Goodson & Red team and Tõnu Toompark present:

Tallinn Property Market 2010 Q1 Tallinn property and rental market review

Tallinn Property Market

• The number of loans granted is low, but it has not curbed the purchase and sales market.

• Consumer security is low, the number of unem-ployed people exceeded 100,000.

• Prices on the residential property market have hit rock bottom and recovery is well under way.

The property market of Estonia and Tallinn step into 2010 with optimism and hope. We have reason to hope that the residential property market is on its way to recovery as many positive signs have been evident despite the impact of numerous negative factors. The balance of residential mortgage loans in Estonia has been going down slowly and decreased from 97.3 billion kroons in November 2008 to 95.6 billion kroons in Decem-ber 2009. Loan turnover or the amount of new loans granted every month has hit the bottom and remained be-tween 520 and 660 million kroons in 2009. Banks have been giving positive messages about loosening their loan terms and conditions, but there is still no statis-tical evidence of actual changes. There have been hints that some banks are planning to start residential mortgage loan campaigns, which is another positive sign.

Interest rates on deposits have dwindled to almost nothing and this is a factor that could make the almost 160 billion kroons held in banks move. Investing in property is a possi-ble movement in addition to other alternatives. The mood of the consumer or the consumer security index is a very important indicator of people’s readiness to in-vest, especially when we talk about the residential property market. Consumers are not feeling particularly secure at the moment. The situation is not as bad as it was at the turn of 2008 and 2009 and in the first half of 2009, but the

situation is still far from optimistic. However, it is good to note that consumer security is slowly moving in a positive direction. One of the reasons here is that people are less afraid of losing their jobs. The number of property transactions increased for three consecutive quarters in 2009 both in Tallinn and in the whole country. This is proven by the fact that the number of apartment ownership transactions concluded in Tallinn in the fourth quarter of 2009 was 1302 in comparison to the 884 transactions from the first quarter of the year. The in-crease in the number of transactions is positive and it is possible that the price decrease will stop.

Purchase and sales prices seem to have reached their low-est point in the third quarter of 2009. The average price per square metre in apartment ownership transactions con-cluded in Tallinn in July 2009 was 11,389 kroons. It had in-creased to 13,466 kroons by January 2010. There are more and more ‘low-flying vultures’ circling above the market, looking for opportunities to invest in properties that generate cash flow. There is less interest in speculative objects without cash flow that only sell at ex-tremely favourable prices. There are many Finnish investors looking around on the market to find opportunities for small investments irre-spective of low rent income. They use the properties they purchase as second homes or places to stay when coming over for shopping by themselves or with their friends. However, these investors seem to be hoping to cash in on the expected price increase of their properties. People who lack equity finance such purchases with loans taken from

Finnish banks, which are probably secured against their property in Finland. The low and stable loan turnover and the increasing num-ber of purchase and sales transactions show that many purchases are currently financed from personal funds without bank loans. Residential premises of developers who have gone bank-rupt or secondary property market premises acquired by investors in expectation of price increases may arrive on the market as another factor that has a significant impact on the rental market. It is a potential that may considerably increase offer on the rental market. Speaking of the rental market we have to note that the number of good sales offers has decreased considerably. New residential premises with unrealistic prices have been taken off the market. Those who were prepared to accept losses have already done it. Local buyers are looking for good family apartments, but unfortunately there is a short-age of these. However, the decrease in the number of premises to let and for sale has been stable over the last year. The fact that many agents are leaving the market has not been the reason behind the decrease in the number of offers for some time now as many agents disappeared in 2008 or the first half of 2009.

Owners have often taken their properties off the market in the hope that prices will stop decreasing and start going up again soon. Investors also see no reason to get out at any cost if they have managed to survive until now. Those inter-ested to sell want the proceeds to at least cover the loan balance. The decrease in offer prices is still stable. However, we can see signs that the bottom has been hit and the decrease is slowing down. One of the reasons in the decrease of offer prices is that the former offers at top prices, which repre-sent completely unrealistic price expectations in the cur-rent economic situation, have disappeared from portals.

Forecast • The price increase is in the past or will soon be put

behind us. By the end of 2010, we have seen a period of at least six months where property prices have not decreased.

• The decrease in people’s income and high unem-ployment mean that acquisition of property will re-main possible for a smaller circle of people than be-fore. It is a factor that could have a positive impact on the rental market.

• The number of transactions on the purchase and sales market is on a reasonable level and cannot increase much more.

Rental Market of the Centre of Tallinn

• We do not anticipate any major changes in va-cancy rates and rents.

• Tenants have become better informed and know how to stand for their rights.

• The number of offers on the rental market is growing on account of the rental flats acquired by big or small property investors.

Rent Prices Rent prices in central Tallinn within the last quarter have remained stable at around 80 kroons. There was some fluctuation in January as this is the month when the terms and conditions of many lease contracts are reviewed. How-ever, there is no evidence to suggest that prices are under pressure and could rise or fall significantly.

Vacancy The estimated vacancy rate of rental premises still re-mains around 15%. Assessing vacancy is complicated as there is no adequate information about the total number of premises on offer on the rental market. Vacancy has increased a little temporarily, but this was mainly caused by expiry of contracts. The number of offers is not excessively large in any sector. This in its turn means that the pressure to reduce prices is small. Demand for large apartments increased at the end of 2009 and it was difficult to find such apartments for tenants on the market.

Tenants No remarkable changes have occurred in the structure of apartment tenants. Tenants in the city centre represent both local people and foreigners. The number of tenants or demand has also remained stable. The city centre is preferred as a convenient location close to people’s jobs and various services. It pays to mention the large number of students from France who were looking for rental premises at the start of the year.

Offers There has been a stable decrease in the number of offers to let. 1284 premises were on offer to let in the centre of Tallinn in January 2010 according to the kv.ee portal. The number of such offers a year ago was 1628.

However, many big and small investors are looking for in-formation at the auctions organised by bailiffs and from other channels as they wish to profit from the purchase and sales prices hitting rock bottom and from the antici-pated price increase. It is not impossible that a development project purchased from a bankruptcy estate is put on the market fully or in part by an investor who managed to acquire it at a good price and now wishes to rent it out in anticipation of a price increase.

Period of Rent The length of the rent period is typically from 0.5 to 1 year. There are also tenants looking for longer contract periods. Such clients are usually foreign companies and institutions that need accommodation for their employees. However renting apartments to tenants is often seen as an

insecure business by landlords and they sometimes even avoid long-term contracts. Another downside of long-term lease contracts for land-lords is that rent prices have dropped rather low due to competition. Local clients prefer to enter into contracts for an unspeci-fied term, but provided that the contract can be quickly ter-minated when necessary under terms that are favourable for the tenant. It can therefore be said that local clients are currently not very trustworthy and landlords are very cau-tious as they do not know how solvent local clients actually are.

Furnishing Apartments for Rent Apartments must be furnished before they can be given on rent with reasonable success. It is almost impossible to rent out an unfurnished apartment and only happens in exceptional circumstances. It can be said that the shorted the period for which the premises are taken on rent, the more furniture there must be in the apartment. Unfurnished apartments can be generally rented out to local clients for a long term or to foreigners who have moved to Estonia permanently. On the other hand, it is understandable that owners are reluctant to invest in furnishing their rental apartments as it means that rent income for two or three years will just cover the cost of furnishing and it is impossible to make any profit in this time.

Preferences of Tenants There are no areas in central Tallinn that are preferred considerably more or less by tenants. The Old Town stands out with its parking problems. The base of preferences is rational. In addition to the rent price, tenants also pay a lot of attention to accessory ex-penses or the total expense of rent. Older houses that are in good order are preferred in certain sense as everything that is good or bad about them is already known. In the case of new houses, it may not be clear what living in them might be like when it gets really cold outside. High utility costs as such have not become obstacles to

entering into lease contracts. To the contrary – the high utility costs caused by the cold winter are often the bar-gaining tool used to make landlords reduce the rent.

Brokerage and Good Practise It is good practise that the brokerage is paid by the person who ordered the service or the landlord. The tradition that brokerage is paid by the tenant, which dates back to the time when rental flats were a deficit, is slow to disappear but the number of tenants who refuse to pay the brokerage is increasing. It does make sense that the person who or-ders the service pays for it. The awareness of tenants has also improved in respect of rent costs. Tenants do not want to pay for investments into renovation and improvement of the building that are an obligation of the owner. Tenants should be liable for the costs associated with taking the apartment on rent and not the renovation loan taken by the apartment association.

Forecast • The general price level on the rental market will not

change. Prices may rise or fall in some niches which may be temporarily affected by either too few or too many offers of premises to let.

• Consumer awareness about brokerage and rent costs is improving. Landlords must consider this in order to stay competitive.

• New investors will arrive on the market after pur-chasing rental apartments in anticipation of a price increase. It is not impossible that some struggling development projects will arrive on the market.

Price Comparison

* Furnished apartment in a good condition that complies with minimum

requirements. The rent price range of larger apartments is too wide to be highlighted in this table.

Rents in the Centre of Tallinn Next 6 Months

Size of apartment Rent price range*

1-room apartments 3000-5000.-

2-room apartments 4000-6500.-

3-room apartments 5500-9000.-

Property Agent Forecast

Uus Maa → (stable)

United Property Consultants → (stable)

Goodson & Red → (stable)

Returns on Rental Business

• Speculative – rental business is based on antici-pations of price increase.

Returns on rental in terms of cash flow are a meagre 3 to 5% and usually remain at the lower end of the scale. This level of returns means that only minimal profits can be earned on cash flow. Most people who rent our residential premises expect to earn from the increase in the value of the property. The purchase and sales prices of apartments have proba-bly hit rock bottom or are about to do it any time now. How-ever, we should not expect the prices of residential proper-

ties to increase fast as high unemployment and low con-sumer security speak against it. We can presume, though, that the prices of apartments will be higher than the current extreme in five years’ time.

Forecast • Return on rent will not increase or decrease, but

remain stable between 3 to 5%. • Investment decisions concerning rental premises

will be made primarily in anticipation of future price increases and returns from cash flow is secondary as it is only expected to over current expenses.

So, what do you think? We would very much like to read your thoughts and experi-ences. Or if you have any questions you’d like us to ad-dress, email, tweet us or leave us a comment on our web-site or Page.

Follow Us Follow us and join in on Facebook or Twitter. You can also subscribe to our posts and newsletter by email. http://www.goodsonandred.com/tallinn-property-blog

NEW! Legal Update by Sorainen

Illegal repossession by landlord The Supreme Court of Estonia clarified landlords’ rights in court case No 3-2-1-83-09. In this case the tenant was not willing to deliver possession to the landlord after the lease agreement expired. The landlord changed the locks on the apartment building so that the tenant was unable to use the apartment and tenant’s belongings in the apartment. The Supreme Court stated that changing the locks is illegal even if the tenant is using the premises after the lease agree-ment has expired. The Supreme Court clarified that the land-lord has no arbitrary right to regain possession from the ten-ant other than laid down by law. This case decreases the op-portunity to enforce the tenant’s surrender of possession obli-gation in the lease contract without filing an action with the court when the tenant is not willing to deliver the premises. The court also clarified that the landlord is obligated to com-pensate for damage caused to the tenant’s belongings during illegal (re)possession. The court can reduce damages if the landlord can prove that the circumstances partially arose out of the activity of the tenant. The landlord may set off the amount of rent or a rent which is normal in the same place at the same time against damages. This practice is based on a residential lease agreement and it is not possible to estimate the consequences to the commercial leasing market.

Lease terminations – what to claim from the tenant? Until recently, the law was unclear as to how much unpaid rent the landlord can claim from the tenant if a lease was can-celled because of the tenant’s breach. The prevailing opinion has been that an unpaid rent claim is limited to 3-6 months. 1. The tenant attempts to terminate the lease. Very commonly, a tenant applies to cancel a lease without legal basis for doing so, or simply leaves the premises. Nei-

ther of these acts terminates the lease agreement, which means that the landlord can, according to a recent judgment, claim unpaid rent in full until the lease expires, or the land-lord signs a lease with another tenant or puts the premises to use in some other way. In this situation the landlord should be careful in claiming damages because the court may consider this as terminating the lease, thus ending the tenant’s obligation to pay rent and triggering the compensation regime. In this case, landlord’s savings due to the tenant’s absence from the premises, for example, reduction of utilities costs, should be deducted from the amount claimed. 2. The landlord terminates the lease. Leaving the premises may not be a breach of contract if the tenant continues to pay the rent, unless the lease includes a clause that prohibits the tenant from leaving. However, a land-lord who terminates a lease on the basis of breach by the ten-ant can claim payment of rent in full until termination or if the landlord has found a new tenant or the lease expires. The Su-preme Court ruled that starting from this point the landlord can claim the difference between the previous and the present rent until the date of expiry of the previous lease, if the new rent is lower than the previous rent. Hence, the Supreme Court agrees that the difference in rent can be claimed until the agreed expiry date of the lease. Note that in commercial leases the law allows the parties to allocate liability between them differently, so that the princi-ples mentioned above may not apply to every lease. Source: Sorainen—Baltic Law Firm of The Year www.sorainen.com Additional information: Kaido Loor (kaido.loor@sorainen.com)

Summary

Economic difficulties have reduced the number of property purchase and sales transactions and stricter loan terms have forced many clients to the rental market. More and more people understanding that rental apartments are suitable for reducing the risks of price increases and de-creases and you do not necessarily have to own your home.

The number of rental premises on offer is decreasing slowly, but it may be a sign of calm before the storm. Pur-chase and sales prices have reached rock bottom, which has activated property investors who are planning to invest in residential premises in anticipation of price increases. It may increase the number of offers both through offers of

Studio apartment in the heart of Tallinn

Rent: 6,250 EEK + utilities (asking price* 6,670 EEK) Rental period: two months Details: 36 m2, 8th floor, fully furnished Pros: downtown (Foorum), new building, elevator, fully furnished Cons: no allocated parking Client: foreigner / private individual

2-bedroom apartment in the heart of Tallinn

Rent: 7,500 EEK + utilities (asking price 7,500 EEK) Rental period: without a term Details: 66.7 m2, 5th floor, storage, allocated parking, fully furnished Pros: centre of Tallinn, new building, elevator, fully fur-nished, parking, storage Cons: no balcony Client: foreigner / private individual

4-room apartment in Tallinn Old Town

Rent: 15,000 EEK + utilities (asking price 17,000 EEK) Rental period: 3 months Details: 179 m2, 3rd floor, furnished Pros: spacious, fireplace in the living-room, Old Town, fur-niture, terrace Cons: no elevator and allocated parking Client: expats of an Estonian company * asking price for two months ! all the transactions were “without commission” for the tenants

single premises as well as the arrival of entire develop-ment projects on the rental market. The decrease in offer prices is slowing down and the mar-ket has become rather active, both evidence of the fact that rental prices have hit rock bottom just like purchase and sales prices. It is possible to let out more and more apart-ments at the offer price, i.e. without tenants trying to bar-gain about it. There are also more and more rental apart-ments that attract the interest of several potential tenants. The profitability of giving apartments on rent still relies on the anticipated increase in the value of the property. The cash flow generated by renting out one’s property is an

additional resource that has to help to cover any current expenses. The fever generated by the possibility of joining the euro-zone next year has had a significant impact on the invest-ment environment in Estonia. The first signals are positive and show that it is highly likely that the euro will become the country’s currency in 2011. These signals also promise that the exchange rate will be 15.6466, which has been the fixed rate used until now. However, we have to keep in mind that we will not know whether the country will be al-lowed to join the eurozone and what the exchange rate will be before the middle of 2010.

Sample Transactions

Goodson & Red Team

Goodson & Red is a passionate international property con-sultancy dedicated to delivering premier residential and commercial property services in Tallinn. Through more than 6 years of consistency in one of the most rapid property markets in Eastern Europe we have developed an enviable reputation for our in-depth market knowledge and expert, considerate personal service. Al-though our knowledge is extensive both in the letting/management and the selling/investing process, in Tallinn and throughout Estonia we are widely regarded as the market leader in our niche of the property market: serviced short-lets, mid- and long-term rentals, management ser-vices, home search, as well as buy-to-let consultancy. At Goodson & Red we embrace change and are constantly challenging tradition because we have a strong desire to improve the way our industry operates. Unlike some established estate agents, who offer every location in Estonia and around the world and claim to be experts in all them, we specialise, we grow gradually and study each our market thoroughly, and we are committed to going beyond the sale. Our philosophy is plain: property is our passion, we perform with integrity and values, and relationships are most important for us; we constantly en-

deavour to provide ease and comfort through considerate personalised and professional service to all our clients, whoever they are and whatever their needs for property in Tallinn. Our services include comprehensive property brokerage services for sellers, home search, long and short term let-tings services and a comprehensive professional manage-ment service for landlords. We also offer foreign buyers consultancy to help investors diversify their portfolio, to-gether with a development consultancy service, providing effective marketing and branding for developers. Whatever your requirements for Tallinn property, Goodson & Red is perfectly positioned to help you achieve your aims. Please do not hesitate to contact should you have any fur-ther questions.

E-MAIL us info@goodsonandred.com CALL us on +372 666 1650 or +44 20 8816 8174 VISIT us in person at Jõe 5, Tallinn 10151 OR www.goodsonandred.com

Goodson & Red Property Experts RED Group PLC, Jõe Str 5, Tallinn 10151

Ph: +372 666 1650 / +44 20 8816 8174 E-mail: info@goodsonandred.com

Www.goodsonandred.com