TBT SPECIAL FOCUS
Baltic real estate market
The Estonian real estate market has been robust and viable despite an increase in prices. The reasons behind higher RE prices for apartments are low interest rates, rise in salaries, hence Estonians with more free money tend to buy apartments as an investment. Interestingly, 40% of the deals took place without a bank loan and overall 10-20% of the apartments were bought as investments, Tarmo Kase, the CEO of Ober-haus Real Estate Advisors, told The Baltic Times. He kindly agreed to answer the questions.
What is characteristic to the Estonian real estate market this year? How different is it from last year?
The total number of transactions and the financial volume have increased. There were 26,793 transactions worth EUR 1.54 billion in the first half of 2016. In the first half of 2017, there were 29,428 transactions worth EUR 1.74 billion. That means that the number of transactions increased 9.8% and the volume - 13%. People are very interested in new developments. For example, in Tallinn in 2015, the share of new apartments from total number of transactions was 19% and in 2016 - 24%, then in 2017 - 25%.
What trends do you observe in separate RE segments, i.e. residential, commercial, warehouse and lease segments? In Tallinn and elsewhere?
When it comes to office space, the most active postcrisis office space development is taking place in Tallinn due to the demand for higher quality and well-located premises. In total, eleven new projects were completed in 2016 bringing 60,500 sq.m. of office space to the market. After completion of these projects, the total area of modern office premises grew by 7% to 906,500 sq.m. of office space at the end of 2016.
It is expected that in 20172018, at least 10 new office projects should be completed in Tallinn; this will add over 100,000 sq.m. of new office space to the market.
The reason behind all of this demand is the expansion and creation of new enterprises, especially in the IT sector. Most of the potential customers for A class office spaces are tied to external companies and their representative firms. The vacancy of A class spaces is close to zero, and for the B class spaces it is about 5%. The vacancy rate in lower quality and less desirable locations is rising, and owners have to make investments in order to keep their customers or change the functions of their buildings. Ober-haus expects that the large amount of office space will put pressure on rental prices.
When it comes to retail shopping real estate space, in 2016, three larger retail projects were opened in Tallinn. At the beginning of the year, Mustamae Keskus shopping centre was opened in Tammsaare Street, the Arsenal shopping centre was opened in the Kalamaja district and Kärberi Centre in Lasnamae, Mustakivi district. The useful retail area of these shopping centres is 27,000 sq.m..
At the end of 2016, there were 41 shopping centres (counting those having over 5,000 sq.m. of GLA and over 10 tenants) with a total leasable area of 603,800 sq.m.. Tallinn currently has 1.36 sq.m. of shopping centre per capita, which is one of the highest figures in Europe.
Construction of one of the largest T1 shopping centres was continued and the preparation works on Porto Franco were started. A construction permit is being sought for an entertainment and shopping centre called Tallink City. In addition, existing centres and Tallinna Kaubamaja are planning expansions. Once these shopping centres are opened, Tallinn will have approximately 160,000 sq.m. of retail space in 2018/2019. However, this amount of retail space doesn’t seem sustainable and some projects might be postponed to later years.
The reason behind delays in the development of new projects is the already well-developed retail property market in Tallinn, with high figures of existing retail space per capita. In reality, rapid growth can only be achieved at the expense of larger purchasing power and increasing population.
Supermarkets close to home are being developed by Selver and Rimi, and as of now there are three supermarket-type stores under development in Tallinn.
A recent trend among shopping centres is the addition of entertainment possibilities on the premises (cinemas, restaurants, gyms).
And, finally, speaking about warehouse space, five new warehouse projects with a total warehousing area of 130,000 sq.m. were completed in Tallinn and its surroundings in 2016. These projects increased the total leasable area of modern warehousing premises in Tallinn and Harju County to 1,180,000 sq.m..
The largest developments in Tallinn and its surroundings in 2016 are Coop and Maxima logistic centres, with a total area of 90,000 sq.m..
Due to the development of storage and manufacturing spaces being highly tied to external demand and directly tied to economic expansion supported by export, and due to the fact that 2016 brought no significant changes to economic growth, there was a vacancy rate of around 5% at the end of the year.
Finding a tenant for B class spaces in secondary locations is still problematic, despite attractive prices. Owners of older storage and manufacturing spaces have to find means to renovate their properties in the near future in the interest of maintaining their customers. Taking into account today’s rental levels, it can be said that it is not viable to build new storage and manufacturing spaces without a definite tenant because of the very different needs of customers for spaces.
During 2016, rents for warehousing premises were stable in the Tallinn region. At the end of 2016, rents for new modern warehouses at the most attractive locations were from €4.50 to €5.00 per sq.m.. Near or outside the city limits, rents range from €3.50 to €4.50 per sq.m.. Renovated premises are being offered at prices from €2.50 to €3.00 per sq.m.. Average and poorquality premises are from €1.50 to €2.00 per sq.m.. Additional costs for tenants are from €1.00 to €1.20 per sq.m. on average.
Foreign clients with specific requirements are prepared to pay higher rents than the market average, but their expectations concerning the location and quality of the facilities are also significantly higher.
Speaking of the residential real estate sector, in 2016, prices for old and new construction apartments in residential districts increased by 5-10% on average. Prices of new and renovated old apartments in the city centre increased by 10%.
The reasons behind the increased prices for apartments have been low interest rates, rise in salaries and purchasing apartments as an investment. One of the reasons behind purchasing new apartments is also energy efficiency (lower heating costs). Altogether, 40% of the deals took place without a bank loan and overall 10-20% of the apartments were bought as investments.
New apartments cost €2,300-€5,000 per sq.m. in the city centre and €1,500–€2,200 per sq.m. in residential districts.
In the centre of the city, demand is highest for one- or two-room furnished apartments, which rent for €430 to €550 per month, preferably with parking. Tenants pay their own utilities on top of the rent.
The gross rental yield of apartments in Tallinn in 2016 was up to 5.0-5.5% depending on the location and the property. Owners generally conclude short-term rental agreements and check tenant backgrounds very carefully.
In 2016, 2,000 new apartments were completed in Tallinn, compared to 1,800 new apartments in 2015. Although development used to mostly take place in the city centre and its immediate vicinity, active development has now also begun in the suburbs and the area near Tallinn. It is expected, that around 3,000 new apartments will be completed in Tallinn in 2017.
At present, there are apartments for sale in 120 newly developed projects in Tallinn and another 40 projects in the immediate vicinity of the city. It is expected, that around 3,000 new apartments will be completed in Tallinn in 2017.
Clients primarily value smaller development projects located in or near the city centre.
The development of apartments is in the hands of larger developers such as Merko, Endover, Metro Capital, Nccbonava and YIT.
How different are the RE developments in the capital city Tallinn from other major Estonian cities?
Real estate developments are taking place mostly in Tallinn and Tartu. Some developments are also in Pärnu. In other regions, with very few exceptions, developers have not started developments. As the market is booming and construction prices are high, then development costs would be too high and would not match local purchasing power.
Which of the peripheral towns do better than most?
We think that Saku, Keila, Haapsalu, Rakvere, Viljandi and Narva have better potential.
How does the Estonian RE supply and demand look in comparison to Lithuania and Latvia?
In Tallinn, there is a buyer’s market and oversupply. In Latvia, transactions are done with medium and cheaper priced properties. In Vilnius, the market is moving from cheaper developments to more quality developments and the market is very balanced among the Baltic capitals. It seems to us Riga has the biggest potential though.
Are lending conditions likely to improve or worsen?
We expect that lending conditions will stay on the same level at least a few more years.
With mortgage rates nearly back to 2008 levels, is there not a possibility of a RE “bubble” burst? What are things to be watched out for?
Average home loan interests have never been lower than they are now - EURIBOR plus bank margin below 2.4%. We do not believe that we have a bubble. Incomes have grown significantly, banks are careful, and developers are more professional.
Tarmo Kase is CEO of Estonia’s Ober-haus Real Estate Advisors