Expert: Construction Restrictions in Jõelähtme and Viimsi Threaten to Drive Up Real Estate Prices

Jõelähtme municipality mayor Andrus Umboja warned that if the government does not quickly regulate the social infrastructure development fee, housing construction could halt in Estonia's main economic regions. According to Mihkel Eliste, an expert appraiser and analyst at Estonia's largest real estate agency Uus Maa, a prolonged unresolved situation could lead to decreased supply and price increases, which will be paid by buyers.

According to Eliste, municipalities cannot cancel existing plans, but they can restrict the adoption of new ones or limit the overall process. "Viimsi municipality has been limiting new developments for several years now, because on one hand there is concern about infrastructure adequacy - especially water supply capacity. On the other hand, the entire municipality's new comprehensive plan is being processed, which has resulted in a temporary construction and planning ban," said Eliste.

„The social infrastructure development fee began to be applied gradually by several municipalities already after the major financial crisis, and its purpose was so that municipalities would not have to bear excessively large indirect costs related to developments, ranging from technical infrastructure to kindergarten places. However, its current use has become considerably broader in practice," said Eliste.

"This has been a rather gray area, and the market has accepted this additional cost in most of Harjumaa at least indirectly, mainly for the reason that it would be possible to continue development activities at all. Municipalities often do not have sufficient budgets to bear all necessary additional costs themselves - for this they would need to take loans, issue bonds, or theoretically apply some other PPP or public-private partnership financing models, which have so far been quite uncommon in Estonia and are often associated with extensive corruption risks. The current situation, where developers are required to pay an additional fee, is accepted by the market as inherently acceptable in its nature, but only up to a certain cost level and reasonableness threshold. However, the current situation seems to have gotten out of hand in some regions and has also become largely a political issue," noted Eliste.

„The problem is that although the law does not prohibit municipalities from asking developers for money, in practice this tends to be required in a context that is no longer related to the infrastructure costs of a specific development project. In Tallinn, it is not uncommon for a municipality to ask, so to speak, for the social infrastructure cost related to the development of an apartment building in Kalamaja to cover the social or infrastructure costs of some other part of the city or district," said Eliste.

„Regardless of court disputes that have already been filed or are pending in similar situations, it still appears on the market in general that the current practice, at least to a certain extent, is likely to persist in perspective. Unfortunately, considering the budget positions of Estonian municipalities and our overall societal development prospects, it does not seem very realistic that municipalities would gain significant additional capacity nationwide to finance real estate developments from their own resources. The situation where municipalities use real estate developments to support their budgets is actually a more structural budget problem," commented Eliste.

„The market tends to balance itself. If development activities in Tallinn or its immediate vicinity would theoretically be halted for a while in the context of plans, the market tends to work around this and supply together with demand simply moves geographically to regions where such legal problems do not exist or are not considered particularly significant by developers. Quite a few municipalities in the Tallinn area certainly see themselves in a position where they might be in greater expectation of new residents than municipalities that have already experienced extensive suburbanization," said Eliste.

„In regions where the processing of new detailed plans or project conditions could become subject to significant additional time or financial costs in the future compared to alternative market regions, housing buyers will experience primarily price increases and possible limitations in supply volumes in perspective. All previous social infrastructure costs have ultimately been paid by the end consumer and it will remain so in the future as well," added Eliste.