It isn't war fears causing foreign investors to pull out of Estonia and the Baltics, but rather the fact that Scandinavia's real estate market is in crisis, leading investors to focus on their home market, fund management company EfTEN Capital CEO Viljar Arakas said Friday.
"Three large transactions took place on the Baltic real estate market at the end of last year: Viru Shopping Center was bought out by its previous minority shareholders; the Rimi distribution center building was bought in Riga; and Technopolis divested its buildings in Vilnius," Arakas said in an appearance on Vikerraadio's "Vikerhommik" on Friday morning.
"All of these have one common denominator – foreign investors are leaving," he highlighted. "But don't think that war or the threat of war are the issue."
The thing about the threat of war, he said, is that those people who do talk about it don't actually know anything about it – and those who do know can't talk about it as it's classified information.
"The concern is rather that the real estate market in Scandinavia is in a crisis of a generation, and at a time like this, all foreign investments are wrapped up and the focus is on their home market," the fund management company chief explained. "So the reason is moreso in that. Of course it's easy to reduce it to fear of [Russian leader Vladimir] Putin, but fears of Putin aren't any smaller in Finland than in Estonia."
Change ahead later this year
Regarding Estonia's own real estate market, Arakas said that the number of new apartment sales is currently twice as low as it was prior to the start of Russia's full-scale invasion of Ukraine.
"Estonia was a red light in the EU in terms of economic growth last year," he said. "And yet our real estate prices don't seem to have fallen. I think we're looking at statistical noise here. The Land Board sums up the square meters in notaries' contracts and their average prices, but we don't know what else people are given on top of that – whether they're given parking spaces, storage rooms, kitchen furnishings and other furnishings. This hidden discount is much more important than what we've currently seen in the overall statistics."
The businessman said he believes 2024 will be a year of trend reversals.
"I believe the price correction on the market will be over in the second half of the year," he said. "That doesn't mean that prices would start to rise again and transaction volumes would increase. But this stable slump should be replaced by if not a period of stable growth, then of lateral movement.
ECB decisions' significant impact
According to Arakas, messaging from Frankfurt is key.
"At the end of last year, markets were expecting the European Central Bank (ECB) to reduce key interest rates by 1.5 percentage points," he recalled. "Currently it's 4 percent, meaning that it would be brought down to somewhere around 2.5 percent. Because the latest inflation outlook for Europe was more gloomy than encouraging, now it's assumed that there will be fewer interest rate cuts this year."
He added that those in Estonia can think what they want, but real estate is such a loan-oriented asset class that loan pricing dictates a great deal.
"What's clear is that the worst is over, in terms of interest rates," he continued. "After all, we're developing projects ourselves, and it can't be said that we're in a complete ice age on the market."
It's a renter's market
As far as rents are concerned, based on EfTEN itself, there isn't much of a major drop in prices to talk about, Arakas said.
"We never charge peak rent because we want long-term tenants," he explained. "We don't want every last euro at the expense of a tenant relocating over every little drop."
At the same time, there are currently a quarter more rental apartments on offer in Tallinn than a year and a half ago, meaning more choice for renters.
"It's landlords who once saw their financial freedom in a one-room apartment in Mustamäe District bought on massive leverage that are in trouble; they're definitely in trouble today," the fund management company chief commented. "But from the tenants' perspective, things are looking more good than bad right now."
Foreclosures unlikely in commercial real estate
Arakas doesn't expect any major shocks on the commercial real estate market, as sellers and buyers alike there have already gotten used to the new interest rate level.
"I don't think we're going to start seeing any foreclosures, and that's because after the last financial crisis, our banking sector has been very conservative; people and companies that have wanted to borrow heavily haven't been given loans," he said. "And thank God our capital market has been so underdeveloped that it also hasn't been possible to rack up much private debt – which are different debt instruments. And which are actually what caused this entire crisis in Stockholm, at the center of it."
The EfTEN CEO said that Estonia has generated local capital within the span of a generation, however the "diabolical pension reform" has curbed the ability of Estonian pension funds to invest locally.
"Currently, the powerhouse of Baltic pension fund investments is in Vilnius, Lithuania," he acknowledged. "I'm not pleased about this as an Estonian, but that's how it is. In other words, if you have a decent investee and at a reasonable price, it will find a buyer. This capital exists here in Estonia."
Arakas, who also serves on the supervisory board of Coop Pank, stated that there are currently thankfully very few distressed borrowers.
"So long as unemployment doesn't jump to 15 percent and beyond, which right now seems incredibly unlikely, then no such thing will happen," he said. "There's not much point talking about foreclosures throughout the entire current cycle – things will start looking up before then. The Scandinavian and Finnish markets – once we start seeing better decisions out of Frankfurt, then that will impact us, but also them. So the second half of the year will be cheerier than the first half."
Editor: Aili Vahtla