Investment Strategies For Estonia

As a growing EU economy, Estonia still has much to offer foreign buyers seeking stable gains on their investments. Estonia is a country where demand is higher than ever for modern, quality accommodation to supply its increasingly wealthy local population. Below you will find out just what is making Estonian investment climate thrive so well today.


General Factors

The Republic of Estonia was declared on 24 February 1918; however, this was unfortunately followed by its destructive occupation by the Soviet Union, lasting half a century and stunting the country’s growth which, until then had been keeping up well with neighbouring Finland. In 1991, Estonia regained its independence, and by 2004 it took its rightful place within the European world.

This tiny country, spanning just 45,226 km2, is the same size as the Netherlands, but has ten times less the population, concentrating mostly in and around the capital city of Tallinn. Estonia is the northern-most and smallest country of the three Baltic states. Its proximity to Helsinki at only 80 km means that Finish investors and visitors predominate, coming to Estonia to live and do business, while profiting from vastly lower prices - some 300% lower - and boosting the Estonian economy ever onwards.

Property prices in Estonia are continuing to rise, though at a more moderate rate than in the past few years, and rental yields are also steady and attractive. The Estonian economy is doing well and demand for quality housing and commercial real estate is still outstripping supply, indicating that there is still plenty of life in the Estonian market today. Foreign companies are increasingly enticed to Estonia due to its comparatively low costs as well as significant tax breaks.

Tallinn, with a population of 400.000 inhabitants, has in recent years been the main hotspot for real estate development. Other major cities in Estonia are the university town of Tartu, Narva on the Russian border, and coastal Pärnu, known as the summer capital of Estonia. Seaside resorts are becoming increasingly popular, in line with a wealthier local population who, with wages increasing by between 7 and 10% p.a., are for the first time in a position to purchase holiday and permanent homes; however, the coastal market as such still remains in its infancy.

Economic Factors

Having experienced years of double digit GDP growth, peaking in 2006 with a high of 11.2%, the Estonian economy has performed very well over the last decade with an expected cooling off taking place in 2007, while it still achieved an impressive 7.1%.

The national currency is the Kroon (EEK) which is, at present, pegged to the Euro at a nominal rate of €1.00 = 15.6466 EEK. It is expected that Estonia will join the Euro zone in 2011, which will make investing in Estonia even more interesting.

Accession to the European Union in 2004 added another dimension to the Estonian economy, causing a surge in foreign direct investments. Estonia receives the second highest per capita EU cash inflow of all 9 acceding countries, boosting its already rapidly expanding economy and increasing personal incomes.

Estonia has an economic policy aimed at encouraging foreign investors. Close proximity to Russia, together with the fact that Russian is still widely spoken in Estonia, has made it a popular location for Russian investors - all the more so as Estonia has joined the Schengen zone, making it very easy for Russians owning property in Estonia to move throughout the European Union. Sweden and Finland, also, are a major contributors to the Estonian economy, and many Finns make the short ferry trip to Estonia to profit from its favourable investment climate of currently low prices and advantageous tax regime. Estonia ranks an impressive 18 out of 178 in the “Ease of Doing Business” charts.

Tourism has long provided a large part of Estonia’s GDP: The historic capital city of Tallinn boasts more than 120 quality hotels, the latest addition being an impressive 5-star international hotel belonging to the Swissotel chain located in downtown Tallinn, in a section known as “Wall Street”.

Recent years have shown appreciation of up to 100% p.a. in all real estate sectors of Estonia. This kind of return is of course not sustainable for any length of time and the market has since stabilised from early 2007, resulting in lower prices across the board. Current price levels however, are once more interesting for investors as bargaining on the price is now acceptable - a new phenomena for property sellers in Estonia who until now were accustomed to receiving the asking price. Meanwhile, as the mortgage market develops, and the number of middle-class Estonians grows, strong opportunities exist for overseas property investors to purchase suitable real estate to sell on locally in the medium to longer term.

Political Factors

Since EU accession in 2004, Estonia’s political agenda has naturally strongly supported foreign investment, largely accounting for the country’s success today.

Overseas investors are invariably reassured by a market that is not only EU based, but also provides a growing economic climate that provides real opportunity for worthwhile returns on investment. Estonia is these things and more, and today’s investors are also basing their decisions to buy in Estonia on its particularly stable political environment, ideal in which to employ their investment strategies. Estonia is a member both of the WTO and NATO, as well as winner of the US ‘Most Favored Nation’.

Politics in Estonia runs along a framework of a parliamentary representative democratic republic, headed by the prime minister and a multi-party system. A deep hostility exists towards any political connection with the communist era, preventing the formation of any type of post-communist party.

Natural Factors

Although relatively small, Estonia boasts no less than 5 National Parks with huge forests offering great opportunities for hikers, while the coastal areas are most popular with birdwatchers. The government of Estonia realises the importance of preserving the country’s natural heritage and actively promotes eco-tourism and harmony between man and nature.

Winter tourism includes ice-fishing on Lake Peipsi, the fifth largest lake in Europe, skiing and snowboarding or “skilanglauf” in the hills surrounding the winter capital, Otepää. In summer, tourists flock westwards to Estonia’s ‘Summer Capital’ at Pärnu to enjoy its white beaches and warm climate.

A rich history means that Estonia proudly features a number of its natural sites on the UNESCO word heritage organisation list, including: the historic centre of Tallinn known as the ‘Old Town’; the Struve Geodetic arc; Kuresaare Fortress; Baltic Klint; Soomaa National Park; and various magnificent wooded meadows (in various regions).

The official language is Estonian, but Russian is still spoken by much of the population. Around the larger towns most people speak English and some older citizens also speak German.

Estonia has a temperate climate with four seasons of equal length, comprising relatively warm summers and cold winters. In summer, daylight hours can last as long as 19 hours while in winter they might be just 6 hours. The longest day, or Jaanipäev, is celebrated throughout the Baltics and Scandinavia on 23 June. In Estonia it does not really get dark on this day and most people light bonfires and stay up all night.

Logistical Factors

Road is the main form of transport in Estonia, accounting for over 90% of all passengers. The density of Estonia’s road network is comparable to that of most other Nordic countries and the main highways efficiently connect with Russia (St. Petersburg region and Moscow) in the east and with Latvia in the south.

Estonia’s geographic location of course makes it ideally suited as a transit country for all routes both by land and sea to and from Russia. The industrial port of Muuga in the north is well geared for the transit of oil, soja, oil scale and cacao to name a few.

The Port of Tallinn is one of the most frequented European cruise ship destinations. With no less than 4 passenger terminals, it welcomes cruise ships from all over the world, with more than 300 liners docking per year and delivering some 295.000 visitors to Estonia. Fast ferries connect Tallinn with Finland’s capital, Helsinki roughly every 30 minutes, as well as other major cities like Stockholm, St. Petersburg, Rostock and Kiel, helping to boost the number of visitors to Estonia to more than 1,5 million (2007).

Tallinn’s international airport has recently doubled in size to cope with the increasing numbers of international visitors that enter Estonia by way of air. Located just 4 km from the city centre, it is a fast and convenient way to reach Estonia from major European hubs.

Short Term Investment Strategy

Key Opportunity

Construction in Estonia still struggles to keep up with demand and carefully selected off-plan property is likely to provide strong potential returns for today’s investors.

With comparatively low prices: for example: some 300% lower than in neighbouring Finland, and reliable capital appreciation of around 10% per annum, property in Estonia is still essentially a profitable option. As prices are, however, now stabilising compared with previous years, many off-plan investors will be able to negotiate prices down to their desired levels, locking instant capital into their flip investment strategies.

It is important to ensure that the reassignment of contracts is permitted in the off-plan project you are interested in and under what terms. Sometimes, though not always, investors may be charged a percentage of the purchase price in order to do so.

Buying off-plan in Estonia means that the investor is assured of the top quality, so sought-after by both local and international buyers and renters. Interest in waning in old, Soviet-style blocks, in favour of modern, European living standards. Off-plan developments are generally built to the very latest of construction standards and use up-to-date construction materials (additional insulation, triple glazing, natural parquet flooring, high security etc).

Other advantages to choosing the off-plan option in Estonia include the fact that: heating costs in new buildings are normally around 50% of those in older, Soviet style apartment blocks; maintenance charges are also typically lower, due to the higher ongoing refurbishment costs for older apartment blocks; and off-plan developments are far easier to rent to foreign businessmen and upwardly-mobile locals who generally do not want to live in older buildings.

Timescale

Investors in Estonian off-plan developments factor in between 12 and 18 months for construction, from reservation to completion stages. Short term investors normally look to profit from a carefully selected, promising market, selling on their unit to mid or long term investors approximately 8 to 12 months after making their initial reservation, regardless of whether or not the project is yet completed.

Highly beneficial finance structures are often in place and, depending upon the development, investors need pay only around 10-20% of the purchase price in the form of a deposit, while the rest is payable when and if they complete. In the case of selling on their contract prior to completion, short term investors will have made a relatively small capital outlay, while receiving potentially steady returns on investment, which in Estonia normally amount to around 10-12% per annum, whilst never having paid the full purchase price.

Of course, the earlier the investment is made, the greater the investment returns. As importantly by entering the project at the earliest possible stage, investors get the best choice of units which will always be first to attract buyers in the future.


Level of Complexity

Short term strategies offer the lowest level of complexity as the purchase has not yet been officially made; therefore, no property taxes or maintenance or management charges are due. This is a simple capital investment, often with no need to proceed to Purchase Contract, or make any mortgage finance arrangements. Remember to check with the developer if there are any charges made to “flip”, or reassign your contract, and at what stage you are permitted to do so, before you proceed

Foreign off plan investors are party to the same laws and regulations as Estonian nationals and are free to rent or sell their Estonian properties.

Risk Assessment

All investors must carefully assess the particular project and units in which they wish to invest. In many cases, a wide range of other projects will be under construction and a choice will need to be made. This is based on how a particular development or project will outshine its competitors in terms of appearance, location, on-site facilities and the unit itself. Investors will also need to consider issues such as the number of other units available within the particular development, predicted demand as well as competition for the type of property they wish to invest in.

To curb risk, a short-term investor should normally seek to buy the best possible unit, ie. a corner unit, a penthouse or ground floor unit with a private garden, which will always sell in preference to a standard first floor unit.

Investors need to be clear how their exit strategy is to run. How will the unit be marketed and by whom? How much will the selling agents charge in commission? Should a buyer not be found prior to completion of the property, investors must be confident they can cover payment to completion of the unit and adapt their strategy if necessary.

Short term “flip” investments are undoubtedly more risky than longer term strategies, but, with careful research and planning in place, off-plan purchase in well located French projects offers a sound investment with lucrative returns.

Return

At an estimated 10-12% per annum, capital growth is constant and solid in carefully selected property in Estonia. Although this rate is not as high as in recent years, current economic indications demonstrate a smoothing off to more sustainable levels, comparing very well with growth in many other EU countries today.

Shrewd investors have the opportunity to reach the highest figures by selecting prime locations at pre-release pricing levels, allowing them to invest at below market value. Growth in Estonia is expected to be at its highest in some of Tallinn’s newest developments, both within and near the city centre.

By reserving at pre-release stage, investors profit from discounted prices and, in many cases, these are subject to successful planning applications, allowing for additional pricing uplift. Reservations on this type of project allow for full refunds if necessary and secure escrow accounts are in place to protect investors’ funds. The earliest possible reservation of course affords maximum returns on investment on any given project.

Financing

The short term investment strategy is purely based on capital outlay as mortgages cannot generally be raised against property that is not yet built. In order to cover all eventualities, investors MUST be confident they can complete the purchase if necessary, even if using a buy to flip strategy.

Taxation

Purchasing off-plan property and then re-selling prior to completion is a tax-efficient way to invest as it allows buyers in Estonia to avoid property transfer taxes and CGT when selling on the contract prior to project completion.

Medium to Long Term Investment Strategy

Key Opportunity

A central location and a continually expanding economic climate help make Estonia the profitable European investment destination it is today.

Mid to long term investors are encouraged by Estonia’s sturdier and less sporadic investment climate than of recent years. Over the past couple of years, the country has experienced a relative dip in growth rates; nevertheless, investors now anticipate reliable rental yields, complemented by steady capital growth over time.

The Estonian investment climate is clearly conducive to growth: zero and low corporate taxation rates, a low cost of living and a skilled local workforce have resulted in consistently high levels of foreign investment. A sophisticated workforce, including specialists in the IT, transportation and construction sectors, indicates that Estonia will continue to grow for some time to come.

A short supply of modern accommodation both in Tallinn city and in some seaside areas such as Parnu is keeping the property market ever buoyant in Estonia, while an emerging wealthy middle-class is now keen to get onto the property ladder for the first time. The growing availability of mortgage finance means a further boost to the market as increased local demand for property should, inevitably, contribute to pushing prices upwards.

Finnish investors tend to dominate overseas buyer statistics as geographic proximity and the prospect of buying property at prices 300% lower than in Helsinki make Estonia an ideal choice for Fins seeking affordable and profitable investments.

The wide availability of budget services, such as Easyjet from London and Berlin and the introduction of new routes such as KLM’s twice daily flights to Amsterdam continue to boost international visitor numbers to Estonia, encouraging demand for holiday homes and investment properties.

Timescale

Average construction time on Estonian off-plan developments, from project sales release to completion of construction, is approximately 12-18 months. Mid to long term investors look to hold onto their units after construction, normally for at least 18 months from initial reservation, either to rent it out and/or benefit from capital appreciation upon eventual resale. Many long term investors use hotspot locations to generate significant and reliable rental income over a period of time, as sustained rental returns are their main focus, followed by capital appreciation over the years.

Capital appreciation is expected to perform well over the next 5 years and the longer investors are able to leave capital in their purchase, the higher their potential long term returns will be. Increasing numbers of visitors to Estonia and a growing demand in the city for quality rental properties means investors can reap solid capital growth from their properties, all the while supplementing this income with high rental yields in many prime locations.

Level of Complexity

In the case of off-plan purchase, a deposit of some 10-20% is payable, simply followed by the balance upon construction completion. Sometimes small stage payments will be required, but these will vary according to the developer.

For mid to long term investors, all costs will be applicable, while ongoing costs such as maintenance, community fees and utility bills will also need to be factored into the strategy finance plan. Bear in mind it’s advisable to open an Estonian bank account in order to pay for the property’s utilities and other ongoing expenses.

Beneficial arrangements are often to be made with local property management and rental companies that are usually conveniently based on or near the site. These ensure that such ongoing costs are covered and that your unit is rented out regularly. Managed properly, maintaining a property abroad can become no more complex than an investment closer to home.

Key Risks

A medium to long term investment strategy entails much lower financial risk than a short term plan which relies on finding a buyer within a very short time frame. Provided the right investment is made on a quality, well located project with multiple facilities, establishing a rental market and eventually a buyer for your investment should not be difficult. However, as with any investment, patience and money is sometimes required until the end user is found.

The Estonian government recognises the importance of foreign investment in this important time of growth. With many foreign companies becoming established in Estonia, they are to make an ongoing contribution to the property sector, boosting the country’s economy. On the one hand, this situation indicates a stable environment in which to buy or rent, but it also brings with it intensified competition on the other.

Bank guarantees are commonly given by developers in Estonian projects will always be protected by local or overseas bank guarantees.

By appointing independent legal representation, the client can be sure that all the necessary paperwork is in place before signing the purchase contract.

Property ownership in Estonia is mostly freehold, leaving no room for ownership disputes.

Return

Constant and sustainable growth in the region of 10-12% per annum and strong rental yields of around 6% per annum make Estonia a stable arena for those looking for a profitable investment within a market that has a buoyant sales market and a constant local and international demand for residential rentals and sales

Despite growth being slower than in other emerging markets, many investors choose Estonia in favour of the other Baltic states, as it represents lower risk for more cautious investors. The absence of political instability or potential economic volatility makes Estonia an ever attractive option.

Prices, for now remain very low and compare favourably with neighbouring countries, such as Finland. Consequently foreign buyers are flocking to Estonia, particularly when growth is slowing, sometimes allowing them to obtain properties for a good deal lower than the asking price, allowing them to lock in further capital to their investment, prior to watching it grow in the mid to long term.

The growing Estonian middle-class is another key indicator of the returns investors are set to see. With average salaries increasing by some 7-10% per annum, many locals are now, for the first time, able to leap onto the property ladder. Such ongoing, popular demand will doubtless increase prices over time.

Financing

Easy access to mortgage lending facilities both in the UK and in Estonia is an advantage to foreign investors. Up to 80% LTV finance is available and interest rates are at an average 4.25%. Generally mortgages are available in Estonia for 30 years or until age 65.

Some developers of new build and off-plan developments offer installment plans over between 12 to 60 months and charges applicable vary according to developer. Although these deals can sometimes be highly beneficial, it is always advisable to shop around for the best mortgage or other finance arrangement to suit your needs.

Release of equity from investors’ other properties, be it in their country of origin or in other investment locations, can also be an easy option to raise finance for a purchase in Estonia.

Taxation

Estonia has a simple tax system regarding real estate and taxes are relatively low.

Property tax is levied by the local government on the assessed value of all land and is generally referred to as Land Tax. It is the only recurring tax levied on property.

Land Tax

Land tax can differ between municipalities and varies from 0.1 to 2.5% of the assessed value of the land (not on buildings or other improvements) depending on the use of the land. Residential land is at present charged at 1% (June 2008).

The tax is charged annually and payments can be spread over three (fixed) installments.

Example 1

An unimproved residential plot of land measuring 1,500 m² just outside the Tallinn City border near the airport would cost the owner € 25.90 per year in land tax.

Example 2

An improved residential plot of land measuring 1,825 m² just outside the Tallinn City border on the popular Viimsi Peninsula would cost the owner € 189.60 per year in land tax.

In relation to a property purchase/sale, expect to pay the following in Estonia:

Notary Fee

The Notary Fee depends entirely on the value of the transaction and is based on a table of fixed fees and payable when signing the deed.

Below a few samples for some transactions, the full updated list of notary fees can be found here; Notar.ee

Transaction value Notary fee (rounded)
€ 32.000,00 € 55,00
€ 640.000,00 € 960,00

VAT is added to the Notary fee


State Fee

On transfer of the property, the State Fee (stamp duty) must be paid within 24 hours through a commercial bank.

The notary will supply information on the sum to be paid and the reference to be mentioned with the payment.

As with the notary’s fee the State Fee is also based on a table of fixed fees and regulated by law, the articles and table can be viewed here (in Estonian local currency only): Riigiteataja.ee

Below a few samples of the State fees charged.

Transaction value State Fee
€ 12.782,00 € 16,62
€ 63.912,00 € 63,92
€ 319.558,00 € 370,70
€ 639.117,00 € 1.022,60


Value Added Tax

VAT is always deemed to be inclusive of the price mentioned in the agreement of an improved property.

A company selling an improved property would have to pay VAT.

A private person selling an improved property person would not pay VAT, but might have to pay income tax.

VAT is currently 18% (June 2008).


Income Tax

Income tax at a rate of 21% (June 2008) would have to be paid over the amount of net profit in case of the sale of an improved property unless the property is the registered address of the owner (in principle it is possible to be registered at multiple addresses).


All Taxes

The Estonian tax system consists of national taxes and local taxes collected by local governments in their jurisdiction.

National taxes include; income tax, social tax, land tax, gambling tax, value-added tax, duty and excise taxes and heavy goods vehicle tax.

Local taxes include sales tax, boat tax, advertisement tax, tax for the temporary closing of streets, motor vehicle tax, tax on keeping domestic animals, amusement tax, and parking fees.


Other Useful Information

Non distributed (ie: re-invested) profits are not taxed in Estonia. Distributed profits (dividends) are taxed as income at a flat rate (21% June 2008).

Estonia is signatory to “double taxation” treaties with many countries, check in the country of your origin if such a treaty is in place.

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