What kind of demands does a new real estate market growth make on real estate quality in

Estonia?

Ene KolbreAngelika Kallakmaa-Kapsta

Tallinn University of Technology

Problem The Estonian real estate market has

experienced a decline and stabilisation phase and started on a new rise

In the real estate market decline phase it was discovered that the prices of low quality objects have fallen the most

The aim of the paper

To investigate the opinions of market participants about the real estate quality and make a hierarchy of quality indicators under the new real estate market rise.

The object of analysis is the housing and office market.

Purchase-sale contracts of apartment ownership

  Number of purchase-sale contracts

Value of contracts of apartment ownership, million €

Average value of contract, thousands €

2007 24369 1495 61.3

2008 16014 882 55.1

2009 10897 388 35.5

2010 13318 475 35.7

2011 1st Q

2722 102 37.5

Housing market

The increase in the number of transactions in 2009 compared to 2010 was 20%.

The median price of apartments in center district has risen to 1 300 €/m2 by 1st quarter of 2011,

which is 25% higher than the lowest average prices in 3rd quarter of 2009

  

Housing market The current situation in housing market is

characterized by a relatively stable number of transactions.

The supply exceeds the demand and offer prices vary widely

Still are unsold or not rented out low quality appartments which were buit at the end of boom period

The prices have clear differentiation based on the quality

A- and B-grade office space indicators in Tallinn 2007-2011

Grade Indicator 2007 2008 2009

2010

20111st Q

A Average rent (€/sqm/month) 15.3 12.7 8,9

7.7-11

8.5-12.88

Vacancy (%) 3 6 20

10-15 10-15

B Average rent (€/sqm/month) 11.5 9.6 6.4

5-8

3.8-7.7

Vacancy (%) 4 15 25-30

20-30 20-30

Office market

In Estonian office sector Tallinn clearly dominates, described by largest stock of office space and highest market activity

During the crisis periood 2008 and 2009

there was great amount of new office space added to the market and the vacancy rate reached 30-40%

Office market

From the second half of 2008 until the end of 2009 the rent levels decreased around 35-40%

The year 2010 brought stabilization on the office market, mostly affected by positive changes in the economical situation

Office market

2011 will bring slight increase in rent levels and stabilization of vacancy rates around 10% in city center.

The vacancy level in older office buildings stays around 20%.

Development activity in office sector will not increase during coming years.

The basis of the quality rating system

Quality grade is a complex indicator that represents a combination of factors that characterise

the income potential and value of the real estate taking into consideration that every factor has to assessed based on the principles of sustainable development and saving use and market expectations for these indicators

The basis of the quality rating system

Income potential is evaluated on the basis of the following attributes:

location and use of the plot, quality of construction, real estate management Valuation of each attribute is based

on the factors that influence the respective attribute

The basis of the quality rating system The choice of factors influencing the

attributes depends on the type of object to be valued

residential, office, commercial, storage and production properties

Methods

Analytic Hierarchy Process (AHP) method elaborated by Thomas L. Saaty was used to evaluate

the hierarchy of the factors influencing the quality grade

the changes in the hierarchy, depending on market changes or whether the quality rating factor is evaluated from the aspect of market expectations, market value or developer

Weightings of factors influencing the quality rating on the basis of location and plot. Office space

Location within the region

Passing traffic and visibility

Supply of utilities on the plot

Parking facilities

Conformity to the building right of the plot

General plan and usage of the object

Maintenance of local roads

Services provided in the region (catering facilities etc)

Greenery and maintenance of the plot

0.00 0.05 0.10 0.15 0.20 0.25 0.30

20112010

Weightings of factors influencing the quality rating on the basis of location and plot. Living space

Location within the region

Supply of utilities on the plot

Infrastructure for public services in the vicinity (schools, kindergartens, shops etc)

Noise

Greenery and maintenance of the region

Parking facilities

Conformity to the building right of the plot

Greenery and maintenance of the plot

General plan and usage of the object

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

20112010

Weightings of factors influencing the quality grade on the basis of construction quality Office space

Condition of structures

Functionality of the building

Condition of technical installations in the building

Architectural solution

Exterior finishing of the building

Quality of the interior finishing and fixed interior fittings in the building

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

20112010

Weightings of factors influencing the quality rating on the basis of construction quality Living space

Condition of structures

Condition of technical installations in the building

Functionality of the building

Architectural solution

Quality of the interior finishing and fixed interior fittings in the building

Exterior finishing of the building

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40

20112010

Weightings of factors influencing the quality grade on the basis of real estate management Office space

Rental rate

Management of a property

Homogeneity and solvency of the property users

Utility service costs (energy, water, heating expenses measured in cash)

Energy consumption of the building (kWh/m²/y)

Use/non-use of electricity saving measures as a result of which energy expenses are lower

Waste disposal and assortment

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35

20112010

Weightings of factors influencing the quality rating on the basis of real estate management Living space

Management of a property

Homogeneity and solvency of the property users

Use/non-use of electricity saving measures as a result of which energy expenses are lower

Energy consumption of the building (kWh/m²/y)

Waste disposal and assortment

Utility service costs (energy, water, heating expenses measured in cash)

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

20112010

Weightings of attributes depending on the purpose of quality rating Office space

2010

2011

2010

2011

2010

2011M

arke

t exp

ecta

tions

Valu

ers

Deve

lope

rs/i

nves

tors

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

Real estate management Construction quality Location and plot

Weightings of attributes depending on the purpose of quality ratingLiving space

2010

2011

2010

2011

2010

2011M

arke

t exp

ecta

tions

Valu

ers

Deve

lope

rs/i

nves

tors

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80

Real estate management Construction quality Location and plot

Conclusions

Experience gained from the real estate boom and the followed fall of the market forced all of the market participants to re-evaluate their opinion on the real estate quality

At the beginning of new real estate market rise the weight of attributes and factors inside every attribute according to which the market participants evaluate the real estate quality has changed considerably

Changes in the attributes that characterise the real estate quality are similar to living and office spaces Weight of location and plot has

considerably decreased Weight of the construction quality as well

as real estate management has risen Changes listed above are valued similarly

by tenants, real estate valuers and investors/ developers

Biggest changes have taken place in the factors which influence the quality rating based on real estate management More attention is now paid to the

following factors: Office space: rental rate and use/non-use

of electricity saving measures as a result of which energy expenses are lower

Living space: utility service cost and energy consumption of the building

Thank You 

Ene.Kolbre@tseba.ttu.eeAngelika.Kallakmaa-Kapsta@tseba.ttu.ee