Analyst: Rental Numbers Growing and the Rich "Park" Spare Cash in Expensive Real Estate

According to Mihkel Eliste, a professional appraiser and analyst at Uus Maa, Estonia's largest real estate office, there are increasingly more people in Estonia who rent homes long-term instead of owning them. Wealthier individuals, however, are buying expensive apartments not to generate direct monthly income, but to "park" their free money.

According to Mihkel Eliste, Estonia has had a very high share of homeowners so far – nearly 80% – and the reason for this is the land reform that followed the Soviet era, during which many people were able to privatize their homes. "In Estonia, the percentage of owners is exceptionally high by European standards; in Germany, for example, there are more renters than owners, while in Finland and Sweden, owners make up two-thirds," said Eliste.

"However, the trend of ownership is changing both in Estonia and in other countries, and increasingly more people are not planning to buy a home at all. On one hand, this is due to decreased affordability and general uncertainty, as well as lifestyle changes – people live more day by day, are more flexible about changing residence and even country, and don't want to commit themselves geographically or with loan obligations for long periods," said Eliste.

According to Uus Maa's appraiser, current low rental prices also encourage renting, which are at their most favorable level compared to income in 15 years. "When comparing purchase prices, renting especially expensive real estate is currently very favorable. For example, with a half-million-euro apartment, new house, or townhouse, the owner's monthly return is often three percent or less, and in fact they are paying extra in terms of cash flow. The cheapest property provides the owner with the best rental return – for example, a 1-2-room apartment in a residential area yields 4.5 - 5.5%, which already covers the loan cost, and 15 - 20 square meter micro-apartments sometimes even yield up to 7.5%, meaning there's even a bit left over," said Eliste.

"Expensive apartments are currently being bought quite a lot simply for parking money, because alternative investment opportunities – such as bonds or stocks – seem incomprehensible and risky to many Estonians, and real estate is traditionally a relatively conservative place to preserve capital and simply "park" free funds," noted Eliste.

"During uncertain times, "parking" money has grown globally – as extreme examples, in New York, London, Paris, and Dubai there are increasingly more empty apartments that simply sit vacant and whose owners don't plan to rent them out. In Estonia too, there are quite a lot of expensive apartments that similarly sit empty for much of the time," commented Eliste.

"At the same time, rental prices are expected to rise in the near future – this year growth is expected to be in line with inflation or slightly faster, averaging 3% - 4%. Considering that construction costs also increase over time and rents rise with time, at some point expensive apartments will also start to earn money in terms of entry price, and additionally the value of the property itself tends historically to rise in the longer term," added the analyst.

"In the long run, however, real estate ownership is in any case more beneficial for the average person than renting – if you think long-term, then reaching retirement and going through life without accumulating any assets may be quite difficult in the future. Therefore, the growing share of lifetime renters is also potentially a major problem for the state," noted Eliste.