Eastern Europe Property

The Times 29th April 2005

ASK DARREN GOODSON to speculate on the next big thing in overseas property investment and he will put his money on Tallinn. So certain is the London businessman of a long-term property boom that he is liquidating a substantial part of his UK buy-to-let portfolio to invest in the Estonian capital. And he has convinced his brother, business partner and two other friends to buy there too.
They are not alone: when Ryanair and easyJet added the Baltic states to their schedules canny investors took note. Fly-to-let investors have already made their presence felt in Prague, and budget airlines, whether serving the tourist or business market, now routinely feature in lists of key economic indicators drawn up by property investors evaluating distant lands.

Estonia’s medieval capital is regularly promoted by the travel industry as the new Prague, but whether this tiny city of just 411,000 is the new property hot spot remains to be seen. Darren, who runs a printing and publishing business in the East End, has no doubts: he has bought three new one-bed flats just outside Tallinn’s Old Town and plans to sell three of his eight London properties to buy another ten flats in the city in the next 12 to 18 months.

An amateur property investor even before he left home in Redbridge, Essex, at 21, Darren, now 32, spotted Tallinn’s potential when he visited an old schoolfriend working in the country’s telecommunications industry three years ago. His friend had fallen for an Estonian girl, but Darren was in the mood for finance, not romance. “At the time Estonia was on the verge of joining the EU, and by speaking to locals I found out prices were going up by 10 to 15 per cent.”

Over the next 12 months he did his homework and he liked what he saw. Estonia’s GDP grew by 4.7 per cent last year, and the country is attracting large amounts of foreign investment, including substantial European Union grants for infrastructure projects. More than 250 subsidiaries of international companies have been established here since 2003, many from Sweden and Finland (Helsinki is just 1½ hours away by hydrofoil).

Much of the housing stock is poor, Soviet-era concrete blocks. With wages and living standards rising, the pan-Baltic estate agent Ober-Haus predicts that demand will easily outstrip the supply of new-build properties.

A key indicator for Darren was the construction index, which rose by 6.2 per cent last year. “That’s a good indication of a rising property market,” he says. “Those building costs have to be passed on to the consumer, which means the price of new houses will increase, at least in line with the construction index. This in turn should push up second-hand prices.”

Darren also discovered that Estonian banks are willing to lend up to 95 per cent of a property’s value, provided that monthly payments are not more than 40 per cent of take-home pay.

Darren, who lives in London Docklands, says his investment decisions are not emotional, but he is an avowed fan of Tallinn. “I liked it from the very first time I went there,” he admits. “It’s a beautiful place. They’re very nice, friendly people, and they’ve got a good service culture. I like the village atmosphere of a small city — you get a feeling of importance there, whereas in London you can feel like a lost soul.”

Wisely, Darren’s choice of property reflects his experience in London. He reserved a one-bed apartment in a new building in the fast- growing commercial and residential ring just outside the old city walls. Darren paid £45,000 for his initial 50 sq m flat in 2003 and £50,000 for a further two. His brother Gary paid £61,000 for a similar-sized apartment a few months ago.

Darren put down a 25 per cent deposit and took out an interest-only mortgage with an Estonian bank for the balance. He spent £6,000 kitting out and furnishing each flat, which he hopes to let for £350 a month. After deducting bills of £500, mortgage repayments of £1,200 and agency fees, he believes he will be left with an annual profit of £1,700 on the two flats he hopes to let; he is keeping the first for his own use.

Including capital growth of 10 per cent a year, Darren estimates that he will see a 35 per cent a year return on his investment, but he admits that there is some risk: his figures depend on letting the flats for at least 11 months of the year and his main rental market will be foreign workers or Estonians working for foreign companies. Agents suggest that this is achievable. He says:

“I’ve been through ten years of property growth in the UK and I see exactly the same thing happening in Estonia. When I bought my first buy-to-let in the UK, friends said, ‘You’re mad, what if you can’t rent it out?’ But if you want to be successful, you’ve got to take risks.”

Loft living comes to Estonia
By Peter Conradi of The Sunday Times March 06, 2005
Tallinn offers more than good stag weekends. British developers see slow but steady returns ahead in the Baltic, says our correspondent

Mention Tallinn these days and the chances are people will immediately think of stag weekends. Every Friday evening the streets of Europe’s newest party capital fill with crowds of young British men — and a few women — drawn not so much by the medieval architecture as by the more predictable pleasures of cheap booze and the wild nightlife.
Most stay only for a few days. But suppose you fall in love with the place and want to buy a slice of it? The first thing to bear in mind is that Tallinn is not cheap — or at least not that cheap. Prices per square metre – the touchstone of the fly-to-letter — are well up by eastern European standards.

The economic fundamentals are good, though — Estonia’s “Baltic tiger” economy is growing fast, the local currency, the crown, is pegged to the euro and local banks are queuing up to offer mortgages for as little as 3%. Prices rose an average 10% or so last year, and are expected to repeat the performance this year.

I started my tour in Raekoja plats, the main square, spectacular under a light dusting of snow. The old town — or Vanalinn, as the locals call it — has been transformed since the Estonians kicked out the Russians in 1991, smartened up with chic cafes, bars and restaurants.

Hidden in the narrow streets radiating out from the square towards Toompea Tower, I came across the ultimate bachelor pad. Tucked up under the eaves of a 15th-century building, it offers 168sq m of space, high ceilings, exposed beams and, of course, the mini-sauna in the bathroom that is de rigueur in these parts. The flavour is distinctly medieval: you almost expect a knight to come in and start loosening his armour. The price, £255,000, is a very 21st-century £1,520 per sq m.

The problem with a trophy apartment like this is that it is so gorgeous you will want to live in it yourself or show it off to your friends, rather than rent it out. Even if you do, the yield will not be great. The pool of potential tenants — almost exclusively foreigners — looking for this kind of property is not huge. Returns, realistically, might be 4%-5% — sufficient to cover mortgage costs, but only just enough.

Canny investors should look beyond the old town to cheaper parts of the city centre, where you can pick up restored or new-build flats for about £800 per sq m, some with parking and wonderful views of the old town. Yields could reach 7%-8%, although rents have been falling in recent months as more locals buy.

The standard of finish is good and although most of the buildings are conventional, a few stand out. I especially liked a former 1930s telephone exchange building, which has been turned into 14 loft-style double-height flats with steel doors, floor-to-ceiling windows and bedrooms on open mezzanine floors.

Surprisingly the developer is a Brit, Julian East, whose London-based company, West One, has been in Estonia for several years. East says buyers were slow to buy off-plan, but were enthusiastic once a show flat had been put in.

“Some people are buying to let, making the most of the rising market, but other people plan to live in them,” he says. “The beauty of it is that people haven’t gone in there and rented the whole thing out, which is the biggest recipe for disaster.”

Those looking for a more modest investment could take a look at the outskirts of Tallinn, where apartment blocks are springing up along the shores of the Baltic. Kerry Yeomans, 54, an international trade adviser from the Isle of Wight, is among a number of Britons buying.

Already in the process of securing a flat in Dubai, he was looking for somewhere else to put his money and came across Tallinn. He has put down a 25% deposit on a new £50,000 one-bed flat. He is due to complete in August, but has yet to set foot in Estonia. He hopes to get £325 per month for it — a yield of 7.8%.

“I was looking for something different to buy in Europe,” says Yeomans. “We did some research: Bulgaria and the Czech Republic came up, but the feeling is that we rather missed the boat and we should be a bit more speculative. It’s a bit of a gamble, but I can’t see we can go too far wrong with it.”

Yeomans’s enthusiasm is proving infectious. Two of his colleagues are buying flats in the same block. Churchill Properties Overseas, which is selling the flat, does not stop at Tallinn’s city limits, offering log cabins along the coast in Parnu, Estonia’s “summer capital”. For £40,000, you can have a 75sq m home sitting on half an acre of land.

The pictures of the summertime beach scenes look idyllic — even though the sunbathers do seem to be wearing suspiciously large amounts of clothing. Somehow, though, at this time of year, with the temperature well below zero and the bay full of fishermen snaring their prey through holes in the ice, a snug little flat in the middle of Tallinn seems a bit more attractive.