RE
What do you think how much real estate prices will decrease?
Tallinn is now underpriced, any more decrease is just momentum, and means the recovery will be that much stronger. Tallinn is now cheaper than Riga, Vilnius, or any other central or northern European capital. This makes no sense, as Estonia has higher personal incomes and GDP per capital than any of those cities. Citizens of Tallinn make more money than citizens of Riga, Vilnius, and prices should be higher. Prices in Warsaw, for example, are much higher than Tallinn (Warsaw avg 2,200 EUR per sqm vs Tallinn 1,360 EUR per sqm) so this decrease has gone too far already.
question
Should i wait until autumn to buy real estate or it doesn't make any difference?
Well, if you are selling one home to buy another, then it does not make any difference. Both your selling price and buying price move the same way. If you are only buying, my feeling is use today's golden opportunity to really drive a good bargain for yourself. There are fewer buyers, as they are all scared or uncertain, and so a tough buyer can really push sellers around on price. If you see something you like, go in an offer 10% less. The prices will not be going down another 10%, so you will then be buying at, even below, the bottom.
Remember also, real estate is not like stocks, where if you miss it today you can buy the same stock tomorrow. If you miss the home you want, and somebody else buys it at a bargain price, you will regret it later.
Use today's opprotunity to get what you want at a discount price.
Agris
What foreign real estate investor interest will there be in the Baltics for the next 2-3 years? In what segments, at what yields?
It's true real estate is both cyclical and emotional, so many individual foreign investors have cooled their enthusiasm. But the smarter investors, those that buy large amounts in blocks, are very active with us. We have sold over 500 flats recently in Poland to two large investors, and we are showing them some opportunities now in Baltic cities.
The yields are moving back up, now 5% - 6.5%, because rents are moving up. Demand is still there for modern housing, as people want to move out of the Soviet-era concrete blocks which make up 53% of the housing, and also as the number of people per flat decreases, then the number of flats needed increases, and salaries are growing, so demand is clearly increasing. But some people choose not to buy, but rent instead. We do see rents at the lower to economical (middle) class segment increasing, even as the purchase prices have recently decreased, so rental yields are improving. There are good opportunities now to buy and rent and hold the flat for long term build-up of equity.
Martin
How do you see real estate developing in Estonia, short and long term?
Estonia will continue to converge with Scandinavia. 70 years ago, before the catastrophe of World War II and Communism, Estonia was richer than Denmark or Finland in per capita incomes. It was a very wealthy country, just like Germany. After the war, when (West) Germany has a market economy again, within 25 years they were once again the richest in Europe. Certain people are just certain ways. The same goes for Estonia. We have had a free market here for just over 15 years. In another 10-15 years incomes here will be the same as Denmark or Finland. Therefore real estate prices will as well. Total convergence of prices means prices here have to triple (gain 200%). That means something like 8% per year growth in real (inflation adjusted) terms or about 12% growth in house prices in nominal (EUR) terms. Today is an excellent opportunity for buyers with long term vision.
Martin
What is your opinion of the quality level of real estate brokers in Estonia.
Do you think the service needs to be inreased in slow times?
The larger firms offer a good level of service today, comparable to that in the UK or US or anywhere. There is always some variation as newer recruits do not have the experience of the veteran brokers. On the whole I am always very pleased with service here.
Martin
Can you tell us the number of apartments, houses and land lots sold per month for the past 3 months sold by Oberhaus?
Commercial rentals and sales and valuation business is as good as ever, but residential sales have slowed down. We have sold about 50 per month now in Estonia, which is one-third less than one year ago. The buyers are uncertain.
Again, this makes it a good opportunity for those who want to buy, to take advantage of the current situation. In the long term - say even five years from now - nobody will remember a time that the average price in Tallinn was 22,000 EEK per sqm (like today). In Helsinki the average is over 4,200 EUR per sqm, so more than 65,000 EEK.
Martin
How many new houses and apartments will be added to the Estonian market in the coming months?
This year developers will bring 2,600 new flats to the market. This is less than the roughly 3,500 delivered per year in past years. Now, real estate cycles take time to play out. From starting a new project to completion is at least three years. What that means is that just when the market recovers and buyers become enthusiastic again (let's say one year, to pick a number) there will be significantly decreased supply on the market, and much less coming the year after. It is a classic end of this type of cycle that demand picks up stronger, there is no supply, and prices jump.
We saw it in Poland, when the market recovered from the 2000-2002 recession, and there was little new supply, and prices for new flats nearly doubled in one year. I can see something similar happening in Tallinn in 1-2 years if the number of new developments decreases any further.
Chintan Joshi
1) What kind of house price movements have you seen in the 3 baltic countries
2) Can you contrast those areas where house prices have fallen sharply versus those where house prices have been stabel
3) Usually in a hard landing commercial real estate suffers the most. What trends have you seen in this part of the market.
Thanks
Chintan Joshi
Tallinn and Riga have fallen while Vilnius has been stable. But it has not been extreme. According to notary statistics the fall has been 9% year-on-year and 12% from the top overall. Vilnius has not changed. Polish cities, Warsaw, Krakow, etc, have grown 5-10% depending on location.
Commercial real estate is in a completely different cycle now. With GDP growing, there is demand for new office space. But there is a lot of new office space coming onto the market here. The property owners who will suffer are those with inferior, older product. Tenants will move to new buildings.
With retail, there will be some pain as retail sales have started to decrease. We see it in the mnthly retail sales figures. This makes sense as consumers take on less debt, and are less certain of the future. But the limitations on new retail developments imposed by banks and the market means that there won't be much new supply, so those that already own retail properties will do fine.
Priit
In your opinion which country's real estate market has the biggest potential for investors ( among the countries where Ober-House is operating)
For private individuals, real estate is still the best investment you can make. It is easy to get housing credit, you can rent the property out so your tenant pays the bank, which burns down the debt over time, and you rapidly build up equity. Property is not a "get rich quick" plan. It is a solid, long-term plan to accumulate equity. Call it a "get rich slow" plan, but it works.
Each country has opportunities now in residential. Of course, the best returns in residential always come from the areas with the greatest demographic growth. As populations grow, so do real estate prices. In that sense, Warsaw still has the most advantages, as Poland rapidly urbanises. At least a million more people will move to Warsaw in the next 10-15 years, as they did to Madrid after Spain joined the EU.
But all capital cities in the Central/Eastern European ("New EU") represent good value for long-term residential investors.
jarmo
Few weeks ago previous ARCO`s CEO Mr. Arakas came out with statment that we will defenately see hard landing in the Baltics. What is Your opinion?
No.
George
How does the market dynamics of the Old Town in Tallinn vary with Kesklinn or the other parts of Tallinn with respect to apartments? How much as prices moved from the peak to current levels? And how much further will prices drop before they bottom out?
There is only one Old Town. As someone who lived there many years, the Old Town of Tallinn is one of the most charming, wonderful places you can live in the world. Such places always increase in value, especially when they are very small compared the rest of the city. The Old Town, and Kadriorg, will always be the most expensive areas of Tallinn. The best areas are usual the best insulated from any price drop. Owners of that sort of property can just wait, and have no need to sell.
George
If you are a liquid opportunistic investor, where is the best possibilities shaping up? And when?
How do you know when? As an expat currently living in Tallinn, perhaps you can first discuss Tallinn, and then the other markets that you operate from.
If you have a good amount of cash, there are residential developers with projects they cannot complete. Not because the market is bad, but simply because some investors made mistakes, like pre-selling for one price before locking in their construction price, or their constructors backed out of the project and new ones cost more. Mistakes have been made, and some investors are now paying for it. We see small developers that are in trouble, and some will get bought for basically nothing.
When it comes to individual properties, again I beleive today, if you knock another 10% off the price, then you will be buying below where the bottom will be.
Always try to buy in the best locations. Today is a buyer's market. Take advantage of it.
What kind of house price movements have you seen in the 3 baltic countries
For our latest market report, go to: http://www.ober-haus.com/pages.php/0119
Can you contrast those areas where house prices have fallen sharply versus those where house prices have been stabel
Herd mentality in investing means that the "crowd" always thinks the market is better than it is when it's good, and always thinks the market is worse than it is when it's bad. The herd moves in extremes.
But an investor focused on long-term wealth creation will take advanatage of a market correction, and buy real estate for the long term.
If you beleive that the economies of the "New EU" will continue to grow faster than the "Old EU", then you have to also beleive that proper prices will grow faster as well. The two go hand-in-hand.
q-a
What do you think about so called holland auction that real estate companies organize in estonia? Is it just a commercial trick?
I suppose "commerical trick" can be said more politely as "sales technique". The auction is a good sale technique, as it creates a "sense of urgency" among the buyers to jump in.
George
OberHaus has a good long term reputation in Tallinn, and I was pleasantly surprised to discover, upon visiting Poland, that Ober Haus has a comprehensive branch network in that country, as well. Upon visiting Poland, I felt the property market has, however, "bubbled". In what Polish cities, once the speculative excesses disappear, do you feel offer the best advantages? When do you expect the Poles to adopt the Euro? What will the impact be once they join the EMU?
The Polish zloty has increased 10% a year vs the Euro for the last four years, which increases your return if you are a Euro based investor. People in Poland always talk about the "weak" Euro, and what Europe shoudl be doing to strengthen it, which is sort of funny. In the end the zloty will continue to strengthen, because of strong Foreign Direct Investment into Poland.
Warsaw offers excellent investment opportunities. The average price is now about 2,200 EUR per sqm (50% higher than Tallinn) but we see another million people moving here in the next 10-15 years and limited new supply, so prices should move up just as they did in Mardid where the population also increased by 1.5 mln people in 15 years.
George
Real Estate prices since 2000 in Eastern Europe has been built on leverage, particularly bank supplied liquidity where banks lent money to anyone who walked in the door and at very favourable terms.
Now,that liquidity has dried up, what will be the driving force?
The convergence theory (that prices will harmonize within the European Union) is one thing.
But, you still need liquidity for that to happen.
The liquiduty is there, and will get stronger. It's not drying up. It is a mistake to assume that because the amount of loans granted in Estonia, for example, has halved in the last year that liquidity is drying up. The reality is that there are half as many purchases, due to buyer uncertainty. But the banks want to continue lending. That is their core business. The "New EU" region has, in total, less than 10% mortgages as a share of GDP, compared to 48% in Western Europe or 110% in the UK, for example. So liquidity will continue to grow. And banks see this region as a safer bet, as property values and incomes are growing much stronger than in the West, and economic fundamentals are stronger than in the West.
The recent price correction has more to do with psychology and a short-term "over shoot" in prices than any macro liquidity reason.
loom
How do you explain that leading Estonian banks and even real estate firms predict price decrease that may last even couple of years? Your view is quite positive why, explain?
My view is based on the long-term. I cannot tell you where prices will be six months from now, but I can tell you where they will be ten years from now, and that is roughly three times higher than where they are now.
If you are a patient investor, with a tenant paying your bank debt, you will get a better than 20% return on your equity every year between now and then.
question
As you don't agree that we are going to see hard landing in the Baltics, what is your visionabout the developments?
To give an example, Poland went through the same phase five years ago, after GDP had grown 8% every year and then fell to 1% for two years, which was a "deep recession". What happend was that the number of new project starts halved (as we may be seeing now in Tallinn) and when the market recovered two years later, prices surged. We see a similar situation here. The smart (or perhaps just lucky) developers are locking in lower construction costs over then next 12 months, while the market is weak, and will come to market one to two years from now with a lower cost base, and charge higher prices, and hit the sweet spot in the market.
Additional information you can find at: http://www.ober-haus.com/files/baltic_report_2008_online.pdf