UMPA MARKET OVERVIEW

Macroeconomy Average gross wages and unemploy- ment rate in Estonia’s general economic growth had a positive im- 1000 18 900 16 pact in the property market, leading to an increased 800 14 700 12 600 10 500 investment interest in existing property objects and in 8 400 development of new buildings. 300 6 200 4 100 2 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 In the third quarter of 2012, Estonian economy was up III kv 3.5% from the same period in the previous year, and Average salary Unemployment % Source: Statistics Estonia up 1.6% from the preceding quarter, driven mainly by economic activities in the internal market. The stron- gest impact was made by the construction market, Consumer Price Index and GDP where growth was achieved as a result or repair and 35 renovation of buildings and construction of infrastruc- 30 25 ture objects. However, the speed of growth decreased 20 at the end of the year due to instability of the external 15 10 environment. The Bank of Estonia has projected an 5 economic growth of 3% in 2013. 0 -5 -10 -15 Due to unpredictability of the global economic situa- -20 tion, Estonia’s export indicators in the past year have 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 been unusually inconsistent. While exports increased CPI% GDP (change of the value)* Source: Statistics Estonia in the beginning of the year (9%), the growth was re- placed by a drop of 3% in the second quarter, with resumed growth in the third quarter (7.8%). The inflow of direct investments exceeded the outflow by 143 Significant transactions million euros. Direct investments of non-residents in Estonia increased by 237 million, while direct invest- in the past year ments of residents in foreign countries increased by 93 million euros. Despite a seemingly calm year for investments, there were several investment transactions of considerable The construction market was active as a result of large size related to commercial property in 2012. government procurements and revival of the real es- tate sector. The total usable floor space of new devel- The largest transaction of the year was completed at opments was 43,100 m2 for residential premises and the end of January with the replacement of the owner 109,300 m2 for non-residential premises. of the Tänassilma Technological Village near . The value of the transaction was ca 24 million euros, Estonia export, import and yearly FDI with a rate of return over 9%. 14 000 2500 The next-largest transaction was the sale of the Mus- 12 000 2000 10 000 tikas Shopping Centre in Mustamäe, Tallinn, in the

1500 8000 spring for ca 21 million euros.

6000 1000 4000 At the end of July, Baltica sold its immovable prop- 500 2000 erty (office buildings and land) at 24 to Kawe 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Group, retaining its headquarters and the Moetänav III kv Export Import FDI mln. EUR* Shop in the same location as a tenant. The value of the transaction was 13.6 million euros. There were several other transactions above 7 million Office premises. The demand for office premises re- euros, mainly with trade premises. Some immovable mains stable. The number of vacancies decreased and properties of the Selver supermarket chain also changed prices increased over the year, but this development owners. In Central Tallinn, there was a transaction with was largely limited to Central Tallinn. The vacancy level the Merekeskus shopping centre and the property at of office premises located outside Central Tallinn is Lootsi 8. A transaction with a card dealership was con- also low, but there is no pressure on rental prices. cluded in the Tähesaju City shopping centre. Several new office buildings are being constructed in The rates of return on some transactions dipped under Central Tallinn. According to owners, ca 60% of the the 8% mark for the first time in five years, indicating new Navigator office building at Laeva st. is already restored faith in the investment market. booked. Tenants have reserved ca 50% of the six- storied class A building, which is built at the crossing of Kentmanni and Sakala streets. A new class A office Rates of return in Tallinn building is being constructed at Tatari 51, but this will (trends indicated with arrows): not affect the balance of supply and demand on the free market, because it will become the new head- Sector Return on assets Trend quarters of Statistics Estonia. Construction of a Triple Offices 8,5 Tower is underway in Ülemiste City. It will have 24,000 Trade 8 square meters of office premises, with more than half of this area being reserved for the Tax and Customs Production and storage 9 Board. Source: Uus Maa Real Estate Company The occupancy of the office and creative centre at Niine 11, opened in the autumn in , rose to ca Market situation 90% by the end of the year. Demand slightly exceeds supply in the category of According to the Land Board, a total of 65 transac- class A office premises in Central Tallinn. In the cat- tions with improved logistic and commercial land were egory of class B office premises, the level of supply is concluded in the fourth quarter of 2012 in Tallinn and still higher than demand. Harju County for a total value of 33.13 million euros. The number of transactions was up 97% from the pre- New office buildings in Harju County ceding quarter, but the total value of transactions was (usable area, m2) down ca 17%.

140 000 120 000 Price and vacancy trends of commercial 100 000 80 000 premises of Tallinn in the 2nd half of 60 000 40 000 20 000 2012: 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 III kv Price Vacancy Building permits Certificate of occupancy change change Price Vacancy Source: Statistics Estonia Type from from projection projection precious previous quarter quarter In the market of trade premises, there are still ex- Class A pectations of growth, as owners and developers of office several centres are planning extensions or construc- premises tion of new buildings. Class B office Extension of the Ülemiste shopping centre was ap- Shopping proved in October; the construction will starch in centres March this year and will cost ca 30 million euros. In Street- level trade the beginning of December, Swedish company CA premises Fastigheter AB adopted a plan for reconstructing (city centre) the former post office at the start of road as Street- a shopping centre, with completion expected in the level trade autumn of this year. The future tenants will include premises the Swedish clothing retailer H&M, as well as Rimi (suburbs) and New Yorker. Estonian Post will also stay in the Class A building as a tenant. storage Class B In December, AS E.L.L. Kinnisvara received a build- storage ing permit for the construction of Panorama City, a Source: Uus Maa Real Estate Company shopping and entertainment centre, in Lasnamäe. The New warehouse buildings in Harju construction will start in the coming months and the County (usable area, m2) centre will open its doors in the autumn of 2014. The rentable area of the building will be 57,000 square me- 140 000 ters, accommodating over 200 shops. The project will 120 000 100 000 cost ca 100 million euros. 80 000 60 000 40 000 20 000 AS Tallinna Moekombinaat, owned by Pro Kapital, in- 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 tends to put up a business and shopping centre with a III kv total area of 131,000 square meters at the crossing of Building permits Certificate of occupancy Peterburi, , Järvevana and Suur-Sõjamäe streets. Source: Statistics Estonia The new centre will include 55,000 square meters of rentable area and should also accommodate the public transportation centre of Tallinn. The planning of a tram New industrial buildings in Harju County line extension was initiated in October to improve ac- (usable area, m2) cess to the envisaged centre.

120 000 100 000 Completion of planned shopping centres is unlikely 80 000 60 000 to affect the existing shopping centres with a well- 40 000 established concept. However, increased competi- 20 000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 tion could have an impact on those shopping centres III kv that are located further away from the main traffic Building permits Certificate of occupancy routes. Source: Statistics Estonia

New trade buildings in Harju County Rental prices of commercial premises (usable area, m2) in Tallinn

Type Price rage (median) 120 000 100 000 Class A office premises 9,5-14 80 000 60 000 Class B office premises (Central Tallinn) 7-9 40 000 20 000 Class B office premises (suburbs) 5-7 0 2 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Premises in shopping centres ...-100m 20-60 III kv Building permits Certificate of occupancy Premises in shopping centres 100-500m2 12-35 Source: Statistics Estonia Anchor tenants in shopping centres 7-10 Street-level trade premises 9-35 In the market of warehouse and logistic premises, Storage and production premises (new/reno- 3,2-5 the year was a success, as economic recovery has vated) increased domestic consumption as well as exports. Old storage and production 1-3 Several Scandinavian clients continued to relocated Source: Uus Maa Real Estate Company their production and administrative units in Estonia. The new buildings were customised according to re- quirements, with no speculative premises introduced Sales of improved industrial land in the market. in Tallinn and Harju County The growth continues in major well-established logis- tics parks. Development of the Nehatu Logistic Park at 80 60 000 000 70 the boundary of Tallinn continued in the past quarter. 50 000 000 The total area of ca 40 hectares is divided between 60 40 000 000 commercial and production facilities. The detailed 50 plan of the area has been approved and the construc- 40 30 000 000 30 tion of infrastructures has started. 20 000 000 20 10 000 000 10 The State Resources Centre is developing an elevated 0 0 class A warehouse with 14,000 square meters of total I III I III I III I III I III I III I III I III I III area in the Liiva Centre Logistics Park at Kalmistu road. 2004 2005 2006 2007 2008 2009 2010 2011 2012

Number of transactions Total Sum EUR This year can be expected to be similar to the past year in the logistics sectors. There are inquiries from Source: Estonian Land Board abroad about large property objects , but suitable of- fers are often hard to find. Sales of improved commercial land in In the office segment, the rental prices of class A prem- Tallinn and Harju Count ises will continue to grow, with vacancy levels remain- ing close to zero. Some decrease in vacancy could also be expected in the category of class B office premises, 70 100 000 000 90 000 000 due to the almost non-existence vacancy of class A 60 80 000 000 premises and thereby created spill-over effect. How- 50 70 000 000

60 000 000 ever, this development is likely to affect only buildings 40 50 000 000 in the vicinity of Central Tallinn. The virtually non- 30 40 000 000 existent vacancy of trade premises can be expected 20 30 000 000 20 000 000 to continue as well, creating good entry opportunities 10 10 000 000 for new development projects. 0 0 I III I III I III I III I III I III I III I III I III

2004 2005 2006 2007 2008 2009 2010 2011 2012 No major changes are expected with regard to street-

Number of transactions Total Sum EUR level trade and services premises, but tourism-related business activity in the Old Town, with the resulting

Source: Estonian Land Board conclusion of new rental contracts, is likely to increase before summer. No major changes are expected in the first half of this year in the sector of warehouse and industrial premises. As several companies are building Projection their own premises, there should be some vacancy of good-quality warehouse premises in the second half of The future state of economy is far from clear. As Esto- the year. Demand and supply are well balanced at the nia is a part of European economy, being dependent moment, there is now upward or downward pressure on external developments and the ability of countries on prices. Some speculative premises will be added to and the monetary union to solve the crisis, the main the market in the second half of the year. focus in this year will be on recovery or coping of our main export markets in the new situation. This will also In conclusion, it could be said that the moderate growth decide the development prospects in the commercial trend of the previous year is very likely to continue property sector, because foreign companies, along- in 2013. The rate of return on cash-flow objects will side with local exporters, can be expected to be the probably improve, with the resulting decrease in entry main investors and clients in Estonia. rates and increase in prices. No significant changes are expected with regard to financing and, consequently, Construction volumes can be expected to decrease the investment market will still offer good opportuni- with the completion of construction or renovation ties for boosting the return on own capital through of objects ordered by the government for funds external financing. The activity of the market of new received from the trade in emission allowances. The developments will increase, assuming that the rise of resulting increased competition will also affect the construction prices is halted. However, if this will not price of construction. Decreased volumes should be the case, it will be doubtful whether increased sale lead to a stabilization of prices, but a larger dip could prices can ensure an attractive level of profit on new also result in reduction of construction prices. Stabi- developments. lization of the construction price, which has been on a stable upward curve, shall be a significant market Keywords for 1st half of 2013 shall remain: Return of factor facilitating recovery of development volumes. development profit and compressing yields on invest- It will make life easier for those developers who have ment grade properties. already purchased the required land or who execute an order of a potential tenant.

Companies, which still have to buy land and are de- pendent on bank financing, will find it significantly more difficult to enter the speculative market of com- mercial premises as the crediting shall rely more on signed cash-flows i.e. lease agreements.

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