Twelve Reasons Why Estonian Property Prices Have To Boom
by Darren Goodson

Twelve Reasons Why Estonian Property Prices Have To Boom - For The Next 20 Years And Beyond

And why you should be taking advantage of this opportunity today BEFORE it's too late!

Reason no.1 - Rising Construction Price Index

The latest Construction price index for Q1 2005 compared to Q1 2004 is up 8.4 percent. The bulk of this increase is attributed to the rising labour cost. Estonian wages and salaries are increasing close to 10 percent per year on average over the last five years, sometimes higher in the Tallinn area. This will inevitably have a knock-on effect on new property selling prices.

With material and labour costs increasing it must be passed on to the customer, like anything else. This means the price of new properties must increase at least in line with the construction price index. This will also push-up the prices of second-hand properties.

Reason no.2 - 695 million Euros of funding pouring into Estonia with its integration with the EU (with a further 5.1 billion Euros to follow)

During the 2004-2006 period, as a new EU state, Estonia will benefit from aid (over 695 Euros million) from European funds for regions lagging behind in development. This funding is called Objective 1 of the European Structural Funds.

The next funding allocation for the years 2007-2013 has just been announced at being 5.1 billion Euros, an enormous amount for such a small country .

These funds will be used to invest in the country’s infrastructure; this includes:- roads, airports, hospitals, education and general improvement of people’s standard of living.

This money will be ploughed into Estonian businesses, which will benefit from this massive contribution. Again, this will lead to more jobs, expanding businesses, higher consumer spending and more property buying.

Reason no.3 - Tallinn receives 81 percent of all foreign direct investments

Foreign Direct Investment (FDI) is booming and 81 percent of all investments in Estonia are made in Tallinn and its surrounding area.

This leads to more businesses opening, more jobs created which, once again will lead to more people buying and renting property, mostly by foreign bosses and managers setting new enterprises and head offices in the area.



Reason no.4 - Size really does matter

The Global Growth Competitive Index has ranked Estonia 20th of 104 countries in the world, higher than any other Eastern European country and higher even than Hong Kong which ranks in the 21st position.

Estonia’s small size is its best strategic advantage over the other new EU member countries. Why? Because its small size makes change easier to implement than the bigger more cumbersome countries like Poland or Czech Republic. Compare it to Bruce Lee, He’s light, fast and agile versus Lennox Lewis who is large, slow and cumbersome.

Estonia can quickly implement new hi-tech systems; for example, by 2008 Estonia plans to become completely wireless. That’s the entire country connected via wi-fi. They will be the first ever country to achieve this in the world.

No matter where you are on Estonian soil, you will soon be able to connect to the Internet through any network using the new 3G network system.

Estonia is dubbed by some experts as the next Hong Kong of Eastern Europe, and the financial hub and conduit for western Europe and Russia. Its locality makes it perfect for this. Estonia has already marketed itself as a centre for financial services.

Reason no.5 - Strong domestic demand

Developers built 1,100 units in 2002. Another 1,800 were completed in 2003 and around 2,000 in 2004. Ober-haus, the real estate agency is expecting demand to outstrip supply. They estimate Tallinn can absorb between 2,200-2,500 new apartments per year.

Housing loans in Estonia total only 11 percent of annual GDP compared to the EU average of 48 percent. Ober-haus envisions over 400 million EUR of increased lending coming to the Estonian housing market over the next four years.

Per capita living in Estonia is 26m2 which is half the EU average.

The growth thus far has been fuelled by a growing domestic middle class sector who are earning good money, and they prefer, and can afford to buy new apartments. The growth has also been fuelled by foreign business people.

Reason no.6 - Low interest rates

Between 1995 to 2005 interest rates have fallen from 12 percent to there lowest ever starting at 3.1 percent.

This is Estonia’s lowest rate in history. Fierce competition between banks ensures rates will stay low.

Low interest rates mean greater affordability and opens up accessibility to a much larger share of the populations where at one time buying was out of reach.

Reason no.7 - Favourable lending conditions

Estonian banks are prepared to lend Estonian nationals up to 95 percent of the value of the property, provided the monthly payments are no more than 40 percent of their take-home pay.

Favourable lending conditions coupled with low interest rates, have spurred the domestic demand over the last few years.

There are even government subsidies for families to help newly formed families get a foothold on the property ladder as well as tax relief for interest payment. Again, these are only available to Estonian nationals.

For foreign nationals, it’s common to receive offers of up to 75 percent of the value of the property, provided your bank statements from home show you are able to afford the repayments (more on that later).

Reason no.8 - Growing economy
Estonia has produced an average GDP for the past 4 years of 6.23 percent, while maintaining a low inflation rate of just 3.1 percent during 2004.

The Estonian economy has been booming over the last few years due to a combination of factors such as: low interest rates, favourable lending conditions to new enterprises, foreign direct investments due to favourable investment climate (0 percent corporation tax on undistributed profits), low labour costs, high wage growth (meaning more spending power for the consumer and higher employment due to the creation of new foreign and domestic enterprises).

GDP, and thus per head GDP, are indicators of a country’s total production and expenditure, and are therefore a way of measuring and comparing the degree of economic development of countries.

The graph below show the estimated periods to reach 75 percent/100 percent of EU 25 GDP level assuming 6 percent growth rate per year for Estonia and 2.5 percent for EU25.

GDP growth in the old EU15 Europe in 2005 is expected to grow by 2 percent, from last year's 2.2 percent.



Reason no.9 – Convergence with Helsinki property prices

One very important but overlooked prediction indicator.

Estonia in many ways identifies itself more with its Nordic EU neighbours across the sea than with the two other Baltic countries with which it broke away from.

It is the general view that the economy of Estonia will converge closer towards the Nordic countries than that of the rest of EU, simply due to the high level of FDI from these countries.

Finland along with the other Nordic countries, have moved to Estonia to cut costs and become more competitive at home and around the world. In fact, 74 percent of the total FDI is from the Nordic countries. This is more likely to bring Estonia in line with these countries in terms of wages and GDP.

Property prices will also converge, but more specifically towards Helsinki (as forecasted by Bank of Estonia). Helsinki city centre property prices per sq mt are approximately 420 percent higher than prices in Tallinn city centre.

There are several reasons for this. Apart from being just 18 minutes away by helicopter, the Estonian language is closely related to Finnish, which belongs to the Finno-Ugric group of languages (the largest languages in this group are Finnish and Hungarian). Most Estonians also follow the Lutheran religion.

No other pair or group of countries, so far, enjoys anything like the closeness of Finland and Estonia. The reasons are historical, and part geographical and part political. Therefore is would be fair to compare the two capital cities in a long-term forecast view.

The Finnish-Estonian relationship was blessed by deep roots (Finns have been zipping over to Estonia for weekend breaks for decades); by plenty of oomph in Helsinki (Finland was famously shrewd in its dealings with the Soviet Union); and, perhaps most importantly, by a model partner in Estonia.

Finland is both Estonia’s biggest foreign trade partner and its second biggest source of foreign investment, behind Sweden (see graph above).

Links at other levels are cosy too. Finland trains, and trusts; Estonia’s military and security services, keep up the morale in the police force and the judicial system through exchanges and liaison schemes; they also operate a joint coastguard and marine-surveillance service.

Additionally linguistic ties mean that cultural links are uniquely close. Tallinn is probably the only foreign city in the world where a poetry reading in Finnish can attract a crowd.

The graph below show the estimated periods in order to reach 75 percent and 100 percent of Helsinki property price levels, assuming an 11 percent growth rate per year for Tallinn and 3.0 percent for Helsinki.

Reason no.10 - Estonia – Officially Europe’s fastest growing country in terms of tourism

Foreign accommodated tourism in Estonia increased by 30 percent in 2004 compared to 2003 from 1.05 to 1.36 million tourists making it Europe’s fastest growing tourist destination. The reasons for this include:

1. Increased awareness of Estonia as a new member of the EU.

2. Budget airline like easyjet are now flying to Tallinn from just €3.99 one way. In addition, Estonian Airlines have reduced air fares by approx. 40 percent.

3. Estonia has an active global tourism marketing campaign designed to increase tourism, especially during the autumn and Winter season, traditionally a quiet period for tourism.

4. Tourists are becoming tired of the traditional European cities and have a ‘been-there-done-that’ attitude. They are now looking for a fresh experience, and they have an eagerness to explore little-known but exciting areas of Europe including Estonia.

5. Prices are cheap: A beer is 50p, a three-course-meal is from £10 and taxis are around £2.

6. Nice people. Nice place. Estonians are genuinely great people; they are extremely friendly towards foreigners. They are helpful, polite and offer any new comer a very pleasant experience--one that makes you feel you must return to this wonderful city!

7. Estonia is rapidly becoming the next Prague. Tourists are beginning to discover that this little country offers trendy bars, excellent restaurants and modern nightclubs that compete with the top cities in Western Europe. In addition, the Old Town is listed by the World Heritage Organisation.

Increasing tourism means more new businesses, more new jobs generated and more people available to buy and rent properties.

The potential? Let’s put things in perspective; taking the UK into account, in 2004, out of a total of 1.36 million foreign accommodated visitors to Estonia only 38,903 (that’s 2.8 percent) were Britons. Last year Britons made 60 million trips to foreign destinations and this figure is growing by 5 percent a year.

Compare these figures to Prague where there were 6.9 million foreign tourists last year, of whom 500,000 were British visitors.

This means Tallinn, as a potential destination for the British traveller is massive. Multiply this worldwide, and you have a potential tourist destination that is about to explode over the next 10 years.

Here’s another important statistic. Helsinki, comparable in population size to Tallinn, has 8,000 hotel rooms, while Tallinn has only 3,000.

Already, there is a massive shortage of hotel accommodation during the peak summer periods, to such an extent it’s sometimes impossible to find a hotel room at the last minute.

For the small property investor, this means there’s a great opportunity for holiday apartment rentals.

In addition, Tallinn likely will become the Culture city of Europe by 2016. Every year two European cities are voted as being rich in culture. The countries have been selected for the next 11 years. Even though the exact cities have yet to be chosen, Tallinn is the most likely city in Estonia.

Reason no.11 – Fly-to-let investors

Savvy property investors from Sweden and Finland have been investing in Estonia for several years. Due to their locality, it means they have been closely linked to what’s been happening in the area.

However, property investors from Western Europe are not far behind the Scandinavians. They are now beginning to realise the potential in Eastern Europe and are beginning to diversify their assets into this high-growth investment market.

According to a survey carried out by the organisers of the Property Investor Show 55 per cent now believe that overseas property is a better buy-to-let bet than bricks and mortar – this is up from 25 per cent last year.

The percentage planning to buy in the next year is also up - from 16 per cent last year to 22 per cent this year.

While rental income and capital gains (60 per cent) are the main reasons for buying abroad, the prospect of better weather (58 per cent), and a better quality of life (42 per cent) were also cited as major motivators.

One fifth plan to buy a retirement home; 15 percent are keen to buy a home that will allow them to indulge in their sporting passions - sailing, golf, skiing and the like - and 10 percent are looking for a healthier lifestyle.


With the stock market and pension funds failing many people, investors are also keen to put their money into more solid ventures, even if it means investing it overseas.

Tallinn is probably 3-5 years behind Prague in terms of a destination for foreign property investment.

Talking with property developers in Tallinn, 15 percent of purchasers are now foreign investors from Western Europe.

The ball has only started rolling; when publicity works its magic, it will create a snowball effect. Look at Spain and Ireland for example, property investors have caused property prices to grow exponentially in these areas.

Reason no.12 - Property prices will increase in-line with wages, which are increasing 10 percent a year.

At the moment Estonian wages are just 20 percent of EU average.

If Estonian wages and salaries continue to increase by an average 10 percent per year (as they have done during the previous five years), it will double every seven years.

In order for wages to rise to the current level of the EU average, it will take 20 years. This is assuming the euro wages increase by four percent per year and Estonian wages increase by 9 percent over the same period.

The EU average wage is currently €2,335 per month.

This is another very important indicator, in addition to the construction price index. Why? Because historically in the UK, house price inflation has consistently, over time, increased at slightly above wage inflation. Average UK earnings have increased by 9.0 percent per year since over the last 30 years, compared to the 8.4 percent annual growth in house prices over the same period (Source: Halifax).

Using this as a sole indicator on its own means property inflation in Tallinn will increase at least in-line with wage inflation of Tallinn. (i.e. around 10 percent per year.)

The bottom-line. Why are property prices rising?

• Rising construction prices
• EU funding
• Foreign Direct Investments mainly into Tallinn
• Size and global competitiveness
• Strong domestic demand
• Low interest rates
• Favourable lending conditions
• Growing economy
• Convergence with Scandinavia
• Booming tourism
• Foreign property investors
• Rising wage inflation