Why Estonia?

As in the other Baltic States, far-reaching structural reforms have had a significant impact on national economic fortunes in Estonia. GDP has grown by an average of 8.7% since 2000 and average wages, up 16% in 2006, have also increased markedly, fuelling strong domestic demand. Following GDP growth of 11.4% in 2006, real domestic demand was 15% higher than in 2005.

Buoyed by such demand, real estate prices have experienced strong year-on-year growth. By the end of 2006, prices for new and renovated apartments in central Tallinn were averaging between 3,800-5,100 EUR/m², whilst new residential units in the capital’s suburbs were typically selling for between 1,800-2,500 EUR/m². 92% of all new residential units offered to the market in Tallinn in 2006 were sold and whilst the rate of growth has begun to slow, prices have continued their upward trend in 2007.

Annualised residential growth stood at 24.5% in the first quarter of 2007 and Knight Frank predicts that property prices will rise by a further 12.5% by the year’s end.

The rapid development of the national mortgage market has helped fuel such trends. Following average annual increases of 55% over the past 5 years, total loan volumes increased by a further 64% in 2006. Whilst the Estonian mortgage market is currently more mature than in either of its Baltic neighbours, mortgage debt still constitutes only 32% of national GDP compared with an EU average of 48%.

Source: Hansabank

Similarly, Estonia’s average living space per capita, at just 28.5 m², is comparatively low in the European context and indicates that the Estonian property market still has further growth potential.  Despite a 13.4% increase in national construction rates in 2006, analysts predict that it may take 30 years for Estonia to reach parity with its western neighbours.

Key Factors Driving the Estonian Property Market:

• Stable political and business environment: Estonia is a member of the World Trade Organisation and acceded to the European Union on 1 May 2004. Part of European Exchange Rate Mechanism II, in preparation for full currency conversion, the country is now considered a sound business environment, ranking 17th in the World Bank’s 2007 Ease of Doing Business report and 12th in the Heritage Foundation’s Index of Economic Freedom (2007);
• Economic growth: Estonia has experienced strong and sustained positive economic growth since 1995. GDP grew by 11.4% in 2006 and analysts predict the national economy will continue to grow by 8.6% in 2007 and a further 6.9% in 2008, ensuring Estonia continues to be one of the EU’s fastest growing economies;
• Foreign Direct Investment (FDI): The home of Skype and a hub for high-tech commerce and innovation, Tallinn has established itself as ‘the Silicon Valley of Europe’ [New York Times, 2005]. 76.6% of Estonia’s foreign direct investment in 2006 was of Nordic origin and FDI stock per capita, at 7,010 EUR (Q1 2007), is the highest of the three Baltic States. Estonia has been allocated 3.5 billion EUR in EU Structural and Cohesion Funds for the period 2007-2013;
• Tourism: Airport passenger numbers at Tallinn’s International Airport have increased by over 175% since 2000;
• Low tax burden: The profits of resident companies and registered permanent establishments in Estonia are not taxed until accumulated profits are distributed.  The effective tax rate on profit distributions is 22% for 2007 and will decrease to 20% by 2009;
• Low unemployment and rising wages: Estonia’s unemployment rate stood at just 4.7% in April 2007 and average net monthly wages increased by 16% in 2006;
• Cheap mortgages and increasing demand: Estonian’s can now obtain 100% LTV mortgages, yet housing loans total just 32% of annual GDP compared to the EU average of 48%;
• Overcrowding and under-supply: Despite significant increases in construction rates (13.4% in 2006), per capita living space is just 28.5 m² compared with an EU-25 average of 40 m². There remains a significant undersupply of new-build accommodation suitable to meet increasingly high local expectations and analysts predict that it may take 30 years for Estonia to reach parity with its western neighbours;
• Real estate price trends: Estonia recorded 24.5% annualised first quarter residential growth in 2007 and is anticipated to see property prices rise by a further 12.5% in 2007;

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