Estonia, the most northerly of the Baltic States, regained its independence from the Soviet Union in 1991. It is a mainly flat country on the eastern shores of the Baltic Sea, with many lakes and islands. Much of the land is farmed or forested. The capital, Tallinn, is one of the best-preserved mediaeval cities in Europe, and tourism accounts for 15% of Estonian GDP. The economy is driven by engineering, food products, metals, chemicals and wood products

Estonia and the EU includes links to Estonian government sites and Tourist Information.

Estonia hits the headlines for topping the Global House Price Index charts for yet another year with an annualised growth last year of 50 percent. Property investment in Estonia continues to looks promising. Tallinn, the capital of Estonia, is growing at a particularly rapid rate and this is fuelled by the speed in which property can be exchanged and completed (typically within a matter of two weeks). The speed of transactions, in Estonia, is mainly down to the fact that most purchasers do not have another property to sell and are, therefore, not subject to long chains like other more developed European countries.

In order to encourage more people to buy in Estonia, there has been a drive by the financial institutions to provide low cost mortgages. Low interest rates and less stringent rules mean that many younger generation Estonians are now jumping onto the property ladder, which is driving property prices up in many pars of Estonia.

Foreign individuals and companies are allowed to acquire property with the permission of the local authorities. There are legal restrictions on acquiring agricultural and woodland of 10 hectares or more, and permission from the county governor is needed. Foreigners are not allowed to acquire land located in smaller islands, or listed territories adjacent to the Russian border.

Buying process: The procedure for buying property is relatively simple; however, a reputable estate agent and an experienced property lawyer should be consulted.

The buying process begins with the selection of a particular property. If the buyer decides to proceed with the sale, a reservation agreement is usually drawn up between the buyer and the vendor, which amounts to a preliminary contract, formally documenting the intended purchase and explaining the deposit amount and the final price payable on completion.

Compensation clauses should be included in the reservation agreement and the deposit amount, which is usually between 20% and 30% of the final purchase price, is payable once the agreement is signed. The reservation agreement does not need to be notarized and can be signed without any need for the buyer to visit Estonia.

When the property is complete or available, the buyer has a certain time period in which to inspect the property and notify the developer or seller of any outstanding problems.

If all standards are met, the final balance of the purchase price is transferable, payable to the notary, in time for the agreed completion or closing date. However, the buyer must attend the notary on the completion date to sign the purchase contact, and this contract is normally in Estonian. Translations can be arranged for a small fee.

The Notary also prepares the Transfer of the Ownership of the property and the parties sign it at the notary’s office. After the completion of the purchase, the buyer must pay a stamp duty charge to the local authority before the purchase agreement is released to them. There are ongoing maintenance charges to be considered, but in the case of apartments, these are levied via the property management company responsible for the maintenance of the overall apartment block.

There are no property deeds in Estonia. A notarized application is made to the Land Register to transfer the ownership of the property to the buyer in the Land Register Book. After this process, the title is legally valid. Public notice of the transfer must be published in the Official State Gazette, though this is does not affect the ownership title, the publication process is almost automatic.

It takes an average of 65 days to complete the four procedures needed to register a property in Estonia.

Costs/Fees: The smaller the property, the bigger (proportionately) the estate agents fees. These rates are applied to the selling price.

Notary fees are based on a table of fixed fees for property values up to EEK10,000,000. For higher values, notary fees have a progressive fixed fee plus a declining rate for each excess. 18% VAT is added to the notary fees.

Stamp duty is based on a table of fixed fees for values up to EEK10,000,000. Stamp duty is 0.4% of the property value exceeding EEK10,000,000.

 

Taxes: Non-resident individuals are liable to pay 21% withholding tax on their gross rental income in 2008. No deductions and personal allowances are given. Withholding taxes are final taxes, so the non-resident has no obligation to file tax returns.

Capital gains from the sale of immovable property are aggregated with ordinary and business income and taxed also at 21% in 2008.

There is no tax in Estonia.

Residents are taxed on their worldwide income at 21% in 2008.

Land owners in Estonia are liable to pay an annual land tax, levied on the market value of the land. The rate is established by the municipal council and varies between 0.1% and 2.5%.

Rental Market: Despite the abolition of national rent control by the Housing Act (1992), the Law of Obligations S 301 forbids “excessive rents,” which are defined as those where “unreasonable benefit is received from the lease of the dwelling, except in the case of a luxury apartment or house.”

Agreements for periodic rental increases are valid in fixed term contracts if:

  • The lease contract is for at least three years
  • The rent increases not more than once a year
  • The extent of the increase or basis for calculation are precisely determined

‘Unspecified term contracts’ are more controlled. Rent control in such cases is administered by the local municipality. Control is exercised not at the time of initial rental agreement, but when the landlord asks for a rent increase, which he can do every six months, or one month in the case of furnished rooms. The landlord is permitted to agree a rent at a level covering the actual costs of housing, i.e., the costs for housing maintenance, the renovation costs, housing services and owner-profit which is allowed to account for up to 10% of the total rent price. The landlord must give 30 days notice in writing, and the date, reasons, and procedure for contesting the rent increase, which is by going to the local courts.

All taxes related to the housing are to be borne by the landlord.

The landlord can ask for up to three months deposit. The tenant may pay this deposit in three equal instalments, beginning after entry into the contract. The deposit must be kept by the landlord in a segregated account, earning at least the local average interest rate, which interest must be paid to the tenant upon the return of the deposit.

Tenancy periods can be freely agreed between landlord and tenant, but there are dangers. Upon expiry of a specified term lease, or cancellation of a lease contract, the tenant may demand that the contract be extended for up to three years, if the termination of the contract would result in serious consequences for the tenant or his family. The tenant can in fact repeatedly demand extension, but may be required to show that he has done all that is reasonable in order to find new housing.

Unless care is taken, specified term tenancy agreements can default to ‘unspecified term agreements,’ in which tenant eviction is difficult:

  • Contracts for more than one year, and not in writing, are automatically unspecified term contracts.
  • The lease contract becomes an unspecified term contract if the lessee continues to use the dwelling after the expiry of the contract, unless either landlord or tenant expresses some other intention to the other party within two weeks.
  • The contract becomes an unspecified term contract at expiry, if a residential lease contract is for more than two years, unless one party gives two months notice before the end of the term that he does not want to extend the contract.

Unspecified term tenancy agreements may be cancelled by either party at three months’ notice. However tenancy agreements may not be cancelled in ‘bad faith,’ i.e., because the landlord wants to raise the rent and the tenant does not consent, or during proceedings.

Repossession for non-payment of rent can be very difficult. After three months of non-payment pass a court can issue an order, but if the tenant makes partial payment the order will not be issued.

Tenants may sub-let the premises with consent, such consent not to be withheld except under strict conditions. But the tenant remains responsible for the activities of the sub-tenant.

The above provisions do not apply to tenancy agreements with a term not exceeding three months, of premises of accommodation establishments and premises intended for holidays, or to lease contracts entered into for the temporary use of other premises.

It can take up to 300 days to evict a tenant for non-payment of rent.

Financial Crisis 2008/09: As the global financial meltdown continues to unfold, Estonia’s housing market has emerged as one of the biggest losers.

Property prices in Estonia’s residential property market continued to slide in 2008, especially in Talinn and Parnu, Estonia’s summer capital, after starting to fall in 2007. Tighter credit conditions, combined with a sharp drop in demand from EU buyers, and an oversupply of new flats caused house prices to crash.

In Tallinn, Estonia’s capital city, the average price of 2-room apartments plunged 17.2% to the end of 2008 from a year earlier. When adjusted for inflation, the average price actually dropped 25.3% over the same period, according to Statistics Estonia.

The house price falls in Estonia in 2008 were among the biggest in the world, rivalled only by Latvia. These falls were in sharp contrast to enormous annual price increases in the past, peaking at an annual price increase of 77.5% during the year to end of Quarter 1 in 2006.

The average price of 3-room apartments In Tallinn plunged 11.5% to EKK20,800 (€1,328) per sq. m. during the year to end of Quarter 3 in 2008. It was down 18.4% from the peak level of EEK25,500 (€1,629) per sq. m. in Quarter 2 of 2007.

In Tartu, Estonia’s second largest city, the average price of a 2 room apartment was up 3% year on year to the end of Quarter 3 in 2008, but it was still 4.5% below peak level. The average price of 3-room flats, on the other hand, dropped 10.3% to the end of Quarter 3 in 2008.

In Parnu, known as Estonia’s summer capital, average prices plunged by around 30% to end of Quarter 3 in 2008 from a year earlier.

Estonia’s economy is expected to move out of recession after 2009. So property prices are forecast to stabilise by end of 2009 or early 2010. However, it might take a few years longer before the market returns to 2007 levels.

Update February 2011

Estonia took exactly the correct stance during the credit crisis. While the rest of the world recommended governments increase their spending to unprecedented levels by borrowing more, Estonia did not go down this route. Much better to have a short, sharp shock - this is exactly what Estonia did. With almost no government debt it suffered a big fall in GDP, rise in unemployment, a dramatic drop in property and other asset prices. The country and its people hurt. However, that shock has now played out. While other countries are struggling through the ongoing hangover after the debt fuelled party and will continue to do so during the next 10 years with slow growth and stagnated asset prices, Estonia is free to grow rapidly.

With UK finance tough for most investors, and larger deposits required, many astute investors are once again looking further away to get the best returns on their money.

With many of the worlds economies recovering quicker than the UK, and with stronger finance options it makes good financial sense to look at different markets.

Estonia took exactly the correct stance during the credit crisis. While the rest of the world recommended governments increase their spending to unprecedented levels by borrowing more, Estonia did not go down this route. Much better to have a short, sharp shock and this is exactly what Estonia did. With almost no government debt it suffered a big fall in GDP, a rise in unemployment, and a dramatic drop in property prices. For the country and its people it That shock has now played out and while other countries are struggling through the ongoing hangover after the debt fuelled party and will continue to do so during the next 10 years with slow growth and stagnated asset prices, Estonia is free to grow rapidly.

On 1st January 2011 Estonia accepted the Euro, cancelling all investor concerns regarding devaluation of the Kroon. Growth was around 4% in 2010. It is ranked 16th in the Index of Economic Freedom (higher than most 'Western' economies) and it has 0% corporate profit tax. The Countries Capital Talinn has been named the Cultural Capital of Europe for 2011, http://www.telegraph.co.uk/travel/destinations/europe/estonia/8245586/Tallinn-A-town-of-many-talents.html

Last year it grew by around 4%, putting it back on the map as one of the strongest economies in Europe. Fundamentally it is strong with an export led, open economy, a well educated and IT savvy workforce, low prices and potential to expand output, 2011 is set to be a very good year.

Statistically, countries joining the Euro have seen an increase in property prices between 30%, 100% shortly after accession, and with the economy back on track this should prove to be a very stable and exciting property market.

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Disclaimer: This guide is for information only and should not be relied upon as definitive. Details have been obtained from various sources and although we have done everything possible to ensure that it is correct, we cannot accept responsibility for it or guarantee its accuracy. This is because processes and laws change frequently, and may vary dependant upon personal circumstances. You are welcome to use the information provided, but should always obtain confirmation of specific details and get independent specialist and legal advice in the country that the information refers to.

Updated 10-02-2011