REAL ESTATE INVESTMENT MARKET PERSPECTIVES IN ESTONIA:

A SURVEY ANALYSISKaia Kask

School of Economics and Business AdministrationUniversity of Tartu

Ene KolbreSchool of Economics and Business Administration

Tallinn University of Technology

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Problem

• Changes in the economy have directly influenced the development of the real estate market.

• The research question: Is the Estonian investment market environment more unfavourable than favourable for potential real estate investors ?

2

33

The Total Number and Volume of transactions in Estonian Real Estate

MarketN

umber

Value of transactions Number of transactions

44

Main Reasons of the Real Estate Market Fall

• Economic state• High interest rates • Rigorous loan conditions• Rising unemployment • Real wage decline

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Economic Indicators during 2002-2008 and 2009 forecast

2003 2004 2005 2006 2007 2008 2009*

Real GDP growth (%) 7.1 7.5 9.2 10.4 6.3 -3.6 -12,3

Real private consumption growth (%)

9.6 6.7 10.6 15.1 7.8 -4.0 -9.5

Unemployment rate (%)

10.0 9.7 7.9 5.9 4.7 5.5 12.8

Real wage growth (%)

8.0 5.2 6.1 11.2 11.6 3.3 -4.7

Nominal credit growth (%)

38.4 33.8 35.6 51.6 30.2 7.3 -7.5

Source: Bank of Estonia

66

Notarised Purchase-Sale Contracts of Registered Immovables with Residential Buildings and Ownership

of Dwellings

Total number of transactions

Value of contracts

Purchase-sale contracts of dwellings

77

Average Purchase-Sale Prices per Square Metre of a 2-room Apartment and number of

transactions in Tallinn

Average price

Number of transactions

888

Indicator to evaluate price developments over a longer period of time

• price-to-income ratio (P/I) – the share of the average (median) price of

an apartment/house in the average (median) total annual net household income, measured in real values and adjusted for inflation

99

P/I ratio of the Tallinn and Tartu housing market (2- and 3-room apartments)

9

1010

Tobin’s q• Tobin’s q investment theory has often been

used to analyse supply and to model long-term changes in housing market and to assess real estate

• The following relationship has been used to find Tobin’s q:q = V/ C, whereV – market value of housing;C – housing replacement costs

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1111

Tobin’s q of the Estonian and Tallinn apartment market

0

0.5

1

1.5

2

2.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

Tobin's q in Estonia Tobin's q in Tallinn

1212

Survey analysis

• Questionnaire conducted in June 2009• A pilot study with a sample of 8 real estate

market experts• Responce rate 100%• Questionnaire contained:

– 6 general questions about real estate investment market situation and perspectives

– 2 questions about the prognosis of vacancy and cap rates for the nearest 6 and 12 months

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Answers to general questions about real estate market

• Estimation of Estonian real estate market transparency – 2.75 (the scale from 1 till 5)

• Estimation of current state of Estonian investment market envioronment for foreign investors – 3.25 (the scale from 1 till 5)

• Estimation about perspectives of investment environment of Baltic real estate markets (the scale from 1 till 10):– Estonia 5.38– Lithuania 5.13– Latvia 3.63

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Real estate investment perspectives by market sectors in Estonia (the scale from 1 till 10)

Real estate market sector Average scoreShopping space 4.75Housing space (for selling) 4.37Storage space 4.13Production space 3.88Office space 3.75Housing space (for renting) 3.38Hotels 3.13Lots 2.63

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Real estate development perspectives by market sectors in Estonia (the scale from 1 till 10)

Real estate market sector Average scoreHousing space (for selling) 3.38Storage space 2.75Production space 2.75Office space 2.25Housing space (for renting) 2.25Shopping space 2.25Lots 2.13Hotels 1.88

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Forecast of the trends in market cap rates by spaces (%)

after 6 months after 12 monthsStorage space 12.2 12.6Production space 12.0 12.2Office space 10.8 11.1Hotels 10.2 11.2Shopping space 9.5 9.9Housing space 7.8 8.0

Average resultReal estate market sector

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Forecast of the trends in market vacancy rates by spaces (%)

after 6 months after 12 monthsShopping space 8.3 10.4Housing space 8.5 3.6Storage space 13.7 16.1Production space 14.4 14.1Office space 16.2 19.0Hotels 42.5 64.2

Real estate market sector Average result

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The stages of real estate market development “booms” in Estonia so far

Privatization of land↓

Development of office spaces↓

Development of shopping spaces↓

Development of housing spaces↓

Development of storage and production spaces↓

Development of office spaces↓

Development of shopping spaces?

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Conclusions• Over the last two years, rates of return have risen in all

market sectors• Within the next year or two, in Tallinn or in its close vicinity

no new major projects are expected to be launched• The bottom of the real estate market is feared to arrive early

in the 2010, the shape of this bottom is expected to be flat• The transparency of Estonian real estate market is still in a

range of semi transparency with a slight backward movement towards opacity

• The most perspective real estate market sector for investment in the nearest 1-2 years indicated by experts, was shopping space market

• The most perspective real estate market sector for development during the nearest 1-2 years indicated by experts, was housing space for selling.

Thank You for Attention!