A Flexible and Stable Rental Market Requires More Investors

Tallinn's rental market needs more professional rental property operators and institutional investors to develop further, who could offer tenants stable and flexible housing without entry barriers.

Priit Vare, CEO of Larsen, one of Estonia's largest accommodation companies, stated that Estonia's rental market is skewed towards rental investors with small portfolios compared to the rest of Europe. "Small investors and individuals play a large and important role in the local rental market, but in order to bring more stability and flexibility to the rental market, the share of professional rental property operators and institutional investors must grow above all," explained Vare.

According to Vare, Estonia's rental market development is currently hindered by the fact that tenants cannot treat a rental apartment as their home, since stability is one of the basic properties of a home.

"People living in rental spaces cannot plan their living arrangements, for example, make daycare or school choices for their children with the certainty that a home will exist for as long as it is needed. Tenants do not treat rental space as a long-term home, and this in turn reduces the attractiveness of the rental market for developers and investors," said Vare.

In Vare's view, an efficient and flexible rental market could be part of Estonia's state value proposition. "In Tallinn, there are currently very few operators besides Larsen who would be ready to guarantee a developer a steady rental flow for a portfolio of over 100 apartments. Market participants understand that the most difficult part is not building a rental property, but operating it successfully and efficiently," he said.

Speaking from an investor's perspective, Larsen's CEO also named low profit margins as a bottleneck. "Today we face the fact that the difference between loan price and rental income leaves very little room to maneuver, and the cost of living and wages have grown significantly faster than rental prices in recent years," said Priit Vare. Nevertheless, Larsen expects a modest increase in Tallinn's rental prices of 2–4% this year, which would also increase investors' interest in investing.

Larsen has, however, grown its rental portfolio rapidly in recent years, and the success of the accommodation company lies in high efficiency. "We operate at the top of Tallinn's accommodation sector efficiency thanks to smart processes and digital solutions. This in turn allows us to maintain a balance, being attractive to tenants on one hand and to banks and investors on the other," confirmed Vare.

Larsen's portfolio currently includes five buildings in Tallinn, which together have over 600 studio-style kitchenette accommodation spaces. However, at the end of this year, Larsen will open a lifestyle accommodation building with a novel concept on Väike-Ameerika Street, into which over 12 million euros will be invested. With the addition of the Väike-Ameerika building, the number of studios managed by Larsen will grow to nearly 800.