Fr, 2.12.2022

Rent is plummeting; Tallinn has been flooded with apartments

Liina Laks
, majandusajakirjanik
Rent is plummeting; Tallinn has been flooded with apartments
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Apartment building renovation. There has been a greater movement in the rental market.
Apartment building renovation. There has been a greater movement in the rental market. Photo: Elmo Riig
  • The heating period has scared the tenants.
  • Expensive rental apartments becoming cheaper.
  • Small and cheap sell well.

The number of rental apartments in Tallinn has steeply increased and experts explain it with two main factors. Those seeking for an apartment can negotiate significantly lower rent than in the spring and the cost of already closed deals may drop.

Martin Rekor, partner of Lumi Capital, assured that the Tallinn rental market is cooling down rapidly. “The prices are clearly dropping; this is good news for tenants.” While the landlords generally use the consumer price index in their formula for increasing rent, Rekor completely dispels the fear that rent would increase 25 percent this year – the situation is anxious and everyone waits for the winter’s heating period with bated breath; no one dares rising rent significantly. Moreover, there is greater supply in the market, which means that competition for tenants has increased.

Difference between new and old ones

“A distinction must be made between existing and new leases. Lease agreements made earlier, for example, six months ago, will not be changed just in case, but the tenants clearly have concerns about the autumn-winter heating period. Several tenants have hinted to the landlord that if the costs exceed a certain limit, they no longer can pay it. The moment of truth will come when the frost really hits, but the average landlord can understand the problem and would say that they could come to an agreement if the situation becomes really bad,” Pindi Kinnisvara sales partner Peep Sooman described the situation. According to Sooman, however, the new leases currently being concluded are another matter: here the price level is already lower than a few months ago.

"This is also shown by the supply side: in Tallinn, the usual rush for rental apartments did not happen in August-September this year, because the arrival of refugees in the spring caused a rapid price increase and the search for rental apartments by students was spread out over a longer period,” said Sooman. According to him, the numbers speak for themselves: if there were 1,008 rental apartment offers in Tallinn this January, this number had decreased to 679 by April 18, but as of October 24, there were as many as 1,498 vacant apartments. The same trend is apparent in Tartu.

According to Sooman, there are multiple reasons for this: “Even those who had two residences are afraid of the increase in heating costs and rented out one apartment – for example, those who lived in their own house near the city, but had an apartment in Tallinn, where it was good to go to sleep after a hard day's work. Such practice of good times is now over,” Sooman said. According to him, the same applies to students: if the educational institution is located in the same city as the parents' apartment, it is no longer happening that the student is rented an apartment in the same city so that they could live on their own.

Good time for tenants

Sooman confirmed that the current time is good for those looking for a rental apartment: firstly, there is more choice, and secondly, due to the fact that there is more choice, the price can also be negotiated. According to him, hardly any tenant fails to use the argument of energy costs when negotiating the lease.

How long such a situation will last, no one can predict today. The global situation, the war and energy supply problems have made the real estate market so turbulent that, according to Sooman, it would be pointless to forecast the Estonian real estate market in even a couple of months. It would be clearer in the spring when one could see the utility bills and what the inflation turned out to be – that is, whether the people could afford it.

Rekor saw several other reasons for the price drop. “People try to postpone both purchase and rental decisions, because the winter’s energy prices scare them. The sale of new apartments has also fallen,” Rekor said. In autumn, more apartments came on the market also because the Airbnb season ended and the owners prefer to take in a long-term tenant rather than pay utilities and bank loans themselves. The price level on the rental market is definitely 5-10 percent lower compared to spring, Rekor estimates.

When talking to brokers, they also confirm Rekor's words: while there is still some activity in the market for apartments costing less than 100,000 euros, apartments costing more than 200,000 euros are no longer selling.

“And today many people receive the apartment they paid for several years ago. Then the prices were going up, everyone thought it was good to become a rental investor, but loan calculations were made with zero percent Euribor,” Rekor explained. At the same time, he confirmed that there is currently no crisis or panicky selling among rental investors. But in his opinion, it is also difficult to sell a real estate portfolio at present, because there are simply not as many buyers as used to be some time ago.

Lumi Capital, which owns rental houses and rents out apartments, fixes ancillary costs for clients for a year, currently until the end of February. “Then the client does not have to worry, all costs are included, except for the electricity and water consumed in the apartment. Because the customer comes to the apartment with a certain expectation and it is an impossible situation if the rent is 500 and then the ancillary costs come to 500 or 1000 euros,” said Rekor. “This means that if the cost of electricity is at 4,000 per Mwh again, the owner will pay for this fun.” Rekor expressed the hope that other real estate owners will also offer such fixation of ancillary costs; this would give the tenants a little more certainty as to what amounts they have to take into account when renting. Regarding the electricity consumed in the apartment, Rekor pointed out that nothing else helps here than monitoring the consumption. "Everyone knows the volume of their electricity usage. If you turn on the dryer during the peak price of the day, this amount will end up in the bill.”

Alain Aun, head of Rendin, which offers rental services, said that there is no single answer regarding the increase or decrease in prices. The reason is as follows: “Rental prices began to slowly show growth in the first quarter of this year, when the Euribor topic was not yet very much an issue. At the end of August, the average rental price increase in the general market was around 20 percent. Our statistics (lease agreements signed through Rendin) showed an increase of about 16 percent compared to Q2 2021 and Q2 2022. Then the main reason was the sudden increase in demand due to the arrival of Ukrainian refugees here. The uncertainty which arose overnight in the market also made the locals more actively compete for apartments, as they were afraid of losing the rental home they wanted.” Even more, Aun stated that in late spring and autumn we also saw landlords who "tried to maximize their rental income in an extreme way and asked for a 30-40 percent higher price compared to before". But at the same time, there were also many owners who did not raise the rent.

As for the current decline, Aun clearly sees one factor: the rent of apartments in the more expensive price class and their rental premises, which are "clearly overpriced", will be adjusted downward immediately. “A vacant apartment is put on market at a high price, and then they slowly lower it,” Aun explained.

Rendin's latest survey shows that 51 percent of landlords want to raise the price this year or have already done so. At the same time, 25 percent of the respondents want to increase the price by 10 percent, and less than 20 percent of the respondents want to increase it by 10-20 percent.

One of the reasons for wanting to raise the price is the increase in the Euribor, as well as inflation, energy and fuel prices. However, the survey also revealed that 58 percent of those respondents who have three or more rental apartments want to raise the price today.

One of the founders of Rendin, Algis Liblik, who is a rental investor himself, said that he cannot raise the rent at present, because it would not go along with the general market trend. “It's a difficult time for investors, because looking at the costs, it seems as if the price should be raised, but I do not see a chance for that, especially in Tallinn," said Liblik. According to him, there are two groups who can raise rent: those who have not done so for a long time, or those whose tenant changes, yet there is not much margin here, because there is an oversupply of rental apartments in Tallinn – more than 1,500 apartments – which means that competition pushes the price down rather than up.

As for raising the rent, Aun suggested the following: "When we communicate with landlords, we always make sure that they think through their intentions. Yes, Euribor growth is strong, but a less considered aspect is the risk of losing rental income instead of earning it. If all expenses for the tenant increase (e.g. food, fuel, electricity and heating bills) and the increase in the monthly rent is added to it, the risk that the tenants will have payment difficulties becomes more and more realistic. Whereas, in general, it is the rent which is left unpaid first. For example, if the phone bill is unpaid, the service is simply turned off. Evicting a tenant is not such an easy process."

From the point of view of landlords, the owners of one- or two-room apartments to offer are currently in a better situation. "More luxurious apartments in new developments are not such a hot commodity today. For example, a two-room premium apartment that costs 900 euros is not very attractive, and it may take longer to find a tenant or you have to lower the price completely to find someone. It should also be noted here that quite often today's 900-euro rental home in a new development recently cost 600 euros,” said Aun. He pointed out a rule of thumb to understand whether the owner has priced the apartment correctly: if an advertisement is posted and no interest is shown in the first few days or a week, then the price is wrong.

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