An Estonian e-residency makes investing and doing business in Estonia much easier. This includes investing in real estate. What is the current state of the property market in Estonia, and does it make sense to invest?
If the overall economy is anything to go by, the answer is yes. The Estonian economy is the strongest of all the Baltic States, and it is expected to grow over the coming years. The IMF predicts this growth will be 2.2 percent in 2016 and 2.8 percent in 2017. The unemployment rate is about 6.5 percent, and the country is regarded as one of Europe’s most advanced.
Some Background First
Over the last 10 years, the real estate market in Estonia has gone through ups and downs. However, these changes must be viewed in the context of two things: the global financial crises in 2007/2008 and Estonia’s pegging of its currency to the Euro before adopting the currency in 2011.
How did this play out? In 2004, Estonia pegged its currency to the Euro. As a result, mortgage interest rates were kept at levels set by the European Central Bank (ECB). This drove interest rates to below four percent from highs of over 10 percent. When this was combined with inflation rates of less than 4.5 percent (from highs of 89 percent in the early 1990s) and a growing economy, the housing market boomed, with annual growth hitting 36 percent.
Then the global economic crises hit. ECB interest rates went up, so interest rates in Estonia went up too. The result was an end to the boom. In fact, real estate prices fell in Estonia from 2007 to 2009.
This was happening across Europe, and the ECB was taking action by cutting interest rates. This led to a recovery of the housing market in Estonia and a return to growth. That growth has now been consistent since 2010.
Today’s Real Estate Market
Like most countries, the real estate market varies greatly depending on location. In Estonia, property is most expensive and in most demand in the capital Tallinn. Other popular areas include the cities Tartu and Parnu.
The average price of a property in the country as a whole is €1,041 per square metre, according to figures for the 12 months up to April 2016. This is up 0.8% on the same period a year earlier. However, the average price of property in the capital city Tallinn is €1,590 per square metre. This is a 1.9 percent increase.
This compares favourably with other European capital cities. In London and Paris, the average price of a property is over €5,800 per square metre, and in Zagreb in Croatia it is over €2,000.
Demand for housing in Estonia is increasing too. In the first quarter of 2016 it was up 1.3 percent compared to the same period in 2015. Construction is growing as well with 1.7 percent more new builds completed in the first quarter of 2016 than the same period a year before. So, there is consistent growth in the market.
Rental yields are reasonable too. Research from Global Property Guide in July 2016 found that yields on apartments in Tallinn ranged from 5.3 to 6.3 percent.
Investing in Property in Estonia
As already mentioned, an Estonian e-residency makes it easy to invest in property in Estonia. You don’t even have to visit the country. You can apply and receive your e-residency in your home country and then use it to do things like open a bank account and enter into a contract with Estonian property management companies.
Costs are one thing you will have to consider. The tax rate in Estonia is 21 percent on all income. There is no tax on capital gains, but capital gains from a property sale are treated as income, so it is taxed at the 21 percent rate. Contact one of our advisors for more specific advice on your tax situation.
On the plus side, transaction costs are low in Estonia with realtors typically charging four percent or less.
Therefore, real estate investing in Estonia is a viable option. It is a stable economy with growth expected over the coming years and a maturing, stable real estate market.