of all, they are connected with the free movement of labor. Now there are no previous barriers for Estonians, which allows them to find work in other countries, primarily in Finland and Sweden. Moreover, in Estonia itself, unemployment fell by 7% last year, reaching its lowest level since 1993. And the employment rate by the end of last year reached 3%. What better reason to make plans for new housing?
Nevertheless, what is happening on the real estate market, despite all the positive emotions, includes a considerable share of dangerous euphoria, since the average growth in housing prices is more than twice the growth in income of Estonian residents. It appears that banks, in their decisions on granting loans, began to proceed primarily from the value of collateral (guarantee), rather than the financial capabilities of the borrower. As a result, a situation arises where even a small increase in the interest rate on a loan can first deprive an unlucky owner of a house or apartment of the opportunity to buy items habitual for him for a comfortable everyday life, and then affect the entire payment capacity as a whole. According to experts, Estonian loan recipients are people with fairly meager savings, especially compared to the size of their loan obligations.
From a cubbyhole to a mansion
At the end of last year, prices unexpectedly jumped for both new housing and Soviet-era apartments built in the suburbs. However, the beginning of this year was marked by an increase in the number of offers, which made it possible to slightly slow down the triumphal movement of prices upward. If 2005 was characterized by spontaneous auctions even for old and unrenovated apartments, then now such a feverish bustle is no longer expected. However, just as one should not expect too obvious manifestations of the opposite trend – a decrease in prices, since sellers have no compelling reasons to agree to any "cheap" deal for the sake of a quick sale. A moderate growth is expected: in the new year, real estate will rise in price by an average of 10-15%.
Block box houses in the suburbs no longer set the tone, but the average rise in prices is affected by the growing demand for real estate in the center of Tallinn and in the Old Town. The most optimistic sentiment is associated with the sale of apartments whose layout and quality of renovation, just a few years ago, would have made buyers only shrug in bewilderment. Small apartments, sometimes comparable to a cubbyhole or a narrow corridor, are sold much more expensively than before. However, we are not talking about all cubbyholes, but only about those located in the "right" places. A square meter of a one-room apartment in the Old Town reaches €3,000, while in a three-room (or even larger) apartment it is valued a third lower.
Mansions
When buying and selling mansions, such feverish fluctuations as in the apartment sector were not observed; prices grew, but not so rapidly. The most popular now are the prestigious districts of Tallinn - Nõmme and Pirita, where houses costing over €550,000 are often found. Just a couple of years ago, the construction of each such mansion became a real event for the press.
In these areas, houses are sold either in very poor condition or lagging behind the requirements of today – only at the price of land, in order to demolish old buildings or thoroughly renovate them. The need for empty plots for housing construction far exceeds supply, which means that within the city limits there is simply no suitable land for its further development. Therefore, the construction of houses is shifting from the capital area to provincial regions, where the cost of plots has quickly grown by almost a third due to this.
In Tallinn itself, on the seashore, the price of one square meter of land often exceeds the bar of €1,500, having increased by half in a short period.
Apartments
Despite high prices, apartments continue to be actively speculated on, which, of course, does not at all contribute to "price stabilization". Most new multi-storey buildings are sold out by apartment even before construction is completed. Currently, 1,886 new apartments are being prepared for delivery in Tallinn, 93% of which have already found buyers by March.
The cost of one square meter in the city center is approximately €3,800, although in particularly 'popular' buildings sold at auction it can double. In areas adjacent to the city center, the price remains within €2,000 per square meter, and in towns just outside the city limits, but not too far from it, with a fortunate combination of circumstances one can find even €1,500.
Over the past year, the cost of new apartments has risen by 50% because land suitable for housing construction has become more expensive. Labor has also become more expensive - by about ten percent - which also affected the final price. It is expected that the shortage of new apartments will persist in the coming years, as builders' capabilities are limited by a shortage of construction materials and a very slow approval process for any city plans.
Land plots
If a few years ago the cost of a plot directly depended on its size, now the decisive argument is the right to build in all its diversity. The more opportunities a developer is given when developing land, the more willingly he pays a large sum. A telling example is the sale by the state of one plot of 9,400 sq. m: with a starting price of 10 million kroons, it ultimately found a buyer who paid 6.5 times more.
Increasingly, developers are offering apartments for sale on the principle of 'whoever gives more', i.e., as a kind of auction, which can be held in any (including virtual) form - because demand greatly exceeds supply. In some cases, developers have even been known to refuse their obligations. They, for example, try to cancel previously concluded contracts or demand additional payment, citing rising construction costs.
Whatever happens around new construction, at the moment no one predicts a rise in the cost of finished apartments comparable to previous years. However, it is not excluded that in the Old Town events will develop according to a different scenario.
Overall, for private houses, a noticeable rise in the cost of plots has become a problem, which was apparently influenced by speculators' games - after completing design work, they often try to resell land at a much higher price. Near Tallinn, in the town of Viimsi, undeveloped land plots have become a quarter more expensive compared to the previous year. There, one square meter on the seashore is priced at €120 and more. Although the relocation of people outside the city has become popular over the past couple of years, it has restrictions that will prevent an excessive influx of those wishing to acquire new housing here. For example, the small capacity of roads connecting to the city, and the very slow construction of new highways and road interchanges. Families have already appeared intending to sell houses located near the city and move closer to the center.
Moving on
In Estonia's second-largest city, Tartu, the same thing has been happening recently as in the capital. One square meter of a Tartu apartment in the city center costs up to 16,000 Estonian kroons (just over €1,000), and on the outskirts about 10,000 kroons (?650), which is 65% more expensive than a year earlier. With the current rapid pace of new housing construction in Tartu, the period of its sale will inevitably be extended, and price growth will slow down. Already now, a considerable number of two-room apartments are offered, and an increased number of three-room apartments under completion are on the way.
Commercial real estate
Office space is also in active development. There is still a shortage of spaces from 120 to 300 sq. m in the city center. But now tenants have much stricter requirements for them, including parking for cars, good ventilation, and many other amenities. Not finding what they want, they begin to look more closely at the city outskirts, although those wishing to rent out offices there have to wait longer for their clients.
Most often, the chase is for small offices and premises, since for large ones owners prefer to conclude long-term contracts. In the city center, a square meter of new office space will cost the tenant €15 and above, closer to the outskirts - a third cheaper. In the coming years, it is expected that the most rapid growth will be related to office space in the suburbs.
As for shopping centers and shops, they were built in large numbers between 1997 and 2004, and recently nothing particularly significant has been added to them. However, the growth of household incomes has again led to demand exceeding supply in this area as well. On the streets of Tallinn, there are not so many attractive for trade, convenient for customers, easily accessible sites.
What to expect in the near future? A 'reshuffling' of retail space at the initiative of owners looks very likely, who, wishing to raise the price for scarce locations, will begin offering them to those 'who will give more'. There is no doubt that there will be plenty to choose from. There are now far more people wishing to have their own retail outlet than there are real conditions for opening one. Therefore, it is quite possible that applicants will begin to outbid 'vacancies' from each other, to the delight of landlords. If the optimistic economic forecast given to Estonia for the coming years begins to come true, then retail activity here will still look very profitable - with all the ensuing consequences.
The golden gleam of Tallinn's commercial real estate market will retain its alluring appeal for investors in the near future. The flow of foreign capital into the Estonian provinces beyond the capital also promises to grow. The largest real estate deal of the past year was the sale of the Rocca al Mage shopping center for almost a billion Estonian kroons (approximately €65 million). Numerous office purchases by foreign investors were also noted. The financial return on such operations is estimated at 8-9%. At the same time, the highest profitability on real estate investments, for example, in neighboring Helsinki over the same period, ranged from 6.5 to 7.25%.