Estonia

Up Up and Away

(RTTNews) - Estonia average monthly gross wages and salaries grew 17.5% on yearly basis in the fourth quarter, the statistical office said Thursday. Average monthly earnings totaled 10, 212 kroons (approx. 850 USD) versus 9, 068 kroons (approx. 750 USD) in the third quarter. Average hourly gross wages and salaries climbed 19.2% annually.

Estonia Producer Price Index - PPI climbed 1.6% on month in January, the Statistics Estonia said Tuesday. The index rose 0.5% in December. On an annual basis, producer prices expanded 6.4%,larger than 5.9% recorded prior month.        

Export price index gained 1.7% on monthly basis and moved up 5.9% annually. Meanwhile, import prices fell 0.1% on month and advanced 3.4% on year.

Estonian real estate grows 33% in Q4

Estonia's real estate market was „a third larger” in the Q4 compared with the same period of 2005, the statistics office said.

The average value of property or land transactions was 1.4 million krooni ($118,000), Statistikaamet said on its Web site today. In all, 16,000 sales were concluded totaling 22 billion krooni in the three months ending December 31. The Baltic country's housing market is being fueled by Estonians' desire to move into modern accommodation and out of decades-old Soviet-era flats. Wages rose 16.5% in the Q3, boosting Estonians' ability to purchase real estate.

AS Hansapank, the biggest Baltic lender, said on February 16 its Estonian loan portfolio grew 50% in the Q4 to €6 billion ($8 billion). Estonian mortgage growth will „slow to some degree,” said Priit Poldoja, head of Estonian operations at AS Hansapank, in an online news conference on February 16. „Real estate prices have risen to a point where for many people, even in light of rapid wage growth, the opportunity of acquiring property is limited.” (Bloomberg)

Estonia Won't Join Euro Till 2010

The Central Bank of Estonia recently reported that inflation will remain above maximum levels required by the Maastricht Treaty to join the Euro.  Currently, average Eurozone inflation rate of under performing economies runs at approximately 1.5% and Estonia's is north of 4%, and will remain so through 2008.  Estonian Central Bank predicts therefore that Estonia won't be able to join the Euro until 2010. 

In other news, unemployment in Estonia fell nearly 50% from October 2005 through this year; Estonia's unemployment rate is now below 2%.  Needless to say the labor market is extremely tight currently.

Eastern European Investment Forum in NYC

I'll be a panelist at this event which appears to be first of its kind in the States.  Likely more to come as investing in this region comes into focus more...

Estonia GDP Growth World's Fastest

Bloomberg confirmed this month that Estonia's economic growth has topped the charts at 12 percent.  China placed second with growth of 11.3 percent and Latvia at 11.2 percent. 

In the current economic circumstances, an appropriate growth for Estonia would be 7.0 to 8.0 percent a year," Bank of Estonia advisor Andres Saarniit said in a statement.

"Exceptionally high growth in the construction sector, the increasing foreign trade deficit and the growth indicators of the retail sector point to the fact that the rapid growth is increasingly based on domestic demand," Saarnit said. "We don't see things changing to allow for more balanced development, which we have been hoping for," he added.

Accordingly, while processing my loan request, HansaBank announced to me today that they are increasing their spread over Eurobor from 1.75 percent to 2.5 percent "across the board".  My banker also mentioned to me that the credit officers are "stressed out" because of the piles of loans they are in the process of reviewing. 

Now that the economy is white hot banks have decided to tighten their lending policies after years of nearly free money.  Amazing what a difference a year makes.

Inflation Worries Continue

Finance Minister Aivar Soerd reported that Estonian prices are expected to rise 4.5 percent this year, up from an earlier forecast of 3.7 percent.  While he still forecasts an annual increase of 3.9 percent by year's end, he warned that prices could climb another 4.2 percent in 2008. 

The current inflation rate across the EU declined unexpectedly to 2.4 percent in July.  Maastricht Treaty requires that accession members maintain an inflation rate below 1.5 percent above the EU average which puts Estonia just out of reach of joining the Euro. 

Estonia was scheduled to join the Euro beginning 2007, but pushed off entry to 2008 citing higher than forecasted inflation this year due to a rise in energy prices and strong consumer demand.  Now even the 2008 target is doubtful the government said. 

"The likelihood of accession to the euro-zone in 2008 has considerably declined in light of today's forecast but it would be premature to bury the aim for good," Prime Minister Andrus Ansip said in a statement.

Delays in joining the EURO could dampen investor enthusiasm.  Recent price appreciation in the property market no doubt contain expectations of introducing the common currency sooner rather than later.  Investor sentiment could weaken further by rising overnight bank rates which are expected to rise above 3 percent before the end of the year. 

Hansapank quoted me a rate of 4.1% on a 5 year ARM in the Spring; I anticipate rates will have risen by the time I finally secure a loan on my next trip to Tallinn in September. 

Bridge Deal Sign of Things to Come

The road to Narva may be paved with riches.  On Sunday July 22nd, Russian and Estonian transportation officials signed an agreement to build a new bridge spanning the Narva river which flows along Estonia's north eastern boarder with Russia.  Construction costs, estimated at 1 billion EEK, or 64 million euros will be financed by Russia, Estonia and the EU. 

When the present checkpoint between Narva and Russia’s Ivangorod was built, its projected capacity was 100 trucks a day; now approximately 400 trucks pass through the checkpoint daily, and trucks have to wait two days to cross the border.   In 2005 the number of cars crossing the border there increased 30 percent and the number of trucks 40 percent in comparison with 2004, with the number of trucks reaching 90,000. It is estimated that the total number of vehicles crossing the border will grow to 300,000 per year by 2010 according to the Baltic Times.

Transportation ministers from both countries say that the Tallinn - St. Petersburg road link is one of the busiest connections between Russia and the EU.  Additionally, the two ministries signed a bilateral railway treaty which could be a major step toward making Sillamäe (just west of Narva) a major port for the export of Chinese and Russian goods.  This will be an important story to keep tabs on.

Needs of Estonian Middle Class

Having been on a blog hiatus for nearly 3 months, I'm back.  Since my last entry, I've been on a small buying binge and purchased another apartment in Tallinn and am in the process of closing 3 more deals: a land purchase on Saaremaa island and two apartments in Riga, Latvia.  Additionally, I'm still in the process of raising money for Broadgate Capital's Fund. 

In any event, I'm going to do my best to write more frequently because the news that continues to come out of Estonia is interesting, particularly as it relates to this blog which centers around emerging market real estate investing in places like Tallinn, Estonia and the Baltics. 

So: The Baltic Times reported this week that Estonians need a net monthly income of 640 Euros (or 9,000 kroons) to live comfortably.  US annual salary equivilent = $8,000.  "Estonians are finding it more difficult to afford household items, as costs increase to match European standards, while wages remain relatively stagnant."  By "relatively stagnant" I suppose that the Times means that while wages are increasing at an annual rate of approx. 10%, housing prices are increasing at much higher rates, i.e., 20-50%.  Nonetheless, I'd say that wages will continue to increase at a good clip.  However, as other EU countries open up their doors to migrants, Estonia's labor drain will continue apace since many can find higher paying jobs outside their home country.

This will be a very important theme to watch in the coming years.  Likewise, Estonia will need to open up its labor market to Russians, Poles and Belarussians if it has any hope of keeping up with the building boom gripping the country. 

Data by the Statistical Office show that average gross monthly pay in the first quarter of 2006 was 8,591 kroons and only a few percent of wage earners received 10,000 kroons a month in 2004. Last year the average gross monthly pay was the highest in Tallinn at 9,462 kroons and the lowest in the northeastern Ida-Virumaa region at 6,057 kroons, the daily notes, the Times concluded. 

Given these relatively low income rates, investors like me will have to count on wealthier Estonians and foreigners doing business there to cover morgtage payments.  These days, average rents for modern 2 room, 70 sqm apartments are fetching 10,000 EEK / month.  Obviously then, at this stage, it's not the yields we're buying, but the appreciation. 

Estonian Real Estate Overheating?

I'm back touring Estonia once again, having just left a US sponsored trade mission to the Baltics in Riga, Latvia.  My trip to Riga was very quick, lasting just two days.  It's a much bigger city than Tallinn and consequently more cosmopolitan.  Yet I'm glad to be back in Tallinn -- the vibe here trumps Riga in my humble opinion.  Still, I will be traveling back to Riga next week to attend a real estate conference and will spend nearly a week there.  Riga will likely grow on me as a result. 

I will be driving down there with a friend of mine and I hope to spend some time in Parnu, a small city with a population of just 45,000 between Tallinn and Riga.  Apparently its a beautiful resort town along the coast that comes to life in the summer with sun worshipers and party goers.  On a side note, Parnu just hosted its annual conference for 550 Estonian marketing professionals -- "Marketing without Advertising"

Aaaaanyway... I've been on the hunt again, looking for property investments and am having trouble finding suitable targets.  Prices have exploded here and have become unreasonably high, especially in the Tallinn city center.  While prices have not yet converged with western EU prices, it's hard to imagine that valuations will continue to accelerate as they have been in the last six months.  For instance, flats in a high rise building called Tornimae are priced at 80-90,000 EEK / SQM, nearly four times what they sold for just a year ago.  I visited one of these flats on the 21st floor just yesterday, a rare occasion indeed as the real estate agents had never before been inside the building themselves.  While the views are stunning, the units I looked at are tiny, just 50sqm and 38sqm each. I was hoping to combine the two into a larger suite, but unfortunately, putting a door between them would violate building code. 

Additionally, I'd need to come up with 40% of the selling price in cash which would tie up too much of my money.  Many of the units being sold by my agents in other well-known developments require similar terms, like Foorum, Rotermanni, Suur Ameerika. 
Too expensive, too much down and too risky. 

So I'm on to greener pastures, so to speak, and am looking at developing homes these days.  Based on my research this is the way to go.  Land has become quite expensive however, so deals are increasingly hard to find.  Too much money chasing too few deals, which seems to be the order of the day here in Estonia. 

Developing Economies Power Boom

Recent front page article in the LA Times discusses the unprecedented boom of emerging economies.  Of the 60 or so tracked by investment firm Bridgewater  & Associates, not one is in recession.   The last time developing nations' economies outpaced those of the developed world was in the early 1970s. 

A number of issues arise as a result of this economic environment, namely increasing unemployment rates in developed countries like those in Western Europe, creation of new middle classes, greater demand for US goods (a more recent phenomenon), and of course a rise in real estate prices in new markets like Estonia.  Some say the ballooning US trade deficit kick-started the boom in  emerging markets, likening US top heavy demand for imports over the last decade to the post-WW II Marshall Plan.