Real Estate Property Investment Series: Focus Estonia 2007
by Rhiannon Williamson
Estonia is a relatively recent addition to the European Union having joined in 2004, and it is one of the most successful and affluent of the new members too. In just a few short years the Estonian government transformed theirs into a modern market economy and by 2007 Estonians’ per capita GDP, as measured using the purchasing power parity method, will be on a par with Portugal’s which sits at around 70% of the EU average…an impressive rise in economic fortunes in such a short period of time.
Contributing to the economic success of the nation is the fact that Estonia has an attractive flat tax rate, it has developed impressive electronics and telecommunications sectors and has strong trade links with some of the more affluent nations surrounding it such as Finland and some of the largest economies in mainland Europe such as Germany. The rise in economic fortunes of Estonia has seen unemployment halve in a few short years and as GDP has grown so has the mortgage market in Estonia – it has grown by 80% in actual fact.
The rise in affluence of the Estonian people and their increased access to property finance products has kick started a property revolution in Estonia that has attracted significant overseas property investment interest.
But going in to 2007 will this opportunity continue to look as attractive?
Some say ‘no’ because interest rates are expected to rise in 2007 and an underlying issue in the construction industry is likely to inflate the cost of building new properties with the inflated cost passed on to the consumer.
The underlying problem is three fold – a lack of labour, an increase in the price of construction materials and a rise in land costs. These factors can push up prices without adding value to a property and this reduces consumers’ interest in property for the short term. Couple this with potential interest rate rises as mentioned, and 2007 could be a flat year for the property market in Estonia.
But there are alternative angles for a property investor to consider such as the growing tourism market in Estonia. The World Travel and Tourism Council have predicted at least nine years strong growth in traffic and GDP contribution off the back of tourism interest in Estonia….so what final conclusions can be drawn from all this vastly divergent data?
It seems likely that 2007 will not return any significant increases in capital gains for an investor – but because demand exists from both the local and the tourism markets in Estonia and because the nation is economically and politically strong, property investments made in Estonia in 2007 will represent good medium to long term capital appreciating assets and offer an investor the chance to tap into immediate rental demand from both the growing tourism market and a local market not willing or able to expose themselves directly to property at this moment in time.
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