Getting to the bottom of the real estate market

The Baltic Times, TALLINN
Interview by Kairi Kurm
Jul 30, 1998

Baltic Times reporter Kairi Kurm recently caught up with the managers of three of Estonia�s largest real estate companies to chat about the potential of the country�s real estate market.

Urmas Laur
managing director
of Uus Maa Kinnisvaraburoo

What is the present situation in the real estate market?
It�s influenced by the season and by the banks. The vacation period is usually the most peaceful. Also the banks are not eager to lend money to real estate projects. They do it in a more limited way.

Should we expect a decrease in the price of real estate?
We do not forsee decreases in the price of real estates and we cannot talk about a crisis. In certain sectors, a 20 percent or so fluctuation of price can take place. The real estate market has advanced and adjustments are taking place. There would preferably be a stagnation on the market rather than a decrease. If the prices decreased by more than 20 percent, the real estate development business would not repay itself.
The situation depends on the financial markets. The fear that the lending situation will get more difficult, has made the real estate owners put their transactions on hold. The owners of exclusive real estate, especially those with foreign clients, do not suffer this selling pressure. The one who suffers the most is the owner of real estate directed at the middle class.
It is likely that this low would not last for more than a year and in the present five-year period, the trend of prices is moving upwards.

What is the economic situation of the real estate companies? Are they forced to merge with other companies in order to secure their market share?
Like the rest of Estonian business activity, the real estate business is associated with low efficiency. The banks have halted the lending and real estate companies feel it first. Their incomes are decreasing and there are few transactions. A merger is a possibility to limit expenses.

What is the potential for real estate development?
It is pessimistic if the banks do not change their loan policy. One-hundred percent of projects are financed by bank loans. The banks are afraid of the fast increase in supply when there is not enough demand, which then leads to bankruptcy of projects. Larger real estate developers are able to finance the projects from their own resources and they do not have problems of this kind.

Hillar Viks
manager of
Hillar Viksi Kinnisvara

What is the present situation in the real estate market?
The present situation is a vacation period. There are two inactive seasons in real estate business � July and December. The active months are September and October. The present situation is also dependent on banking. Capitalist countries are building with bank loans. If the banks do not give loans, the amount of money flowing is small. Some of course get money from abroad or sell their property or get money by other means.

Should we expect a decrease in the price of real estate?
In order to have a decrease in the prices of real estate, we need a low for more than a year. The real estate owners do not let the prices go down with the first symptoms of the crisis. In Finland, it took seven years after the crisis before the prices went down. We have not gone through great changes compared to the previous year so I would not call this a low.

What is the economic situation of the real estate companies? Are they forced to merge with other companies in order to secure their market share?
I do not preclude mergers in this sector, but as our company is not a member of the real estate association, I am not aware of their economic situation. We have no payment troubles.

What is the potential for real estate development?
It depends largely on the location of the real estate. It is useful to act in exclusive places when there are not enough clients for everyone.

Kalev Roosivali
AS Pindi Kinnisvara Tallinna bureau manager

What is the present situation in the real estate market?
The 17.5 percent decrease in transactions in the first quarter of 1998 compared to 1997 shows the uncertainty of buyers and sellers. The participants in the real estate market have partly taken up a wait-and-see attitude until the prices of the market show a more fixed direction, either to rise, stabilize or decline. The uncertainty is mostly caused by the changes in the loans given by the financial sector to the real estate sector and the contrary opinions of the analysts. All in all, like the rest of the market, the real estate market is dependent on the seasons.

Should we expect a decrease in the price of real estate?
In such a rapidly developing country as Estonia, the endless correction of prices on the market is natural depending on location and quality. The lasting decline in demand is caused by a tightened and more expensive financing. This results in a decline of prices in certain sectors, which is a positive trend in the long run for continuous economic development and the rise of the solvency of Estonians. Speaking of the market in general may leave a wrong impression, because the market has to be observed through concrete types of real estate.

What is the economic situation of the real estate companies? Are they forced to merge with other companies in order to secure their market share?
Those companies that have been active in Estonia for more than three years have already acquired a lot of experience from different market situations, including the inactive market situation. If the last period�s profit has been reinvested in a risk-free and clever way, the stable fixed income will keep the company�s position normal.

What is the potential for real estate development?
The undertaking of new projects depends on further state financial indicators, financing possibilities, the progression of the existing projects and belief in continuous economic development. The success of the real estate developers depends largely on their capability of marketing their experience and know-how to the large foreign investors in order to acquire foreign capital.

Banks back off Lahekalda

The Baltic Times, TALLINN
By Kairi Kurm
Jul 30, 1998

Three Estonian banks have reneged on a previous decision to loan several hundred million kroons to AS Lahekalda, developers of Tallinn�s posh waterfront residential district.
According to Estonian business newspaper Aripaev, Hansapank, Hoiupank and Forekspank have refused to finance the project because they deemed it too risky.
Lahekalda is building a new housing area in Maarjamae at a cost of more than 1 billion kroons ($69 million). Developers have planned to build up to1,000 new apartments in five years in a 16.8-hectare waterfront residential area in Tallinn. The size of the apartments varies from 43 to141 square meters. The price per square meter ranges between 12,000 and 13,000 kroons.
�The idea of our company is to create a completely separate living environment where a normal apartment could be bought by a person with an average salary,� said Lahelkalda council head Karl G. Wellner. �The prices of Lahekalda start from 600,000 kroons. The biggest apartments cost up to 2 million kroons.�
According to the Postimees daily, Wellner said the demand for apartments exceeds the supply while the investments in office premises, on the other hand, have been too high.
Wellner, also said the project will continue as planned, despite the setback.
�If Estonian banks turn us down, we will go to foreign banks,� he told the ETA news agency.
According to the company�s marketing director, Tiina Uudelt, the banks were interested in lending money during the previous negotiations but are postponing the initial financing decision for some time because they have money problems.
�The decision was postponed and will be discussed again in the future,� said Uudelt. According to Uudelt the company is negotiating outside Estonia and this takes more time.
According to Postimees, Wellner is disappointed with the Estonian bankers because they talk too much about their clients and the facts in the newspapers are wrong. He points out that the Estonian banks have not refused to lend money to the Lahekalda project but have merely postponed the decision.
Hansabank�s Kristi Liiva declined to comment because it is a matter concerning the client and the bank. She agreed that there are problems with obtaining loans, but this should not be handled separately from the Estonian general situation.
According to Aripaev, Lahekalda has invested 50 million kroons and the borrowing needs are about 500-600 million kroons.
The share capital of Lahekalda is 50 million kroons. Lahekalda is owned by Kodumajagrupp Ltd., Kawe Maja and a New York based investment firm Gruss & Co.

Tough times for leasing market

The Baltic Times, TALLINN
By Kairi Kurm
Jul 23, 1998

 

Last year was one of extensive growth for the leasing market and for the financial sector as a whole. It is typical for Estonia that most of the leasing companies are subsidiaries of banks.
Now that the inflow of cheap capital has decreased and turned everything upside down, the changes on the banking market are also being felt on the leasing market.
According to the Estonian Association of Leasing Companies, the consolidated portfolio of Estonian leasing companies increased three times in 1997 in comparison with the previous year and amounted to 5 billion kroons ($345 million) by the end of the year. The leasing of real estate increased the most � its volume grew more than five times during the year, amounting to nine percent of the total leasing portfolio. Automobiles and commercial vehicles remained the largest sector in the composition of the portfolios.
In 1997, 64 percent of the association�s leasing portfolio was taken by capital lease (sale on leasing terms). The share of the commercial lease (the object of lease is returned to the leasing company or the trader at the end of the lease) had decreased by 4 percent compared to 1996 and the share of hire purchase had increased from 1.8 to 5.6 percent.
Now interest rates are increasing and salesmen predict a drop in car sales by one third. The development in car sales last year was supported by extremely low real interest rates, which dropped at times to below 10 percent. The rate of interest, which is about 18 per cent at present, is predicted to be around 20 percent at the end of the year.
The merger of leasing companies, which is part of a consolidation of Estonian banks,will form two market leaders on the Estonian leasing market.
Hansa Capital, the subsidiary of Hansabank Group, offering leasing-financing, is buying the companies belonging to Hoiupanga Liising (Savings Bank Leasing) and the subsidiary of Latvia�s Zemes Banka which was controlled by Hoiupank. Hansa Capital is active in the Baltic States, Russia and the Ukraine. Its market share in the Baltic Sates is about 35 per cent and once the mergers are completed, its total assets will amount to seven billion kroons and its staff will number 220.
Uhisliisingu AS, the largest subsidiary of the Eesti Uhispank, has already taken over the operations of Tallinna Pank Leasing and its actual merger will be confirmed during the next two months. The subsidiaries of Uhisleasing and Tallinna Pank Leasing in Latvia will be united to form about 12 percent of the Latvian market. The Latvian and Lithuanian branches of Tallinna Pank Leasing will make the Uhisleasing dream of a pan-Baltic package of services come true.
Together the merging leasing companies Hansa Capital (37 percent market share) with Hoiu Leasing (27 percent) and Uhisleasing (22 percent) with Tallinna Pank Leasing (5 percent) form about 90 per cent of the Estonian leasing market according to the data of the first quarter of 1998. The rest including the subsidiaries of Forexpank, EVEA Pank, ERA Pank, Krediidipank and Merita Pank have to operate on a 10 percent share.

Most Maapank depositors satisfied

The Baltic Times, TALLINN
By Kairi Kurm
Jul 23, 1998

The Estonian government decided July 14 to compensate 80 percent of all private deposits at the bankrupt Maapank up to 100,000 kroons ($6,900) and all government deposits up to 350,000 kroons.
Deposits of education, welfare and health care institutions frozen at the bank will be fully compensated.
Estonia�s opposition politicians criticized the scheme, which they say gives municipalities preference over private depositors.
But government officials were sure this was the best and fairest way to solve the problem.
�By deciding this way, the government solved the problems of the biggest number of creditors,� said Heido Vitsur, economic adviser to Prime Minister Mart Siimann.
One former prime minister, Mart Laar of the Pro Patria Union party, suggested instead that only deposits of local governments be compensated.
Laar said taxpayers� money should not be used to compensate for the deposits of companies, fearing that it gives the impression that all money will be compensated, no matter what the circumstances.
He pointed to the fact that now-bankrupt car company EAG Autokeskus, known for lending money at high interest rates, is demanding money back just like private depositors.
EAG left 1,500 creditors without 90 million kroons went it went bankrupt May 25.
Thousands of small Maapank depositors have received their deposits of up to 20,000 kroons from 77 Uhispank and three Tallinna Pank branches since July 10. The process has gone peacefully up to now.
The expanded compensation scheme is estimated to cost 146 million kroons: 119.8 million kroons to private depositors, 19.5 million to local governments and 5.8 million to education and health care institutions. About 86,743 out of 91,384 depositors� claims were compensated through the first plan. The present plan will leave 361 private depositors� and 40 local governments� claims unsatisfied.
The government has decided to order an expert evaluation from an international independent institution to clarify the Maapank situation and make amendments to the legislation to avoid similar situations in the future.

An Italian’s secret to his Estonian success

The Baltic Times, TALLINN
By Kairi Kurm
Jul 16, 1998

Italian investor Ernesto Preatoni started business in Estonia in 1995. He is active in the banking and real estate markets. He owns 80 percent of Estonia�s biggest real estate company, Pro Kapital, which is planning to invest 1 billion kroons ($71.4 million) in real estate development in Tallinn. Kairi Kurm caught up with him to chat about his Estonian investments.

Why is investing in Estonia attractive?
Investing in Estonia was a good idea. The social conditions were the reason to invest here. The people are loyal. The country is not a third world country. There is a good culture. People respect the laws and rules.
The important thing is that in this country, there is a lack of entrepreneurs. About 45 years of interrupted history has caused this. In other countries, including Italy, there are very good entrepreneurs. Here, we are catering to different needs and doing it perfectly, in my opinion.
The second thing is that in this country, there is a need for money and in other countries there is an excess of liquidity.
So I can easily find people who can invest money abroad because the conditions in Italy and in Europe, generally speaking, are not good for investment for different reasons � very high taxes, few opportunities and low interest rates. Anyway, the European Community is not my dream.

What do you think about the taxes in Estonia?
Taxes are very good in this country. I have talked to several political men that say that in this country, we should sit down at the table and decide what we want to do; whether we want to develop as an industrial country or we want to make it a banking sector.
That is not clear in my mind and I don�t think in anybody�s mind. It is a pity because having a strategy is always very important. I do not believe that there is a real strategy.
We want to grow and become as rich as possible and as fast as possible, but that is not enough. This country really needs an entrepreneurial mentality. For example, if I buy Eesti Kaabel (Pro Kapital, an old factory rebuilt into a business center) and sell it away, I generate nothing.
But if I buy it and then transform it, I make a lot of jobs, create tax revenue, and provide shops and office space for people to buy. So this is what is needed in this country. We do not need fast speculators buying something and selling it away as fast as possible without any transformation. The capacity of every country is the capacity to transform something. Maybe we can just transform investments. Maybe we can become an important banking center such Switzerland or Luxembourg.
When somebody keeps telling me that things cannot be done because Estonia is a small country or Estonia has to join the European Community, I always say that Switzerland and Luxembourg are also small countries. Small today is just beautiful. Take General Motors for example. The working process has to be organized in such a way so that everyone who is working in a small segment will understand how useful his job is. If you are in a chain and you do not understand the final product, you are not participating, you will suffer and you will do your job in a very bad way.
So usually big is bad and small is beautiful. I believe that Estonia should consider remaining small. This is my personal opinion. Maybe I am just a visionary for long-term business, and for short-term business, I am wrong.

Are there any obstacles in investing in Estonia?
In Estonia, there is no established class of people who already have the economic power in their hands. So it is not as it is in Italy � if you invade a certain space of a certain institution or a certain family, then you become like an enemy and they start to put obstacles in your way.
In Estonia, there are some obstacles, though. For example, if you want to build something in the Old Town, they are sometimes a little bureaucratic. But this is reasonable at the same time.
Take for example this building on the corner of Vene and Viru streets. The facade of our building is beautiful. Compare this building to other shopping centers in the city or in the Old Town and you will understand that the quality of my life is good, otherwise I would not spend so much money to build something that could be useful and beautiful.
It has to be beautiful. We spent a fortune, but the architects did a very good job. We are really happy that we gave back to the city the building, which was considered one of the first buildings built in Tallinn.

How does the Estonian business environment differ from other Eastern European countries? Why did you want to invest in Estonia and not somewhere else?
It seemed to me that the rules in Estonia are clearer than in other countries. I have the impression that in Latvia, they are following the experience of Estonia. Estonia has a very small Russian influence in the country, in my opinion. It is very strange. I have nothing against Russian people. I am also doing business in St. Petersburg and I understand better why it is easier to do business in Tallinn and more difficult to do it in St. Petersburg. It is about the Mafia, but they are over exaggerating this problem. In Russia they are missing trust.
When I talk to an Estonian, he trusts me and I trust him. It is easy to do business because we do not start from the idea that we are cheating one another. When you go to Russia, it is exactly the opposite.
I am restructuring an important building in St. Petersburg, and, for the first time in my life, I had to finance the builders. Usually, the builders get paid after they have built, step by step. But I had to finance them because they could not buy the windows and the doors they were supposed to buy from Finland or Italy. Nobody would sell the goods to them if they could not pay in advance. There isn�t much trust in Russia. That is the big difference between Russia and Estonia.

What would you change if you were the prime minister of Estonia?
I am not really in a position to answer that, but there is one thing I would like to change. The system of visas is very bad. In Egypt, I was able to make them change the system of visas. We have passport control, where they control people who enter and exit the country. We do not need a double control. It is just a way to get some money. Rather than having so many long lines and forcing people to fill out so many long forms, why doesn�t Estonia offer a stamp in the passport for $30 or so and be done with it? They do it that way now in Egypt.
I have met several ministers and other people about that, but I was not able to change anything. This is something that, in my opinion, needs to be changed.
I would like to give you another example. We have a very good Italian technician here. We need him. He has spent five years with the same Russian girl.
She is like a wife to him but he cannot marry her yet because it is not common in Italy to marry if you have not been divorced for a long period of time. We are going to lose this important technician, because the girl was here for two months, then she was sent back to Russia and she cannot get a visa to stay here in Estonia. In my opinion, the country should be flexible in these kinds of things.

Finns consume meat packing company

The Baltic Times, TALLINN
By Kairi Kurm and Urmas Maranik
Jul 16, 1998

Finnish meat packing company HK Ruokatalo Oy plans to acquire 80 percent of Estonia�s biggest meat packer AS Rakvere Lihakombinaat. A preliminary agreement on the sale of Rakvere Lihakombinaat shares was signed with the owners of Rakvere Lihakombinaat AS Epeks and AS Talinvest on July 8.
The sale price is 190 million Finnish marks, or nearly 500 million kroons ($34.4 million). HK Ruokatalo will pay about 130 million marks of the purchase price in cash, and the rest in shares.
Finland�s HK Ruokatalo paid two and half times the market price, or about 16.50 kroons a share, for its majority stake in the Rakvere Lihakombinaat meat-packer while the price on the free market of the Tallinn stock exchange on the last day of trading, June 30, was 6.80 kroons.
AS Talinvest Council Chairman Jaak Roosipuu said, the Finnish meat packer was paying a higher price for Rakvere Lihakombinaat shares because it considered the company�s real value and future prospects.
Roosipuu said that Talinvest gave up its investment as this was laid down in Talinvest�s investment strategy, according to which a company is sold after its price has achieved a certain level, in order to move on to new investments. The aim of the investments company is a high return on equity.
�This business operation is a very important detail in HK Ruokatalo development strategy. This will permit us to widen our operations from the Baltic countries to Russia and Eastern Europe,� said HK Ruokatalo Managing Director Simo Palokangas.
HK Ruokatalo is going to make a proposal to its shareholders to issue shares for 50 million marks for AS Epeks, by which Epeks will acquire a stake of about 7 percent in Ruokatalo.
� Selling a stake in Rakvare Lihakombinaat was a profitable transaction. At the same time we will continue cooperation with HK Ruokatalo in the meat industry in Estonia and the Baltic states. Epeks can concentrate on new investments in food industry,� said Toomas Kouhkna, chairman of the board of the investments company Epeks.
According to Palokangas, KH Ruokatalo is interested in putting its experience into practise with Rakvere and contributing to Rakvere�s development in Estonia and the Baltic states.
The relations between the two leading meat packers has been longstanding. HK Ruokatalo designed the new premises of Rakvere Lihakombinaat and it has acted as supervisor during the constructions. The employees of Rakvere Lihakombinaat have been trained in HK Ruokatalo factories.
Rakvere Lihakombinaat, a group with nearly 1,500 employees, predicted a turnover of 1.2 billion kroons this year. The sales of 1997 totalled 829 million kroons and the loss was 2.7 million kroons. The group produces around 30 million kilograms of meat products every year and its market share in Estonia is about 45 per cent and in Latvia about 20 per cent.
The subsidiaries of Rakvere Lihakombinaat are AS Ekseko, AS Linnulihatooted and Rigas Miesnieks in Latvia.
The company�s main director will continue in his position and the deal is not affecting any existing jobs.
The HK Ruokatalo group employs 3,000 people and its turnover in 1997 was 7.1 billion kroons. The group�s market share in Finland was 50 per cent in 1997 and it produced about 130 million kilograms of meat products.
The sale of AS Rakvere Lihakombinaat comes when the food industry in Estonia is at a low-point. The EU prohibition on Estonian milk exports and the new tax system implemented by the Russian government in March, which makes the export of food products to Russia unprofitable, has forced domestic manufacturers to seek new opportunities.
This is likely to be only the first step of this kind, as the somewhat struggling food industry needs investment injections. EU experts allowed Estonian companies a one-year development period at the beginning of the year.
�If the quality satisfies the EU experts, the license may be retained starting from Jan. 1, 1999 at the earliest,� Estonian food industry leaders stated earlier this year.

Source: http://www.baltictimes.com/news/articles/2277/

Hansapank-Hoiupank merger a reality

The Baltic Times, TALLINN
By Kairi Kurm
Jul 16, 1998

Shareholders of Hoiupank and Hansabank approved the proposal to merge the two banks July 12. Almost all Hansabank shareholders � 99 percent � and 57.6 percent of Hoiupank shareholders voted for the merger. Only 46 percent of Hansapank�s shareholders were present instead of the necessary 50 percent and the rest had to be called.
The long-awaited merger will create the largest bank and financial group in the Baltic states with assets totalling 25 million kroons ($1.7 million). The central bank approved the merger July 13.
The operations of Hoiupank will be wound up as of July 20 and trading with its stock on the Tallinn Stock Exchange will be suspended as of July 15.
The merger agreement retains Hansapank as the official bank name. The leaders of Hoiupank, who were connected with the unpopular Daiwa deal will not get a seat in the new bank. Hansabank has declared that it is not going to take over Hoiupank�s extraordinary loss of 225.1 million kroons related to Hoiupank�s claim concerning six million shares in the bank.
Under the merger agreement, the present Hansapank shareholders will own 65 percent of the new bank group. The remaining 35 percent will be owned by the shareholders of Hoiupank.

Source: http://www.baltictimes.com/news/articles/2270/

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