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.