Tallinn property market turns into a real estate bubble

In the opinion of Ąripäev- a real estate bubble is rapidly building up in Tallinn. Opinions whether this is the case differ.

There are at least 3-000 new expensive apartments- private houses and lots that are currently offered in Tallinn each costing at least one million kroons. The big question is whether there are enough buyers for all this property?

If not and the bubble bursts- it will push several developers into bankruptcy and affect consumer since most property is sold before it is completed.

The Ąripäev Real Estate Catalogue that was published in early March shows that developers and real estate agents are selling around 150-000 square metres of new apartments in Tallinn and Viimsi in the outskirts. About as much as already been sold or booked in advance in renovated buildings. If we calculate that the average floor space is 80 square metres it means that there must be at least 1-850 vacant apartments on offer in addition to 460 private homes and 600 lots.

It means that the Tallinn market needs 3-000 buyers that are capable of paying more than a million kroons for their housing since new apartments or houses don’t come cheaper than that. In the opinion of Äripäev this shows that a real estate bubble is building up which may turn out to be the swansong for several developers and affect consumers who have paid for the housing up front.

Statistics upholds this view since the construction business went up 34 percent in 2002. The increase in the second quarter was as high as 41 percent.

Also the volume of housing loans went up in 2002 by 75 percent. Nordea Pank and ܜhispank are already offering housing loans are less than five percent. In comparison- in January 1999 the banks were offering loans at 11.4 percent. A total of 5.7 billion kroons in housing loans and consumer leasing was issued by banks in 2002. Around ten percent of households have loans or leasing liabilities.

“The question is how well property developers are monitoring changes in demand-” said Ain Kivisaar- analyst for Uus Maa- a real estate agent. “Projects that comply with buyers’ wishes continue to be sold long before the ground is being broken. At the same time there are many apartments on the market that were completed 3 to 6 months ago and whose price is too high to find a buyer. This shows that competition on the market is growing.”

Tõnu Toompark- analyst of ERI Real Estate- says that competition was becoming cutthroat mainly because of the arrival of new developers. “Real estate development has become the business for lawyers- shipping companies and even candymakers-” said Toompark- referring to recent cases where Tallink- the leading ferry operator- paid 52.7 million kroons for Teenindusmaja in Tallinn to convert it into a hotel and Kalev- Estonia’s leading candymaker- leased out its premises to the police board and acquired Keila-Joa state summer cottage area for 52 million kroons in cooperation with Skanska EMV.

Toompark added that this situation has made banks increasingly worrying and they have tightened their borrowing requirements. “Hansabank and Eesti Pank have already warned developers for a possible bubble-” he said.

Claims that the market was overheating are disputed by Martin Otsa- analyst or Arco Vara- a leading developer and property firm. Otsa says that demand is likely to remain stable for the next couple of years allowing to sell around a thousand apartments a year.

“I don’t see any signs of overheating-” said Otsa. “There are no signs of lower demand. What I believe is that the period of sale could extend and the number of apartments sold before they are completed will fall.”

Also representatives of the ministry of economic affairs say that it was too early to talk about a property bubble. “Today we are not seeing overheating markets-” said Helena Hannula from the ministry’s economic development department.

Artikli autor on Toomas Hõbemägi. Artikkel ilmus 19/03/2003 väljaandes Balticbusinessnews.com.