15.06.2008
Prices of suburban soviet-time flats to decline further
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Last week Goldman Sachs bought 93 000 flats at a price of EUR 3,4 bln (including debt) from the German state of North Rhine-Westfalia. This makes an average price of EUR 37 thousand per flat. Even without further details on this deal, it reminds us of the fact that the market value of a flat can be substantially lower than its construction cost. This is of course true in Estonia as well.
During the last 14 months I have used the real-estate site city24.ee to follow the price development of Tallinn's low-end flats. I have looked at price changes for the lowest and second lowest deciles of the market for 50 sqm flats. As the supply of these flats has been steady around 200 the selection has been statistically acceptable. During these 14 months the sqm-prices of the lowest decile has moved from EEK 23 200 to EEK 17 800 and the second lowest decile from EEK 24 400 to EEK 18 800. Thus, in both cases there have been price declines of 23%.
Both the deciles mentioned basically relate to Lasnamäe panel-house apartments built in the 1970-80's. The prices are the sellers' offered prices, transaction prices are obviously often lower.
So let us focus on the lowest decile. As mentioned, today's offered price is EEK 17 800 per sqm. In a similar way as described above, one may derive the rent level for that flat to approximately EEK 3 500 per month, which equals EEK 840 per sqm and year. Hence, the offered price of one sqm is EEK 17 800, and it generates a rent-income of EEK 840 per year. This implies a yield of 4,7% without taking into consideration maintenance costs, vacancies, taxes etc.
It is clear to me, that a 4,7% yield is far too low for these apartments, taking into account also their presumably low attractiveness for future generations. A yield, as calculated, in the range of 10% would be more reasonable, I think. The yield could obviously rise either as prices of the flats fall, or as rents rise, or both.
Also the presumed vacancy level and maintenance costs should be important factors when forecasting the future yield levels of these flats. Their location value should be low as Tallinn holds plenty of similar or better land which will be used for construction of residential housing.
For me there can only be one conclusion. The suburban Tallinn soviet-time apartments will have to continue falling in price. People buying them should ask substantial discounts from the offered prices.