TBT SPECIAL FO­CUS

Baltic real es­tate mar­ket

The Baltic Times - - FRONT PAGE - Lu­cis Li­nus Moscow­itch

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

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