Investments in real estate in Estonia: trends and risks

Investments in real estate are usually low risk investments, but in practice it may be quite different. In order to reduce the possible risks, investor should be aware of the peculiarities of the market of the country in which the property is located. Foreign investors actively purchase real estate in Estonia as a possible investment. The question is: on the basis of what criteria to evaluate their choice? Is such a choice objective and how attractive is real estate market in Estonia for foreign investors?

Practice shows that investments in real estate in Estonia in 2013 increased significantly. By the beginning of 2014, the volume of transactions in real estate remains at least at the same level as it was at the end of 2013. However, it is difficult to predict what the pace of further development of the real estate market will be in Estonia. For comparison, according to the Global Property Guide (www.globalpropertyguide.com), the increase in real estate market in Estonia in the third quarter of 2013 was 8.43% (5.54% inflation-adjusted or to €835 per sq. m.). In Tallinn (the capital and the first largest city of Estonia), the growth in real estate market in 2013 was 15,5 % to €1,272.4 per sq. m. In Tartu (the second largest city of Estonia), purchases skyrocketed by 12.1% to €1,073.9 per sq. m. In other Baltic states, Latvia and Lithuania, there was a relatively small increase in real estate prices.

In addition to material risks of investing in real estate, legal risks should likewise be considered.
In what follows, we intend to draw the readers’ attention to some peculiarities and possible risks associated with investing in real estate in Estonia and give investors guidance on how to act in and prepare for real estate transactions.

Gathering information about the seller and real estate

It is critical to gather as much information as possible about the seller and the real estate being sold. The aim is to establish the identity of the seller. If the seller has a questionable reputation, even the most attractive deal is better to be cancelled. Before the transaction, one should also check whether the real estate has been encumbered with mortgages, valid lease contracts, etc., unless the parties agree otherwise. While the legislation provides that obligations should be performed in good faith, there have been cases of attempts to deceive the buyer or to draw her/him into a negative profit deal.

Checking the real estate before transaction

The buyer must inspect the property prior to the transaction and make sure that it actually corresponds to the terms of the contract. If this fails to be done, then possible risks are for buyer to handle. The National Court of Estonia ruled that all hidden defects (the defects which are difficult to notice during a routine inspection of the object) must be reported within a reasonable period of time. In law, the meaning of “reasonable period of time” abstract, meaning that in each concrete dispute the interpretation of “reasonable period of time” will be considered separately.

In the cases of large and complex objects, technical experts become involved in the assessment of real estate.

Insurance helps to reduce the risks

When buying real estate, one should bear in mind that real estate, just like any property, is at risk of accidental loss, for instance in the cases like fire or vandalism. Hence, it is first of all necessary to insure the real estate, as this will help reduce the risks of damage. The matter of insuring should be approached responsibly. The insured must promptly notify the insurance company about any accident. Unfortunately, the practice of the courts in insurance disputes often reduces to the issue that insurance companies refuse to pay compensation or pay it only partially. However, there is a positive trend in that the National Court in its decisions on insurance issues is trying to interpret the law in favour of the consumer, thereby protecting her/his rights.

Real Estate for Rent

If the acquisition of real estate is associated with its further lease, one should pay attention to the fact that the parties of the lease contract should specify the conditions of object use, payment terms, duration of the lease, and possible termination of the contract. Frequently the question arises about the termination of the contract because of its violation by the lessee. Termination of the contract requires the fulfillment of several formal and material conditions. The former includes application of the party of the contract and the latter demands for explication of the reason why the contract has to be terminated.  In case of unfair lessee, the lessor bears losses and eviction is possible only by the court order. Litigation can last from several months to several years and during all this time before the entry into force of the decision of lessee eviction, the investor will not be able to use her/his real estate. Therefore, if such situation occurs, it is crucial to react to it quickly and adequately.

Resume
In sum, it should be noted that the possibility of investing in real estate is constantly attracting potential investors. However, despite the attractiveness of real estate deals, it should be remembered that the acquisition of property is associated with various risks, both financial and legal. Therefore, real estate transactions should be approached with due awareness.

Ilya Zuev

Attorney at Law and Managing Partner at Grandman Law Firm

The article was published on the webpage of bbn.ee:

http://www.bbn.ee/blog/2014/5/12/investments-in-real-estate-in-estonia-trends-and-risks