Estonia has long been the leading Baltic market in terms of economic growth and reform and has benefited further from EU membership. The property market has gathered momentum in recent years and occupier demand for retail and office property has been good. Retail has attracted most development activity and has seen more international interest, the office market has been dominated by local companies. Property yields are lower than the other Baltic states but high relative to other European markets, a factor that should stimulate international investor interest.
Estonia is the smallest but most affluent of the Baltic States. Local consumers are price sensitive and discounters dominate. Trading patterns are, however, changing, with rising expenditure on luxury items and strong recent growth in wages boosting consumption. Sales volumes in 2005 rose 12%, with clothing and footwear seeing the strongest uplift. Tallinn dominates the sector and is also a popular shopping destination for Finnish and Swedish tourists.
Shopping centre provision is now above the European average, with new development focused on Tallinn. However, demand is high and, with little space in the pipeline, rents are set to remain stable. International retailer interest is up and retailers are now looking to expand outside the capital. Finnish retailers have been most in evidence but interest from other countries is now growing.
The investment market is still immature and developer-led but whilst significant deals have been limited, foreign buyers have made offers on the best existing retail properties at yields of around 9%.
Demand for quality office space is high and increasing in Tallinn. With healthy levels of annual take-up, the overall vacancy rate in the city centre has fallen to around 6%. A development pipeline of around 25,000 metres2 is to be delivered by the end of 2006 but this will have only a marginal impact on availability, with demand strong and most space pre-sold or pre-let. Prime rents are stable but might come under upward pressure later this year.
Economic growth, company expansion and EU accession are all factors increasing the interest of foreign investors. Occupiers are also realising that rental repayments are similar to mortgage payments. Interest is dominated by Nordic and smaller local players and prime yields have fallen to around 9%. The number of potential investors outweighs supply and this is unlikely to be resolved in the short term, with much of the new supply expected in 2006 for owner occupation.
The industrial market has been characterised by stable rents and low vacancy, with a high level of owner occupation and build-to-suit schemes. Demand has been boosted by EU accession, with expansion and relocation activity focused on well-located, modern space. Some speculative schemes are now entering the market but, as quality space is limited, these are often pre-let before completion. Nonetheless, with the development pipeline promising to release more quality space over the next 12-24 months, supply and demand levels will slowly converge.
To date, most investors have focused on the office and retail sectors but more are now considering the industrial market for higher returns, with yields of around 12%. Lack of high-quality product will constrain activity but some investors, mainly domestic, are looking at secondary stock for redevelopment and resale potential. leaving a wide gap between the capital and second cities. Property is high-yielding compared with central Europe, but yields are expected to harden as international investor interest picks up and the risk premium falls.
Darren Yates, Joanna Tano, Darren Mansfield and Claudia Visini of Cushman & Wakefield