Estonia: Jet to Let Guide to Estonia

The story so far…

Estonia became a sovereign state in 1918, but after occupation by German forces from 1941 to 1944 it was again annexed by the Soviet Union in the aftermath of the Second World War.

In 1989, Estonians, Latvians and Lithuanians joined hands in a human chain that ran from Tallinn through Riga to Vilnius. This was a symbol of the desire for independence in the Baltics which was finally granted in 1991 and the fall of the USSR is still celebrated as a holiday in Estonia. Since then, the Baltic States have sought closer ties with the West, implemented economic reforms, including privatisation, while keeping inflation and unemployment relatively under control.

Where is it?

The Republic of Estonia borders Latvia to the south and Russia to the east. The country is separated from Finland in the north by the Gulf of Finland. The Estonian coastline is 3,794km long and the country has more than 1,500 islands, with Saaremaa and Hiiumaa being the largest. Estonia has 45,226km squared of territory.

What is the weather like?

Estonia is slightly colder than the surrounding countries because of its proximity to the Baltic Sea. The climate is relatively mild with high humidity and persistent winds. Summers are warm and winters are relatively mild compared to the average for countries located across this latitude. It rains throughout the year but rainfall is heaviest in August. Snow is usual in the winter and the cover lasts for approximately 80 to 100 days from the beginning of December through to the end of March.

Estonia has long hours of daylight in the summer (the longest summer day lasts up to 19 hours), and dark winters when daylight lasts just six hours.

Language

Estonia has an estimated population of 1.33 million people consisting mainly of ethnic Estonian (68 per cent) and Slavic minorities, divided into Russian (26 per cent), Ukrainian (two per cent) and Belarus (one per cent). The country’s official language is Estonian, spoken by 68 per cent of the population. The ethnic minorities predominantly speak Russian and Finnish, while English and German are also widely spoken and understood as second languages.

Currency

The Estonian currency is the Kroon (EEK) divided into 100 Cents. Estonia is aiming to adopt the euro in January 2007, although this date may be later due to Estonia not fulfilling the economic criteria set by the European Union (EU). The Kroon is pegged to the euro at EEK 15.646: €1.

Politics

Estonia is a democratic parliamentary republic. The current government coalition is made up of the liberal right-wing Reform Party, the centre-left Centre Party and the conservative People’s Union. Estonia’s current President is Arnold Rüütel, elected in 2001. The current Prime Minister is Andrus Ansip, elected in 2005.

After independence in 1991, the Estonian government created the circumstances for rapid economic growth by instigating radical political and economic reforms. This paid off and Estonia quickly became a stable country.

Estonia is known for having the world’s first electronic government and conducts its proceedings using a web-based system. Almost everything administratively is accessible online, making it one of the most open governments in the world. Voting via the internet is also something that has been tried in local elections and is set to allow much of the population to vote electronically in the national elections that will follow.

Economy

The newly independent Estonia has accepted and pursued the vision of a free market economy. Estonia abolished all barriers to trade and also fully opened the economy to foreign investment, ensuring that foreign and domestic investors were treated the same. Additionally, the Estonian government launched a radical privatisation programme and other effective measures included the introduction of its own currency and a flat-rate Income Tax. Following this Estonia’s gross domestic product (GDP) grew a massive 11.4 per cent in 1997!

Estonia’s economic development continued from 2000 onwards, with GDP growing at an astonishing rate. The modern Estonian economy has relatively low inflation, low levels of unemployment and strong FDI. Estonia has been referred to in the press as the Hong Kong of Europe. In 2005, the Global Growth Competitive Index placed Estonia 20th of 104 countries, above any other Eastern European country and, ironically, above Hong Kong!

Economic growth

Estonia’s economy continues to grow at a remarkable rate. The European Commission reports that Estonia’s GDP is expected to grow by 7.2 per cent in 2006 after achieving an impressive 9.8 per cent in 2005. Estonia’s GDP per capita is €13,000, according to a 2005 estimate.

Year Real growth of GDP (%)
2000 7.9
2001 6.5
2002 7.2
2003 6.7
2004 7.8
2005 9.8

Source: Eurostat, the Statistical Office of the European Communities

Inflation

Inflation increased to 4.1 per cent in 2005, caused mainly by an increase in fuel prices, transport, clothing and housing costs, but it’s forecast to fall to just over three per cent by the end of 2006.

Interest rates

The interest rate in March 2006 is 2.9 per cent.

Unemployment

Unemployment rose to its highest in 2000, but since then it has been progressively falling. Unfortunately, this is hampered by high levels of regional unemployment, especially in the north, although in 2005 unemployment decreased throughout the country and reached its lowest level since 1993.

Unemployment rate (percentage unemployed)
2000 12.5
2001 11.8
2002 9.5
2003 10.2
2004 9.2
2005 7.9

Source: Eurostat, the Statistical Office of the European Communities

Foreign direct investment (FDI)

Estonia recently became one of the leaders in Central and Eastern Europe in terms of FDI per capita. There have been speedy advances in privatisation and in stabilising and reshaping its economy. Other advantages include a stable currency, liberal economic policies, free trade and an excellent and improving climate for business.

Companies that are partly or fully owned by foreigners account for 33 per cent of Estonian GDP and over 50 per cent of the country’s exports. Foreign investment is forecast to increase further.

Foreign direct investment in Estonia (€million)
Year Real growth of GDP (%)
1999 284.2
2000 424.6
2001 602.6
2002 306.7
2003 822.2
2004 837.9

Source: Estonian National Bank

The property market

Property prices have been rising by an average of 15 per cent since 1995 and peaked in the run-up to EU membership. However, according to a report from the Royal Institute of Chartered Surveyors (RICS), property prices in Estonia grew 28 per cent in 2005, which was faster than anywhere else in the whole of the EU.

The demand for new-build apartments remains strong and the bulk of developments continue to sell off-plan. Property prices are forecast to continue rising by five to ten per cent per annum for the next five to ten years.

Property hotspots

Tallinn is the medieval capital of Estonia, a key harbour and a centre of business and commerce. It receives 81 per cent of all of the country’s FDI and is the focus for the majority of jet-to-let investors. Property prices in Tallinn rose by 153 per cent between 1998 and 2004 and in the last two years they have risen by 50 per cent in the most popular districts. Property in Estonia is still cheaper than the EU average and the neighbouring Baltic state of Latvia.

The rental market remains strong around Tallinn and while outlying apartments mainly attract local families or students as tenants, those in the centre are mainly tenanted by the growing number of foreign corporate or diplomatic workers. Other investment options to consider include coastal properties and Pärnu continues to appeal with increased local interest and new projects planned to develop holiday homes and leisure activities. Prices on the coast are not much cheaper than Tallinn.

Transaction costs

There are no restrictions on foreign ownership in Estonia. The ownership of land can be transferred to a foreigner or a foreign company providing you have permission from the County Governor.

The process of buying a property is well established and straightforward. Buying off-plan houses and apartments is the most common method of buying a property. The alternative of old Soviet-style apartments have high renovation costs in order to bring them up to modern standards.

When buying off-plan, the developers normally require a non-refundable deposit of 10–20 per cent of the price at the time the preliminary contract is signed. The construction period is usually 12–18 months. The final balance is payable on completion.

Transaction costs are relatively low. There are no transfer taxes or stamp duties in Estonia. Notaries, rather than solicitors, typically oversee the transfer of ownership.
Purchase expenses are:

• Registration fee: When new-build apartments are purchased, there is a fee of up to 0.5 per cent of the transaction value to register the property at the Land Registry.
• Notary fees are based on the price of the property and on average are about 0.5–1.0 per cent of the purchase price.
• Estate agents’ fees are almost always included in the sales price of the property. There is no standard commission, but they often range between three and seven per cent and are normally split between the buyer and the seller.
• Legal fees will cost in the region of £150–£300, depending on the length of the contract.
• Other additional expenses may include a translation of the contract and you should allow around £70 for this.

Total costs come to about four to six per cent of the purchase price.

Annual costs

The cost of living in Estonia remains lower than the European average but has been rising steadily. Annual operating costs for running a property are summarised below:

• Land Tax. The local authority decides the rate of Land Tax, which varies from 0.1 to 2.5 per cent of the value.

• Maintenance costs cover heating, utilities and maintenance of communal areas and vary according to the type of property.

Taxes

Income Tax
A flat rate of 23 per cent is charged on income earned in 2006.

Corporation Tax
The standard rate of Corporation Tax is 23 per cent in 2006.
It’s important to note that the flat rate of Income and Corporation Tax will be reduced to 22 per cent in 2007, 21 per cent in 2008 and to 20 per cent in 2009.

Capital Gains Tax
In most cases, capital gains in Estonia are taxed as income for individuals and companies. Individuals are exempt from Capital Gains Tax on the sale of their main residence.

Facts at a glance

Geography

Population (2005 estimate): 1,332,893
Language: Estonian
Ethnic groups: Estonian (67.9%). Ethnic minority groups include Russian (25.6%), Ukrainian (2.1%) and Belarus (1.3%)
Local currency: Kroon (EEK) divided into 100 Cents

Political system

Political structure: Democratic parliamentary republic
President: Arnold Rüütel
Prime Minister: Andrus Ansip
Main parties: Estonian Centre Party, Estonian Reform Party

Economy

Unemployment rate in 2005: 7.9%
Unemployment rate, February 2006: 5.9%
Inflation rate in 2005: 4.1%
Inflation rate, February 2006: 4.5%
Interest rate, March 2006: 2.9%
GDP growth in 2005: 9.8%
GDP growth forecast for 2006: 7.2%
GDP per capita (income €13,000 per person) in 2005

Taxation

Income Tax: 23%
Corporation Tax: 23%
Capital Gains Tax: Taxed as income

Corruption statistics

Corruption rate: 6.4
Corruption rank: 27th

Industry and technology

Major industries: Engineering, Electronics, Wood and wood products, Information technology.

The Estonian property market

Hotspots: Tallinn, Pärnu

Property taxes (transactions)

Registration fee: 0.5%
Notary fees: 0.5–1%
Estate agents’ fees: 3–7%
Legal expenses: £150–300
Total fees: 4–6%

Property taxes (annual)

Land Tax: 0.1–2.5%

Mortgage

LTV: 70–85%
Term: Up to 30 years
Currency: Euros, Estonian Kroons and US dollars
Current interest rate: 3.5–4.5% in euros

Investor resources

Embassies

British Embassy in Estonia
Wismari 6
10136 Tallinn, Estonia
Tel: +372 667 4700
Fax: +372 667 4756
Website: www.britishembassy.gov.uk/estonia

Estonian Embassy in the UK
16 Hyde Park Gate
London SW7 5DG
Tel: 020 7589 3428
Fax: 020 7589 3430
Website: www.estonia.gov.uk

Useful websites

Bank of Estonia
www.eestipank.info

Estonian Statistics
www.stat.ee

Invest in Estonia
www.investinestonia.com

Tourism in Estonia
www.visitestonia.com
www.tourism.ee

© Lawpack Publishing 2006

“The Jet–to–Let Bible”, Dominic Farrell
Reproduced with the permission of Lawpack Publishing.

Further information on this topic can be found in “The Jet-to-Let Bible”, by Dominic Farrell, ISBN 1 905261 11 X

For information and advice on investing overseas, contact Bewarethesharks.com on +44 (0) 151 482 5525 or visit www.bewarethesharks.com

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