Small Flats Attract Both Home Buyers, as well as Rental Property Investors

According to the data of the Statistical Office, a total of 2264 residential properties were built in Tallinn in 2016. Only 6% i.e. 133 of these properties built were one-room flats. 850 of the properties i.e. 38% were two-room flats, while 35% or 790 properties were three-room flats. 22% i.e. 491 of the residential properties built in 2016 were flats with four rooms and above

This shows that the residential property development process in Tallinn is clearly skewed towards two- and three-room flats. Such predominance of flats with smaller number of room is caused by better liquidity of flats of such size, i.e. the estimated shorter selling period. A shorter selling period allows developers to exit from the project within an optimum period of time and keep their risks at a controllable level.


Demand Favours Smaller Flats

Demand plays its own role in such intensive development of smaller flats. This demand is fuelled by both home buyers, as well as rental property investors. The share of the latter on the market has visibly increased in recent years. The preferred choice of rental property investors is a one-room, at most a small two-room flat. The absolute buying price of such flat is low and the expected rental yield is the highest.

In addition to rental property investors, flats with smaller number of rooms, i.e. flats with one to two rooms attract individuals who are looking for their first proper home. The price of flats with fewer rooms and fewer square metres is more affordable. This offers a wider range of consumers a possibility of purchasing such a flat. This increase in popularity of smaller flats is also backed by the trend of decreasing size of households.

Beside first-time home buyers flats with smaller number of rooms are also sought after by older buyers whose children have left home, causing their need for space to decline. A smaller flat is cheaper to keep and could offer a good solution in a situation where utility bills of a large flat begin exceeding one’s means.

Offer Does not Grow in Proportion to Demand

Due to such high demand property developers would be happy to build many more one-room flats than today. However, they cannot do it because the effective requirements set to parking make it impossible.

Rental property investments into smaller, i.e. mainly one-room and two-room flats have created a situation where in 2016 around one thousand of new offerings were added to the rental property market of the capital city. In a situation where the population in Tallinn is growing they have not created clear surplus of offerings and a drop in rent rates yet, but there is a slight risk that such a situation could emerge.

The demand that favours rather smaller flats is still going strong. Even more so, because the difference between prices of new and older flats is not very big. For instance, according to Land Board data, in 2017 the average transaction price of flats built in this decade was 2290 €/m². The average price of transactions involving flats built the last decade is relatively similar, i.e. 2100 €/m².

In conclusion it could be said that although the market of newly built flats in Tallinn is already skewed towards smaller flats, then in view of the actual demand the offering of one-room flats could be much higher than it is today.

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