1. REAL ESTATE INVESTMENT MARKET PERSPECTIVES IN ESTONIA: A SURVEY ANALYSIS Kaia Kask School of Economics and Business Administration University of Tartu Ene Kolbre School of Economics and Business Administration Tallinn University of Technology

2. 22 Problem Changes in the economy have directly influenced the development of the real estate market. The research question: Is the Estonian investment market environment more unfavourable than favourable for potential real estate investors ? 2

3. 33 The Total Number and Volume of transactions in Estonian Real Estate Market Number Million EEK Value of transactionsNumber of transactions

4. 44 Main Reasons of the Real Estate Market Fall Economic state High interest rates Rigorous loan conditions Rising unemployment Real wage decline

5. 55 Economic Indicators during 2002-2008 and 2009 forecast 2003200420052006200720082009* Real GDP growth (%)7.17.59.210.46.3-3.6-12,3 Real private consumption growth (%) 9.66.710.615.17.8-4.0-9.5 Unemployment rate (%) 10.09.77.95.94.75.512.8 Real wage growth (%) 8.05.26.111.211.63.3-4.7 Nominal credit growth (%) 38.433.835.651.630.27.3-7.5 Source: Bank of Estonia

6. 66 Notarised Purchase-Sale Contracts of Registered Immovables with Residential Buildings and Ownership of Dwellings Value of contracts (mln EEK) Number of transactions Total number of transactions Value of contracts Purchase-sale contracts of dwellings

7. 77 Average Purchase-Sale Prices per Square Metre of a 2-room Apartment and number of transactions in Tallinn EEK/sqm Average price Number of transactions

8. 888 Indicator to evaluate price developments over a longer period of time price-to-income ratio (P/I) – the share of the average (median) price of an apartment/house in the average (median) total annual net household income, measured in real values and adjusted for inflation

9. 99 P/I ratio of the Tallinn and Tartu housing market (2- and 3-room apartments) 9

10. 10 Tobin’s q Tobin’s q investment theory has often been used to analyse supply and to model long-term changes in housing market and to assess real estate The following relationship has been used to find Tobin’s q: q = V/ C, where V – market value of housing; C – housing replacement costs 10

11. 11 Tobin’s q of the Estonian and Tallinn apartment market

12. 12 Survey analysis Questionnaire conducted in June 2009 A pilot study with a sample of 8 real estate market experts Responce rate 100% Questionnaire contained: – 6 general questions about real estate investment market situation and perspectives – 2 questions about the prognosis of vacancy and cap rates for the nearest 6 and 12 months

13. 13 Answers to general questions about real estate market Estimation of Estonian real estate market transparency – 2.75 (the scale from 1 till 5) Estimation of current state of Estonian investment market envioronment for foreign investors – 3.25 (the scale from 1 till 5) Estimation about perspectives of investment environment of Baltic real estate markets (the scale from 1 till 10): – Estonia5.38 – Lithuania5.13 – Latvia3.63

14. 14 Real estate investment perspectives by market sectors in Estonia (the scale from 1 till 10)

15. 15 Real estate development perspectives by market sectors in Estonia (the scale from 1 till 10)

16. 16 Forecast of the trends in market cap rates by spaces (%)

17. 17 Forecast of the trends in market vacancy rates by spaces (%)

18. 18 The stages of real estate market development “booms” in Estonia so far Privatization of land ↓ Development of office spaces ↓ Development of shopping spaces ↓ Development of housing spaces ↓ Development of storage and production spaces ↓ Development of office spaces ↓ Development of shopping spaces?

19. 19 Conclusions Over the last two years, rates of return have risen in all market sectors Within the next year or two, in Tallinn or in its close vicinity no new major projects are expected to be launched The bottom of the real estate market is feared to arrive early in the 2010, the shape of this bottom is expected to be flat The transparency of Estonian real estate market is still in a range of semi transparency with a slight backward movement towards opacity The most perspective real estate market sector for investment in the nearest 1-2 years indicated by experts, was shopping space market The most perspective real estate market sector for development during the nearest 1-2 years indicated by experts, was housing space for selling.

20. Thank You for Attention!