The Estonian property market

THE ESTONIAN PROPERTY MARKET SOLID ECONOMIC GROWTH WILL SUPPORT INVESTMENT

The Estonian economy continues to grow and the country remains one of the most rapidly developing in the European Union. In 2019, Estonia’s GDP grew the most among the Baltic countries, at around 4.1 per cent. Con

sumption is forecast to grow further, influenced by rising employment and wage growth of nearly 8 per cent. The information and communication technologies sector has long been the biggest driver of the country’s economic growth. Newsec believes Tallinn will manage to maintain its strong position, though its neighbouring country competitors Latvia and Lithuania are inching closer owing to widespread technology innovations.

The real estate investment market in Estonia underwent a slowdown in 2019, with the total amount invested failing to reach EUR 100 million, though demand for attractive assets persisted on the market. Prime office yields compressed to 6.0 per cent, retail and industrial yields to 6.5 per cent and 7.5 per cent respectively. The office segment in Tallinn is still the largest and most balanced among the Baltic capitals. As supply in the market is growing more slowly and the level of vacancies remains stable, both developers and tenants are preparing for a new intense round of expansion. Once the A class office buildings that are underway are completed, local developers will give more attention to the development of B class office projects, expanding the office complexes and multifunctional properties that are already successfully operating and in demand in the centre of the city.

Contact: Kristina Živatkauskaite ˙ k.zivatkauskaite@newsec.lt

Photo: Shutterstock

»This year, Estonia is on track to significantly outdo its performance in the last several years as total investment transactions may triple compared to 2019«

Interesting trends on the Estonian investment property market in 2019 and 2020:

A LARGE SUPPLY OF INVESTMENT REAL ESTATE For the size of its investment real estate market, Estonia really has a lot of properties that could be of interest to investors. There are many motivated sellers with assets to sell – portfolios of properties, individual assets, and especially retail properties. With the supply of modern office space constantly growing, the Estonian market remains attractive both to local investment funds and to international investors seeking new investment opportunities.

EUR 90 MILLION 2019 transaction volume

PRIME OFFICE YIELDS compressed to 6.0 per cent

AML IS INFLUENCING REAL ESTATE OWNERS New anti-money laundering regulatory changes are impacting the real estate market too. Investors with substantial capital of doubtful origin, from Eastern bloc countries for example, are being forced to sell properties they hold for a variety of reasons.

TENSION REIGNS ON THE RETAIL MARKET Tallinn’s new 55,000 sqm T1 shopping centre survived its first full year of operations. The project’s developers offered leisure innovations for the city’s residents and guests, but also ran into considerable customer-flow challenges. Assuming future completion of the planned

GDP GROWTH of 4.1 per cent in 2019

Rail Baltica station terminal beside the shopping centre, successful operation of T1 still seems realistic. The main question is whether the parties involved in the project will have enough “financial patience” to wait and see whether Rail Baltica’s implementation bears enough real fruit.

INVESTMENT VOLUME IS FORECAST TO BE THREE TIMES BIGGER IN 2020 This year, Estonia is on track to significantly outdo its performance in the last several years as total investment transactions may triple compared to 2019. The fact that most Baltic funds historically began operations in Estonia means that, as the first funds’ operations near an end, their managers will become active sellers. Newsec also notes more motivated candidates, especially the opportunistic foreign fund managers who entered the region 3–5 years ago, who could seize the opportunity to sell their assets.

GROWTH IN TOURISM BODES WELL FOR PROPERTY In 2019, 3.8 million tourists stayed in Estonian accommodation establishments, 2.3 million of which were foreign tourists. Both the number of foreign tourists as well as their nights spent increased by 5% compared to 2018. The growth in foreign tourism has been fueled by the expansion of local airlines Air Baltic and Nordica, as well as increased competition from foreign airlines. Tallinn remains the most popular destination, but increased diversification is occurring, with e.g. Swedish airline BRA establishing direct flights from Stockholm to the island of Saaremaa. The hotel market continues to grow as a result of the rising international tourist arrivals, increasing both domestic and foreign investor interest in Estonia.