Steve Roman in Tallinn -

The consensus among insiders is that the worst is nearly over. Signs of recovery in Estonia's real estate market, which has been "frozen" since transactions slowed dramatically in the second half of 2007, have prompted the major agencies to predict that the ice will break up and residential property sales will finally start flowing again this autumn.

The main factor behind the thaw, believes Uus Maa broker Oliver Ojala, is that prices have dropped to a sellable level, which should start having a real effect once the traditionally slow summer period is over. "It's definitely going to have to start moving again soon because developers have already started going down in price - in some projects 20 percent, some even more," Ojala tells bne.

According to Uus Maa's estimates, the average Tallinn apartment sold for €1,534 per square metre (sqm) this March compared with €1,713 a year earlier. The price drop has been even more severe - as much as 22% - for Soviet-built apartments in suburban areas.

Ojala adds that some investors are already taking advantage of market conditions, sensing that prices won't drop much further. "There are a lot of investors walking around with their money and looking for stuff to buy, actual projects that are in trouble financially. And a lot of people are buying for themselves because it's a buyers' market."

Estonian real estate development and sales, which economists cite as a major driver of the nation's double-digit GDP growth in 2005 and 2006, ground to a halt late last year when a rapidly cooling economy and tighter restrictions on bank loans prompted potential buyers to hold off on purchases. At the same time, developers who had gambled on continuing growth brought hundreds of new apartments on line, flooding the market. Though estimates vary, some real estate agencies have said their transaction numbers have fallen by as much as 50% from last year. The crisis has not only sent property developers into bankruptcy but has also been wreaking havoc on the real-estate brokerage business itself, with medium-sized agencies forced to consolidate or close their doors.

Encouraging numbers seen in recent weeks were, therefore, welcome news to the industry.

Cautious optimism

"Based on our company, [comparing] the first four months of this year to the last four months of 2007, the number of transactions has risen about one-third and the revenue about 50%," says Kaur-Kaspar Kulli, head of the valuation department at 1Partner, speaking about suburban apartment sales.

Similar increases have been registered among all the large real estate companies, however Peep Sooman, member of the board of Pindi real estate, cautioned that the recent month-to-month jumps in transaction figures have to be taken in context. "April was much more active than March was, March was more active than February was, but we can't forget that February was the most horrible month in five years," he says.

Still, Sooman said that the growth in activity is a good sign. "That's positive of course, and we can see that when the prices have already come down people's buying capacity is growing and they are starting to buy."

This "buying capacity" that Sooman refers to is itself a hopeful indicator. "When we start to compare the buying capacity - how many square meters the average Estonian ...can buy - [it] has increased already, and probably will increase more. According to our analysis ... we are already back [at similar levels to the] beginning of 2006 and in the end of 2005."

What's currently holding back that capacity from being used, Sooman believes, is pessimism stemming from continuing bad news on the economic front, such as a dismal 0.4% GDP growth rate in the first quarter and continuing government budget cuts. Nevertheless, Sooman predicts eager buyers who have been on the fence will soon tire of waiting out the storm and sign on the dotted line. "If we only see negative news in the internet portals of course people keep postponing their decision, but it's just a question of a couple of quarters, we believe."

Kulli from 1Partner echoes Sooman's opinion that the media's (at times inaccurately) bleak portrayal of the real estate sector has deepened the crisis, but he also pointed to a different factor in how the market will shape up. "The future of the Estonian real estate market is in the hands of the banks," he says. "If the buyer gets the loan, the deal will be made, if the buyer doesn't get the loan, the deal won't be made."

Here, too, the falling prices could help prod the market back into action, pushing the banks to loosen their conservative lending requirements. "I think the banks also realize that this price level is acceptable, it's not overrated and they will give out a loan more easily," Kulli says.

Despite the rosier picture in residential property sales, the experts caution that Estonia's real estate market as a whole is nowhere near recovery. Suburban office space, for example, is predicted to be grossly oversupplied this year and next with new projects coming onto the market, while prices, even in sectors that get moving again this autumn, are unlikely to climb back to pre-crisis levels for several years.

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