Goodson & Red team and Tõnu Toompark present:

Tallinn Property Market 2009 Q3 Tallinn property and rental market review

Tallinn Property Market

• Dawn is about to break, but it is still dark • The rock bottom of purchase and sales prices is

close It seems that the property market in Estonia is about to over-come the biggest difficulties in autumn 2009. Even though the price decrease has slowed down, the purchase and sales prices of property are still falling in all sectors of the property market. The turnover of residential mortgage loans in Estonia in the first three quarters of 2009 was EEK 5.2 billion or more than four times less than in the previous year. Loans are granted very cautiously. The interest rate on residential mortgage loans in September 2009 was 3.6%. Braver banks have once again started to advertise residential mortgage loans, but the terms are of course much stricter and getting a loan is almost impossible for non-residents who do not have a local source of income.

The consumer security index is on the level of -19 points. Con-sumer security hit rock bottom in March 2009 when it hit -37 points or the lowest level during the 13 years that this indica-tor has been measured. Consumer security has improved con-sistently since March. 7382 property purchase and sales transactions were con-cluded in Tallinn in the first three quarters of 2009, which is one-third fewer than in the previous year. The number of transactions concluded with apartment ownerships in the same period of time was 3266 or 39% less than in the previous year. According to the property portal kv.ee, there were 7742 apart-ments up for sale in Tallinn in September 2009. The number of sales offers is decreasing slowly, but stably. The number of apartments for sale was 10,184 just a year ago.

The average price of a square metre of apartments in Tallinn according to the offers in kv.ee was EEK 19,228. The offer price a year ago, in September 2008, was 26,241 EEK/m2. The offer price has decreased by 27% in a year. According to the data of the Land Board, the actual average price of purchase and sales transactions in Tallinn in the third quarter of 2009 was 12,220 EEK/m2 or 41% less than in the previous year. There were 1972 sales offers in the centre of Tallinn in Sep-tember 2009 and their average offer price was 25,352 EEK/m2. According to the data of the Land Board, the actual average transaction price in the centre of Tallinn was 18,316 EEK/m2. Not many new developments are brought to the market in the current conditions. Any new development projects that are being launched are small residential buildings with no more than 20 apartments. Big developers are still on standby, but they have promised to launch new projects in the next year. Forecast: • There are more potential buyers looking, the number of

transactions with residential premises is going up slowly, but prices are still decreasing.

• Both the global and local financial industry are still weak, the labour market is not expected to recover un-til 2011. Therefore money supply will remain low and the number of households who struggle with their loan repayments could still increase. Our property market is still tense.

• There are no many projects in good locations that have been frozen or that are waiting for the sales prices to start complying with the market. It means that the stock of new apartments will remain very low in the next year, which may contribute to the preservation of the current price level.

Rental Market of the Centre of Tallinn

• The ratio of rent prices and income has improved for consumers.

• The level of rent prices has stabilised. • There’s shortage of quality product, no new de-

velopment are being introduced to the market.

Rent Prices According to the data of the kv.ee portal, the prices of rental offers in central Tallinn have decreased by 32% to 93 EEK in a year. Today, it can be said that the price level has stabilised.

There are more and more cases where several people want to rent the same flat, which means that the owner can let it out at the offer price, i.e. without bargaining about the price. The long-term prospect of rent prices depends largely on the general conditions on the market. We can assume that rent prices will be on the same level as today in a year’s time if the economy recovers in the nearest future as ex-pected. However, we cannot forecast a price increase.

Vacancy There are not many new offers arriving on the market. The number of premises to let has increased by 41% over the year, but decreased in the last four months. Some offers may appear on the market on account of speculatively acquired property, where owners feel stran-gled by loan repayments decide it would be better to fur-nish their empty apartments and rent them out. Speculatively acquired apartments have often not been rented out because owners have not wanted to invest in

furnishing the apartments. It is almost impossible to rent out a completely empty apartment. At the same, the number of new apartments arriving on the market is smaller than the number of apartments taken on rent. It can therefore be said that the number of premises to let is decreasing even further. We do not expect to see any significant changes in demand. Demand is affected the most by the general economic envi-ronment and the labour market. It can be said that demand remained stable all through the previous year. As supply is decreasing and demand is remaining stable, we can presume that vacancy on the rental apartment market in the city centre will decrease. The estimated vacancy rate today is 15%. We can presume that vacancy will have dropped to 10% in a year’s time.

Tenants People who rent in the centre of Tallinn may be character-ised as people who, in addition to the good location, prefer the convenience of not owning property. Many people who rent apartments in the centre of Tallinn are local, but the proportion of foreigners is somewhat big-ger in the centre than in other districts of Tallinn. The scale of the areas of activity of lessees is broad – people who rent range from (foreign) students to senior executives of companies. It is difficult to highlight a common denomina-tor.

Period of Rent The duration of the average period of rent is six months to one year. Lessees often prefer contracts without a speci-fied term as they can be cancelled at short notice. Rented apartments are often seen as a short-term solu-tion. The temporary nature of renting may be caused by the person working in Estonia temporarily, insured events, changes in the marital status and studies.

Furnishing Rental Apartments Apartments that are to let could be furnished. They must at least have kitchen furniture, light fixtures, curtains and

curtain rods, sanitary equipment. Apartments that have not been furnished to the minimum level or apartments that do not have kitchen furniture are a challenge for the lessor, which usually does not yield a positive result. It is easier to rent out an apartment if in addition to the minimum package, it also has a washing machine, ward-robes and shelves, i.e. only lighter furniture that is easier to remove is missing. It is the easiest to let out apartments that are fully fur-nished so that the lessee can immediately move in with their clothes and dishes and the lessee does not have to incur any extra expenses. It is advisable for all lessors to consider furnishing their apartments if they have not managed to find lessees yet. A completely empty one-bedroom apartment can be fur-nished for approximately EEK 100,000 to 150,000.

Regions The Old Town differs from the other regions in central Tal-linn as it has a parking problem. The big advantage of new developments is that parking has been solved either with parking spaces in the yard or a car park under the building. Lessees prefer regions in the city centre that are easy to access both by car and by foot. Examples of this are Tatari-Sakala-Süda-Liivalaia Streets up to Tartu Road. Also Põhja Avenue. The high-rise Tornimäe building and the large exclusive apartments in the Foorum buildings can be highlighted separately as the good location and prestigious buildings mean that apartments can be let out for a price that ex-ceeds the market average.

Agency Fees and Good Practice The Estonian tradition where the agent’s fee is paid by the lessee is slowly disappearing. Lessors are beginning to understand that they are the ones who need the agent’s services. This means that more and more lessors are pre-pared to pay the agent’s fees themselves. As usual, the invoices submitted by all service providers (security, cable TV, telephone, electricity, gas…) and the apartment association are added to the agreed rent price. As a rule, the lessee enters into contracts with communi-cations service providers in their own name.

When an apartment is taken on rent through the RED Group, then the RED Group organises subscriptions for services and thereby makes taking the apartment on rent easier and cheaper for the client.

Summary Rent prices in the centre of Tallinn have stabilised. A qual-ity apartment that is in a good location and well furnished can be rented out in a relatively short time, often in weeks. The slowly decreasing supply is reducing the difference between the offer price and the actual transaction price. Activity on the rental market of Tallinn has continued to increase at the time when the number of purchase and sales transactions has decreased. The number of premises to let has decreased considerably. The decrease in property prices has made the people par-ticipating in the owner-centred local property market that renting residential premises is a risk-free and good solu-tion. The latter is supported by the conservative loan policy and the low security of consumers that also affects the rental market participants.

Forecast: • Tenants prefer furnished apartments; sales periods

are getting longer for unfurnished apartments. • More and more lessors are realising that the agent’s

fee has to be paid by the lessor and not the lessee. • Vacancy is decreasing and the level of rent prices is

stable, however, the market remains strongly af-fected by the general economic environment.

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.

Size of apartment Rent price range*

1-room apartments 3000-5000.-

2-room apartments 4000-6500.-

3-room apartments 5500-9000.-

Buy-to-let Investment • Value and price are not in balance The rate of return of the rent business is currently rather low and usually remains between 3 and 5%. We are talking about the net rate of return in terms of cash flow minus the costs associated with owning the apartment. The given rate of return does not consider the possible decrease or in-crease of the value of the property. Rate of return in terms of cash flow at the top of purchase and sales prices in 2006 and 2007 was even 1 to 2%. The possible increase of the value of the property must be considered when taking a look at the rate of return of a rental apartment. We can presume that the prices of apart-ments will be higher in five years’ time. This means that the possible income from the increase in the value of prop-erty is added to the rate of return in terms of cash flow.

Forecast • The already low rate of return will hold or increase

slightly on account of decline in sales prices, reduc-ing vacancy and stabilising rent prices, but not sig-nificantly.

• The projected future of the purchase and sales prices of residential premises remains an important factor in the rate of return and cost-effectiveness of the investment.

Standard Transactions 1-bedroom apartment in the centre of Tallinn

Rent: 6,250 EEK + utilities (asking price 6,500 EEK) Details: 53.2 m2, III floor, big balcony, bathroom w/ bath-

tub, fully furnished Pros: downtown (Foorum), new building, elevator, fully furnished Cons: no allocated parking

1-bedroom apartment in Ilmarise block

Rent: 3,900 EEK + utilities (asking price 3,900 EEK) Details: 41.9 m2, I floor, unfurnished (kitchen only) Pros: centre of Tallinn Cons: I floor, no allocated parking, unfurnished

5-room attic apartment in Tallinn Old Town

Rent: 18,000 EEK + utilities (asking price 22,000) Details: 278.7 m2, V floor, furnished Pros: spacious, sauna complex (Jacuzzi, steam sauna, sauna), fireplace in the living-room and sauna, 3 bath-rooms, large kitchen Cons: no elevator and allocated parking, on a busy street in Old Town * all the transactions were “without commission” for the tenants

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

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

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