Uus Maa: The end of the year 2008 in real estate showed what will come in 2009Tuesday, 20 January 2009
The last quarter of 2008 on the real estate market of the Harju County was pessimistic. The number of transactions concluded with residential premises fell to the level of 2002 and the prices decreased significantly in the last months of the year. The commercial premises market is vegetating as fewer transactions are concluded and there is a strong pressure to lower rental values.
Prices on the level of 2005
The prices of apartments and private houses have been decreasing for one and a half years since their peak time (the summer of 2007). The Land Board has reported the following decrease in prices for this period: apartments – ca 30%; house plots – 30-40%; private houses – ca 25%. During the last quarter the prices of apartments have decreased on the average by 5-15%, depending on the location of the premises as well as other factors. The value of standard apartments located in the so-called bedroom suburbs and new but medium-quality houses in central and suburban areas have decreased more than others. The values of private house plots ‘in the middle of the field’ and private houses at the so-called box stage have also decreased more. The total value of such objects has sometimes decreased by 50%. Such a fast change of prices makes it difficult for the sellers to adjust to the situation, the result being that premises of different quality (standard apartments in need of renovation as well as renovated apartments, private houses at the box stage as well as completed private houses) are offered at the same price range. Since the transaction prices are dictated by market and not the sellers, such an anomaly can exist only in the offering prices but not the actual transaction prices.
Fewer transactions than in the year 2003
The number of transactions concluded with residential premises has been decreasing since the middle of 2006 and has now fallen to the level of 2002. The decrease of the number of transactions compared to the peak time is the following: apartments – ca 50-70%, house plots – ca 80%, and private houses – ca 70%. This means there was about 3-5 times more transactions during the real estate boom. Such a sharp decrease of prices in only 2.5 years as well as the continuous oversupply will force the prices to decrease also in the future. The number of transactions in November and December was small and similar state of passivism is predicted for the next quarter. It is likely that there will be even less transactions and sharper decrease of prices in January. Although the supply of residential premises has not significantly increased recently, in case the number of transactions stays the same the apartments currently in supply will satisfy the market’s demand for a couple of years.
Commercial land is not very liquid
The commercial premises market also had very few transactions in the last quarter. Commercial plots with development potential are the least marketable. The price of land rose very quickly during 2005-2006 and during the last year there has been a pressure to lower these prices. Although the prices have already decreased, there is still only marginal interest in this sector. The reason for the lack of liquidity is the almost total refusal of financial enterprises to finance land and real estate development. During the last one and a half years, the average pace of transactions of commercial land plots in Harju County has been 10 transactions per quarter. At present, there is a clearly visible oversupply of land on the market but the expectations of many sellers have still not changed since the boom time. The storage and industrial sector did not see any significant changes in the previous quarter. Several enterprises have now premises they don’t need and they are trying to rent them out. There hasn’t been many transactions in the storage and industrial sector because the problems with financing are not limited to Estonia and also affect foreign investors. Further decrease of prices is expected and the number of transactions is predicted to rise only when the financial conditions and the general state of economy will start to improve.
Wide selection of office buildings
In the end of 2008 several office buildings were completed, in the last quarter of the year permits for use were issued for almost 54,000 m2 of new office premises. In total, permits for use were issued for 85,000 m2 of office premises in 2008. The total area of office premises to be completed this year is estimated to be slightly smaller. The rapid increase of supply and decrease of demand has lowered the rental values of office premises and increased the vacancy. Rental value in suburbs has decreased approximately by 10-30% and in the city centre – by 5-15%. Vacancies are high mostly in the new recently completed buildings, where vacant spaces sometimes make up 50%. The older office buildings in the city centre have smaller mobility of tenants, but the rental values are still being negotiated. Considering the present market situation owners of the premises are willing to put effort into keeping large and sustainable tenants.
On the trading premises market most of the traders have noticed significant decrease in turnover – there is no lack of customers but they buy significantly less than before. Shops still have enough customers but the trend is towards the decrease of consumption and it is only beginning to show it’s larger effect. The prices of trading premises in shopping centres have not changed but the rental values have decreased in the case of service premises located in the streets with high flow of pedestrians as well as by-streets. Vacancies for such premises have also increased since there is less demand. During the last years permits for use were issued for almost 50,000 m2 of trading premises. Some of the largest of these premises were the first stage of Tähesaju City in Lasnamäe and the extension of Rocca al Mare shopping centre.
Prognosis for 2009
- There will be no new residential premises projects as absorbing of the current volume of supply will take a couple of years.
- The transaction activity will remain low, at least in the first half of 2009.
- The office premises sector experiences pressure to lower both renting and selling prices.
- To attract and keep strong and sustainable tenants, owners of office premises are willing to make an effort and be flexible in all terms and conditions.
- When forecasts become positive, capitalized investors ready to invest will emerge on the market about 6-12 months before the situation improves.
Andres Hall
Chief Executive Officer of Uus Maa Kinnisvarakonsultandid