Estonia: Overview

RENTAL YIELDS

Yields are moderate at 6% in Tallinn

Rents have begun to rise in the past two years, especially this past year, after remaining relatively stable for several years. Average rents for a furnished apartment in Tallinn are around €9 - €13 per sq. m. per month, according to the latest Global Property Guide survey. National rentals statistics suggest that rents on the smallest Tallinn apartments have risen around 20% in the past two years, though 3-bedroom apartments are still near their 2003 rental levels.

The most popular area is in and around the old town at a 5 to 10 - minute walking distance from the centre.

However, rents combined with rocketing prices are lowering rental yields. The 20% yields of the beginning of the decade are now down to 6%, and further falls can be expected.

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TAXES AND COSTS

Taxes are high in Estonia

Rental Income: Non-resident individuals are liable to pay 22% withholding tax on their gross income. No deductions and personal allowances are given. Withholding taxes are final taxes, so the non-resident has no obligation to file returns.

Capital Gains: Capital gains from the sale of immovable property are aggregated with ordinary and business income and taxed also at 22%.

Inheritance: There are no inheritance taxes in Estonia.

Residents: Residents are taxed on their worldwide income at 22%.

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BUYING GUIDE

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

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

The Baltic’s star performer

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.

Estonia’s economic growth slowed during the Asian and Russian Economic crises of 1998, but the country recovered well. In 2006, annual GDP growth was 11.4%, following 10.5% growth in 2005, and an average growth rate of 7.2% from 2000 to 2004. GDP per capita is around US$14,500, more than double its pre-independence level. The unemployment rate dropped to 5.9% in 2006, down from 14% in 2000. Inflation was at a 4.4% in 2006, down from 29% in 1995, but on a rising trend.

Estonia’s strongly technologically-oriented culture, its niche in internet development, its physical and cultural proximity to Finland and attractiveness to Finnish investors, its attractiveness to foreign investors and the high quality of its institutions, should ensure that strong economic growth continues.