REAL ESTATE INVESTMENT MARKET PERSPECTIVES IN ESTONIA A

REAL ESTATE INVESTMENT MARKET PERSPECTIVES IN ESTONIA: A SURVEY ANALYSIS Kaia Kask School of Economics and Business Administration University of Tartu Ene Kolbre School of Economics and Business Administration Tallinn University of Technology

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

The Total Number and Volume of transactions in Estonian Real Estate Market Million EEK Number Value of transactions Number of transactions 3

Main Reasons of the Real Estate Market Fall • • • Economic state High interest rates Rigorous loan conditions Rising unemployment Real wage decline 4

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 (%) Unemployment rate (%) Real wage growth (%) Nominal credit growth (%) 9. 6 6. 7 10. 6 15. 1 7. 8 -4. 0 -9. 5 10. 0 9. 7 7. 9 5. 9 4. 7 5. 5 12. 8 8. 0 5. 2 6. 1 11. 2 11. 6 3. 3 -4. 7 38. 4 33. 8 35. 6 51. 6 30. 2 7. 3 -7. 5 Source: Bank of Estonia 5

Value of contracts (mln EEK) Number of transactions Notarised Purchase-Sale Contracts of Registered Immovables with Residential Buildings and Ownership of Dwellings Total number of transactions Purchase-sale contracts of dwellings Value of contracts 6

EEK/sqm Average Purchase-Sale Prices per Square Metre of a 2 -room Apartment and number of transactions in Tallinn Average price Number of transactions 7

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 8

P/I ratio of the Tallinn and Tartu housing market (2 - and 3 -room apartments) 9

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, where V – market value of housing; C – housing replacement costs 10

Tobin’s q of the Estonian and Tallinn apartment market 11

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 12

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 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 – Lithuania – Latvia 5. 38 5. 13 3. 63 13

Real estate investment perspectives by market sectors in Estonia (the scale from 1 till 10) 14

Real estate development perspectives by market sectors in Estonia (the scale from 1 till 10) 15

Forecast of the trends in market cap rates by spaces (%) 16

Forecast of the trends in market vacancy rates by spaces (%) 17

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? 18

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 19 experts, was housing space for selling.

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