The Estonian Property Market

“Most real estate investment transactions are being carried out by local Estonian investors and funds that actively invest in the Baltic region” The Estonian property market

Developers are preparing a new wave of supply for investors

After very robust economic expansion in 2021, GDP growth is expected to slow in Estonia, especially in H2 2022. Back in the spring, economists were predicting a recession, but in fact the country can expect a positive outcome for the full year. The economy is forecast to grow 1.0% in 2022 and 0.5% in 2023. Estonia is a hot spot for rising prices in Europe and led the Baltic region at the end of Q2 2022 with an annual inflation rate of 22.0%. July brought an even higher figure of 23.2% – the fastest price-level growth in the eurozone for the fourth month in a row. Average annual inflation in Estonia is expected to come in at 19.5% this year before slowing to 6.7% in 2023. Wages are projected to rise 11.0% and 7.4% in 2022 and 2023 respectively. In H1 2022, real estate investments in Estonia totalled nearly EUR 130 million. Deal value was 30% higher than in H1 2021, but much lower than in H2. Estonia is the only Baltic country where investment is being led by the industrial segment, which accounted for 44% of the total volume in H1 2022. The retail segment, especially grocery retail properties, had similar demand and accounted for 37% of transaction value. Ongoing larger deals in H2 will sustain market activity in the retail and industrial segments, with investments in the office segment set to increase as well. A total of EUR 280 million is expected to be invested in Estonia in 2022 and significantly support the liquidity of the Baltic investment market.

Most real estate investment transactions are being carried out by local Estonian investors and funds that actively invest in the Baltic region. Average transaction size in Estonia was the lowest in the Baltic region, amid a lack of larger deals of EUR 20 million and above. In Estonia, like Lithuania, outlying cities are also attracting investments, with Tallinn only getting about 60% of total investments in the country.

Contact:

Kristina Živatkauskaite˙ k.zivatkauskaite@newsec.lt

Interesting trends on the Estonian property market in H1 2022 and beyond

Estonia’s road to energy independence

Estonia is advancing with Europe’s first new liquefied natural gas (LNG) project since Russia invaded Ukraine in February 2022. The decision was fast, and the country been constructing an offshore terminal at a round-the-clock pace. Estonia is one of the European countries that is least dependent on gas. Almost three-quarters of Estonia’s energy supply comes from locally produced oil shale. The unstable geopolitical situation has set the stage for faster development of renewable energy resources in the region as well.

Supply of new production is in the works

Lack of prime properties available for investment and tenants is fuelling the development of commercial properties, especially in the office and industrial segments. New supply that is under construction will ease the tense situation of decreasing vacancy and rising office rent prices in late 2022 and in 2023. The industrial segment will see new logistics and storage premises, and offices available for rent will increase as well.

More activity within the office segment

Offices are the commercial space most in demand amid a lack of new projects delivered recently. The resulting increase in prices has been most noticeable in new modern buildings. Lack of available prime space in good locations is felt in the capital of Tallinn as well as Tartu. Active ongoing development will provide new supply equal to about 10% of total Tallinn market stock later this year or in early 2023. Improvements in energy efficiency are accelerating

Tenants, facing an unprecedented surge in energy prices, need to balance their costs expenses and are looking for longterm solutions that are more energy efficient. BREEAM and LEEDS certification of existing buildings and projects under development is gaining momentum, especially in the office and retail segments. The industrial segment is getting added attention as well as owners, increasingly anxious about higher energy prices, are looking for government decisions to help them survive the coming winter. Local landlords also see certification as a way to attract the attention of foreign investors.

Retail segment must withstand inflationary shocks

Higher prices can make consumers anxious and may alter their spending choices. Estonia seems to be the first country in the Baltic where annual growth of retail turnover in constant prices has started to slow. IKEA, world’s biggest furniture brand, opens store

After 2 years operating in Estonia with only a showroom in Tallinn, IKEA has opened a store there, its third in the Baltics, in August 2022. The first IKEA store in the Baltics was built in Vilnius in 2013 and a store in Riga opened in 2018. In close to a decade of operations in Lithuania, the IKEA store there has achieved annual turnover of close to EUR 100 million. The Latvian store had retail turnover of more than EUR 80 million in its first year of operations and increased that to about EUR 100 million last year. The Estonian property’s starting point is turnover of just under EUR 35 million with only a showroom. It has a long business journey ahead.

EUR 447 million

Total investment volume in 2021

EUR 280 million

Total investment volume expected in 2022 as a whole

+1.0%

GDP growth expected in 2022