Apartment Deals, Prices In Estonia Picking Up But Caution Still Needed

Summer 2011 apparently experienced a low volume of real estate transactions in Estonia, according to Tõnu Toompark on his adaur blog. However, the months of August and September actually saw a rise to the highest level of the year so far, writes Tõnu. There were 3 428 apartment transactions in the third quarter of 2011.

The increased level of transactions also left its mark on average transaction price and values, which are both rising rapidly, Tõnu continues.

Whereas the number of transactions rose by 5.3 per cent and average prices by 14.1 per cent, the overall value of transactions has risen by 25 per cent.

That being said, given that the global economy has not yet found a solution to its continuing risks, the resulting uncertainty means that it unwise to forget about the potential risks involved.

One upside of the current situation, Tõnu writes, is that caution is held in much higher esteem than would have been the case in the past, despite the steady improvements in the market; noone is suggesting that real estate is a risk-free investment which cannot experience a subsequent fall in prices over time, something that was apparently lost on the market during the boom years of 2005-2007.

As a comparison, the number of deals peaked twice during the boom years, at around 8 500 in the fourth quarter of 2005 and again at slightly less than that a year later, when overall value of transactions stood at its highest level of  a little over 500 million Euros; the low point (first quarter of 2009) saw around 2 000 deals and a total value of less than 100 million Euros.

Average prices peaked at in the second quarter of 2007 at around 1 200 Euros per square metre, reaching a low of approximately half that (600 Euros per square metre) in the third quarter of 2009. The average price per square metre currently stands at around 700 Euros per square metre.

The full article (in Estonian) along with detailed graphs depicting overall value of apartment deals, number of transactions and average price per square metre going back to 2004 can be found here.

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Energy Savings Pay Off When Buying Real Estate In Estonia

When buying a new home, it seems that the biggest cost is likely to be the actual purchase price according to property developer Allan Kool, in an article published on Tõnu Toompark’s adaur blog. However, it gradually dawns on home owners that there are other costs associated with home buying which are essential; the most significant of these is energy costs, he goes on.

This article will attempt to make a comparison of apartments with different energy-classes. The two apartments in question are a 2006-built gas central-heated D class terraced apartment with a 2011-built A class apartment, which is being developed by Mr. Kool. In addition a typical family dwelling built in the 1960s, using coal as a heating medium will also be compared (the EU energy performace rating scale runs A-G, where A is the most efficient level and G the least efficient).

With a total area of 133 square metres, the 2006 built energy efficiency D-rated apartment experienced a total heating bill for 2010 of 2 150 Euros, or 180 Euros per month.

The 1960s-built house was classified with an energy efficiency F rating, and at 144 square metres in area cost 2 365 Euros per year, or 200 Euros per month.

By contrast the 2011-built apartment, located at Vuti Street 36/38 in the Kristiine region of Tallinn, the smallest of the three in the comparison at 125 square metres and with an energy rating level A (i.e. the most efficient) had a far lower figure for its estimated heating costs for 2011, at just 800 Euros (i.e. a little under 67 Euros per month).

Thus it can be said that the more efficiently-rated flats actually have heating costs that are over three times cheaper than a less well-rated apartment!

In general, Mr. Kool argues, energy price forecasts are somewhat tentative. He cites the claims of noted Estonian geologist Anto Raukas that energy prices in the future might be as much as three times as high as today. As a result, attempting to protect the return on investment becomes paramount in this situation.

Nonetheless at current price levels the A-rated terraced dwelling maintains a saving of 27 000 Euros over 10 years on that basis when compared with the D-rated property. When compared with the F-rated older family home that figure is even higher, at a 32 000 Euro saving over 10 years.

In summing up, it could be said that energy is a significant issue that directly affects an individual’s income. Costs, especially heating costs, should be thought about very hard when making a purchase in the housing market. A property with a lower purchase price can prove much more expensive in the long term in comparison with that with a more efficient level of energy consumption, thus it is worth paying close attention to the energy rating when buying your home.

The full article (in Estonian) including a table comparing the three properties studied is available here.

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Estonia Property Prices Lowest Since Downturn, Offers Increase

Positive changes in residential offer prices in Estonia as reflected in the kv.ee index are, despite positive forecasts, not apparent, with the index showing its lowest figure since the 2008-2010 crash, standing at 61.0 on 3 July, 2011, writes Tõnu Toompark on his adaur blog.

This, however, does not represent a catastrophic drop; the figure is only 1.5 per cent lower than a year ago.

Over the past year the index has fluctuated, albeit in the narrow range of just two points. Unfortunately the index is thus far a long distance from the 10 per cent rise predicted at the beginning of the year.

That said, there has been a 10 per cent rise in the level the number of offers year-on-year. At that time the number of offers in the kv.ee portal stood at 18 900, whereas at the time of writing the figure is 20 700, Tõnu writes.

The deals cited consist of offers on apartments and residential houses. The latter are primarily to be found in provincial Estonia (The biggest change was in provincial Estonia, in Paide – not that houses predominate there, of 185 per cent).

In Tallinn the number of residential offers has increased by 9 per cent year-on-year; in the second city of Tartu, and the south Estonian town of Võru, the number of offers have actually decreased, by -6 per cent and -7 per cent respectively, according to Tõnu.

The original article (in Estonian) including a table showing changes in number of offers for all regions of Estonia, can be found here.

The kv.ee index, which commenced on 18 February, 2008 (i.e. this is the date on which the value of the index is calibrated at 100) measures the week on week change in residential real estate prices in Estonia. The data has been measured back anachronistically to 1 January, 2005, when the index stood at an “all time” low of 49.9. The “all time” high came on 7 May, 2007, when it stood at 108. As noted the lowest figure since the downturn of 2008 onwards, of 61.0, has just been recorded.

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Do Apartment Ownerships In Estonia Constitute An Enterprise?

The Estonian Tax and Customs Board sometimes seems to use unlawful measures to limit the taxpayer’s right to deduct value added tax (VAT), report Law Firm LEXTAL attorney-at-law Ants Karu and lawyer Margus Reiland.

Obligation to pay VAT usually lies with the seller of goods (e.g. apartment ownerships or immovables). As a general rule the (VAT registered) buyer of those goods has in turn the right to deduct input VAT in cases where it uses the purchased goods to create VAT liable goods or services. This means that the buyer does not generally bear any real tax burden.

However, there are situations where the buyer pays the price (including VAT) demanded under the contract, but the seller does not pay VAT to the state. In these cases the buyer must keep in mind that the Estonian tax authority has a strong interest in limiting the buyer’s right to deduct input VAT.

According to the logic of VAT, the buyer’s right to deduct input VAT should not depend on whether or not the seller pays VAT to the state (this principle does not apply in exceptional cases, such as tax fraud or when the buyer has not been diligent).

However, the Estonian tax authority has recently made several attempts to limit the buyer’s right of input VAT deduction using rather creative measures. This generates a substantial tax risk for the buyer. According to the recent decision of the Estonian Supreme Court the Estonian tax authority’s conduct in limiting the right of VAT deduction hat not always been lawful, as we shall explore.

The Supreme Court decided in favour of the taxpayer

The main question of this dispute was whether a group of apartment ownerships acquired by the buyer constituted as a transfer of enterprise. Pursuant to the Value Added Tax Act, the sales transaction of apartment ownerships may be taxable with VAT, but in cases of transfer of enterprise no supply will arise, as a result of which the purchaser has no right to deduct input VAT. The Estonian tax authority was of the opinion that the buyer acquired an enterprise instead of apartment ownerships and the buyer disputed this opinion in court.

The buyer claimed that empty flats do not constitute as an independent enterprise. An enterprise is an economic entity consisting of things, rights and obligations (e.g. workers) and is able to function independently. For example, a factory is considered to be a typical enterprise because it consists of staff, equipment, trademarks and know-how. The Supreme Court agreed with the taxpayer’s arguments. A group of apartment ownerships are simply a body of things, which do not constitute an independent functioning economic entity, that is to say an enterprise.

Summary

The mentioned case may be considered a significant victory for those taxpayers who deal with the buying and selling of apartment ownerships, immovables and similar. The Estonian tax authority’s overly aggressive conduct in limiting the right to deduct input VAT may be unlawful in some cases and should thus be revised.

The authors of this article represented the taxpayer in the referred tax dispute.

Authors:
Ants Karu, attorney-at-law, Law Firm LEXTAL
Margus Reiland, lawyer, Law Firm LEXTAL

www.lextal.ee

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Tallinn Property Price Index Unchanged

As recently posted on this blog, there was a recent blip upwards  in the otherwise generally stagnant level of property prices in Tallinn, at least according to real estate portal kv.ee‘s index of prices. It seems that things have reverted to how they had been during the last months of 2011 however, with the index standing at 62.2 as of today (down from 62.8 last month). This is notwithstanding the fact that more flats and houses seem to have appeared on the market.

According to real estate expert Tõnu Toompark’s blog,  this figure stands at some 2.5 per cent lower than the figure this time last year, and has bottomed out, though this doesn’t mean any upturn is imminent just yet.

Since the beginning of last year, successive real estate offers started to be added to the kv.ee portal. This peaked in the summer when the number of offers stood at over 20 000. The number of offers began to fall the following winter, reaching a level of 18 700 at the end of the year. Since then, offers started to grow week on week, and today stand at a level of 19 319.

There has been a number of newly-built developments entering the market, but these are often being snapped up quite quickly, thus not impacting the number of current offers level all that much. In general, demand seems to seasonally lag behing supply somewhat, so the coming spring is likely to bring an upsurge in buying and selling activity; the slump in transaction numbers in winter hasn’t helped existing sales offers to be realised.

The kv.ee index, which commenced on 18 February, 2008 (i.e. this is the date on which the value of the index is calibrated at 100) measures the week on week change in residential real estate prices in Estonia. The data has been measured back anachronistically to 1 January, 2005, when the index stood at an “all time” low of 49.9. The “all time” high came on 7 May, 2007, when it stood at 108. Following the economic downturn of 2008 onwards, the index reached a low point (to date) of 61.4 on two occasions, on 5 September and 27 October, 2010.

Tõnu’s original article (in Estonian) is available here.

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Ten Tips Which Landlords Should Keep In Mind

Why invest in Tallinn and not another European city, particularly in the former Eastern bloc? Well, now is a very good time to consider investing here. Prices are at around a five year low and the rental market is buoyant. Furthermore Tallinn will be European Capital of Culture in 2011, undoubtedly bringing with it a rise in already-high levels of tourism and associated businesses, and Estonia routinely scores higher in corruption indices than its baltic neighbours, for example. Furthermore Estonia joins the Euro zone on January 1, 2011.

But more than all this, the buying process here is quite simple in comparison with some other countries. For instance, it is not necessary for both parties in a transaction, the buyer and the seller, to find their own solicitor and to suffer the inevitable delays, not to mention cost, of paperwork and procedures during this stressful time. Here in Estonia the process is very transparent and it is sufficient for both parties, upon agreeing a sale, to make their way to one of the many competent notaries, who will carry out all the necessary procedures. This takes place with both parties present (together with a sworn translator where necessary) in a short space of time and for a very reasonable fee (including the standard state fee).

Nevertheless, many people become a ‘landlord’ with little knowledge of the realities of what the process involves. Maybe they are moving out of their former home or part time home, but wish to retain it and let it out. Or maybe they invested in property at the height of the boom here in Tallinn. Or perhaps they came by a property through family connections. Whatever the case, a lack of knowledge about being a landlord can lead to such unwanted scenarios as unexpected expenses, void periods or problem tenants.

To help you avoid any of these undesirable situations, here are some important pieces of advice that we will give to any aspiring, or existing, landlord!

  1. Be prepared to be flexible in rental prices. Sometimes a happy situation will arise where a property will immediately be let out for its full asking price, but at other times, particularly when it is a renter’s market, it might be wiser to accept a reasonably reduced offer from a potential tenant rather than hold out for the full amount and carry the burden of a void period for any length of time.
  2. Steer clear of void periods at all costs, even if this means being flexible about rent figures. This also means you should be flexible in terms of rental periods, for example having a short term let for part of the year and longer terms the remainder, to maximise profits and minimize void periods. This can have the effect or earning 10-15 per cent more per year. Naturally having a fully managed service will mean that the hassle of organising this is out of your hands.
  3. If the property was formerly your personal home or part time home, or contains fixtures and fittings left over from a former occupant, be prepared to make the necessary internal alterations in order to successfully attract a tenant. One’s own personal tastes may not match with those of other people. Experience has shown that tenants on the whole prefer light, neutral colours and modern (but not too extreme) fixtures and fittings. Time to get rid of that lime green ceiling or novelty lampshade! ‘Minimal is king’, is a useful watchword here.
  4. Consider getting a property professionally cleaned at the end of a tenancy period. This can work wonders in attracting a new tenant, breathing new life into worn carpets and making grubby tiles sparkling again. First impressions last and it would be a shame to put off a potential tenant simply because of an unpleasant odour or dirty bathroom.
  5. It’s worth having an inventory taken (even in unfurnished properties). This lists in detail all the items which have been left in the property for the tenant’s use, and the condition of the apartment in general. This will be signed by both landlord and tenant, thus avoiding any unpleasant disputes arising surrounding any damage at the end of a tenancy.
  6. Expect a certain amount of wear and tear. This is only inevitable, and over time items will need to be replaced. As a general rule, fridges and other white goods will need to be replaced as they become outdated or cease to work over the years, and a property will need small redecoration works and maintenance works approximately every four years. Wooden parquet flooring also requires attention from time to time.
  7. Do not leave anything of great financial or sentimental value in a property which you are letting out.
  8. Location, location, location: something of a cliche but true nevertheless. Experience shows that the best chance of investing in a successful rental property falls within the central part of Tallinn. This incorporates the old town, the ‘Kesklinn’ (city centre) and to a certain extent the areas of Kadriorg and Kristiine, to the east and west of the centre respectively.
  9. Do think about the type of property you are investing in. Is it likely to be suitable for a student, foreign national or young professional(s)? How old is the building? What are communal areas like? Are there likely to be any planning permission issues? Is there much storage? Is there a parking space? A garden? What are the communal charges? Is it near public transport links, retail outlets and other facilities?
  10. Keep in touch: your managing agents can advise you about developments at the property, maintenance issues etc, but always respond to emails and queries on this promptly. This will lead to a better relationship with a tenant and an increased likelihood that they will want to stay on.

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Residential Prices In Estonia: Index Shows Fall, Many Agents Favour Rise

The KV.ee index for residential prices in Estonia, which has stayed with the range of 61-65 points through the course of this year, yesterday settled at a figure of 61.8, thus  falling by 4.3 per cent through the course of the year, according to a report by Tõnu Toompark on adaur.ee (in Estonian).

The average price for the whole of Estonia stands at 12 686 EEK per square metre at the time of writing, down from 13 272 per square metre exactly a year ago.

This is hard to believe, given the fact that the residential property market is becoming increasingly active, Tõnu argues, and could in fact be due to the fact that the index lags behind actual prices by as much as a year. Actual transaction prices are probably stable and not falling at the moment.

Looking at the three major Estonian towns (Tallinn, Tartu and Pärnu) it appears that the gap between asking  prices and the corresponding actual transaction prices has narrowed somewhat, to below 4600 EEK and 4200 EEK per square metere  in Tallinn and Tartu respectively, and just 2200 EEK per square metre in Pärnu.

However Tõnu predicts that this trend will not continue indefinitely, and it seems likely that transaction prices will start to rise slightly in the near future. He goes on to explain that most of the difference between asking and final transaction prices does not represent a growing market but rather reflects the differing expectations of buyers and sellers. He also speculates that estate agents are wanting to return to pre-crisis price levels and are thus influencing prices upwards to a certain extent – this could mean that the disparity between asking and transaction prices will rise…

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Slight Fall In Tallinn Property Transactions For October

Tallinn property transactions fell in October in comparison with the previous month, according to Tõnu Toompark’s blog Adaur.ee (available in Estonian only).

Citing figures compiled by Tallinn real estate agents 1Partner Kinnisvara, transactions fell by 12 per cent, from a figure of 482 million Kroons (c. 30.8 million Euros)  in September to 423 million Kroons (c. 27 million Euros) in October. 1Partner’s executive director Martin Vahteri said that activity was particularly noteworthy in the Vanalinn (Old Town) and City Centre areas, where the highest real estate prices are generally to be found. He further remarked that a significant proportion of transactions involved overseas nationals, most notably Finns and Russians. 17 per cent of transactions, a total of 112 objects, comprised foreign investors, he said.

Average price per square metre stood at 15,546 Kroons (c. 994 Euros). The value of transactions of apartments varied hugely, from a reported highest price of 6.225 million Kroons (a little less than 400,000  Euros) to a low of 10,000 Kroons (c. 640 Euros)!  The most expensive transaction on a whole housing unit stood at 11.5 million Kroons ( c. 735,000 Euros). There were foreclosures on 31 buildings in October.

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