Estonia: Overview

RENTAL YIELDS

Last Updated: Jul 30, 2009

3.62% average with no sign of recovery yet

For property investors the crisis continues in Estonia, as in the other Baltic countries, and there is no sign of recovery yet. The bare facts are depressing from the viewpoint of property investment. Gross rental yields on apartments in Tallinn are quite poor, ranging from 3.22% to 3.96%. Our estimate of the average gross rental yield level has fallen to 3.62%, down from 4.6% in 2008, presumably reflecting a fall in rents along with prices.

It would be hard to be enthusiastic about property investment at these levels.

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TAXES AND COSTS

Last Updated: Oct 27, 2008

Taxes are high in Estonia

Effective Tax Rate on Rental Income
Monthly Income	€1,500	€6,000	€12,000
Tax Rate	21%	21%	21%
Click here to see a worked example
Source:			Disclaimer

Rental Income: Non-resident individuals are liable to pay 21% withholding tax on their gross income in 2008. No deductions and personal allowances are given. Withholding taxes are final taxes, so the non-resident has no obligation to file tax returns.

Capital Gains: Capital gains from the sale of immovable property are aggregated with ordinary and business income and taxed also at 21% in 2008.

Inheritance: There are no inheritance taxes in Estonia.

Residents: Residents are taxed on their worldwide income at 21% in 2008.

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BUYING GUIDE

Last Updated: Mar 07, 2007

Roundtrip Estonian transaction costs are very low

The main cost is the realtor’s fee, which varies between 2% to 4% depending on the size of the apartment. In addition there are 0.5% notary fees and a registration fee of 0.25%. All costs are paid by the buyer.

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LANDLORD AND TENANT

Last Updated: Jun 01, 2006

The Estonian tenancy term trap

Estonian rental market practice is pro-tenant.

Rents: ‘Luxury’ housing category is free from rent control. Other housing is subject to a prohibition on “excessive rents” (Law of Obligations S301). The landlord can ask for up to three months’ deposit.

Tenant Security: Contract periods can be freely agreed between landlord and tenant, but there are dangers – upon expiry of a specified term lease, the tenant may demand that the contract be extended for up to three years, and in fact the tenant can demand repeated extensions. In addition, unless care is taken, specified term contracts can default to ‘unspecified term contracts,’ in which tenant eviction is difficult.

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ECONOMIC GROWTH

Last Updated: Jan 07, 2009

Baltic’s star performer stumbles.

Estonia is a small country of 1.3 million people at the coast of the Baltic Sea. The most prosperous among the Baltic states, its success is attributable to the bold liberalization measures adopted in the early 1990s. Estonia’s economic success explains why it was the first Former Soviet Union (FSU) state to be invited by the European Union (EU) to start negotiations in 1997. It was formally admitted into EU in May 2004, a few months after NATO membership.

The declaration of independence by the Baltic states of Estonia, Latvia and Lithuania in 1991 was the precursor of USSR’s disintegration. Like the other Baltic countries, Estonia did not participate in the Commonwealth of Independent States (CIS) formed to facilitate regional cooperation among FSU states. To date, all the Baltic states have enjoyed faster economic growth than the other FSUs.

The economy entered recession in Q3 2008 with GDP shrinking 3.3% from a year earlier (after a 1.1% y-o-y contraction to Q2 2008). Overall economic contraction for 2008 is estimated to be around 1.5%. The recession is expected to continue in 2009 with the GDP shrinking by 1.1%.

Even with the remarkable drop in inflation from 2000 to 2006, it was still above the EU limit (currently at 3.2%). Historic high global fuel and food prices pushed inflation up to 6.6% in 2007, and to 10% in 2008. Despite the economic recession, inflation is expected to be around 5% in 2009, and 4.0% in 2010.

The convergence criteria for EU adoption restrict the government’s debt and deficit. After years of budget surpluses, Estonia posted a budget deficit of 0.4% of GDP in 2008. Although now safely below the 3% budget deficit limit, the government is likely to breach the limit within the next few years, due to budget deficits prompted by the credit crunch, combined with lower revenues.