Pocket tiger

There are only two Estonian cities with more than 100,000 inhabitants and the population of the entire nation is roughly equal to that of Warsaw. This former Soviet republic nevertheless boasts the highest GDP among the Baltic states and has of one of the lowest unemployment rates in the European Union

One of the two major factors driving the economic development of this small country is the massive influx of foreign capital, with investors using Estonia as a springboard for expansion into Russia. The other factor, highly advantageous from a geopolitical perspective, is the number of Estonian ports along the Baltic coast, serving as strategic distribution points for Russian oil. Estonia’s economic success is also underpinned by a stable currency, liberal regulations on foreign trade and a flexible taxation policy. This is all reflected in the nation’s GDP, which has been growing steadily by 7.5 pct on average since 2001, transforming this erstwhile insignificant Soviet republic into one of the region’s economic tigers.

City-State

The Estonian economy is mainly concentrated in the capital city of Tallinn. More than half of Estonia’s companies are based here, producing more than 50 pct of the nation’s GDP and approximately 75 pct of its profits. Tartu, Estonia’s second largest city, while much weaker in terms of economic potential, is considered the country’s leading scientific and educational centre. Tartu is home to many educational institutions including the University of Estonia – the nation’s oldest and most prestigious. This situation has resulted in development in the capital leaving the rest of the country playing catch-up. Investors in Tallinn and in other regional locations are confronted with a diverse array of problems. Urban development in the capital is greatly hampered by its coastal location and its historical city centre. On the other hand, the smaller cities do not have the “critical mass” to make large retail projects feasible. However, the problems besetting all investors include excessive bureaucracy, long procedures and a lack of good development plots with transparent legal titles in good locations and at reasonable prices.

Space Race

According to a report by AC Nielsen, modern retail space in Estonia in early 2006 comprised more than 3,500 retail units occupying a total area of approximately 387,000 sqm. Therefore the index of retail space per 1,000 inhabitants is 288 sqm, and the index of the number of retail units per 1,000 inhabitants is 2.6. According to the same source there are 167 supermarkets and 19 hypermarkets in the country. All of which puts Estonia into first place among all former Soviet Baltic states in respect of modern shopping centre development and retail space saturation.

The lack of large cities has resulted in all the modern shopping centres (the total number being 14, with a combined gross area of 367,000 sqm) being located exclusively in Tallinn. The oldest of the centres, Rocca Al Mare (of 35,000 sqm) was opened in 1998. The real boom in shopping centres took place in 2000, when 4 new centres opened, bringing a total of 89,000 sqm of gross retail space onto the market. With this, the index of retail space per 1,000 inhabitants in Estonia has now reached 186 sqm, being the best result among the Baltic states and only 7 pct lower than the average of the ‘old fifteen’ European Union states.

Probably due to the high level of market saturation there are not many new retail projects planned for the next two years. There will be 44,500 sqm of new retail space developed in the capital city, being the result of the extension of three existing centres – Rocca Al Mare, Magistral and Lasnamae Centrum. It is however worth noting that the first modern retail centre developed outside the capital city – in 2008 a centre called Raadi Kaubanduskeskus – will be opened in Tartu, with a total area of 40,000 sqm.

Developers’ enthusiasm is also tempered by a lack of proper development plots with valid spatial development plans and in good locations. There are simply no such plots in the centre of Tallinn and along the main capital city streets (Tartu or Parnu). However, the owners of existing retail centres have no cause for complaint – the list of potential tenants queuing up to lease space is very long. It should come as no surprise that rent levels are going up, with landlords being able to dictate the terms and conditions. The most popular centres among tenants are Viru Kesku (due to its central location and the number of visitors), Rocca Al Mare, Kristiine and Ulemiste. But, due to the limited supply of modern retail space, current tenants cling on to their retail units and pay the increased rents without a murmur; therefore the chance of finding any retail space through re-letting is close to zero.

Offices in 3 years

Estonia’s accession to the EU and the influx of western companies has caused a surge in demand for modern office space in the country and this has posed significant problems for the construction sector. Companies based in smaller towns (e.g. Parnu or Tartu) solve their office problems by building their own headquarters – either new buildings or by adapting existing ones. The only modern office building outside the capital city is the Emajoe Business Centre building completed in 1998 in Tartu, with 7,500 sqm of office space.

Companies operating in Tallinn are in a slightly better situation. According to data prepared by Cushman & Wakefield, there is less than 191,000 sqm of A and B class of office space available in 13 buildings in Tallinn. Even though Estonia has a better office space index than Lithuania and Latvia, the demand for office space in the capital far exceeds the supply. The vacancy rate is close to zero for A class office buildings and does not exceed 4 pct for B class office buildings. This situation will improve once another 50,000 sqm of office space becomes available this year. However, these new developments are mainly small and medium size B class office buildings, spread around the whole city, and mainly outside the city centre.

But the office space boom in Tallinn is just about to happen. The huge chance to create a real business centre in the city lies with the spatial development plan for the waterside districts of Tallinn. Former harbourside and industrial areas are to be revitalized and transformed into office complexes, such as Admiralty Area (20,000 sqm) or Rotermann City (8,000 sqm) to name but two. The first buildings will be ready for tenants later this year, with the last ones planned ready in 2010. Another project about to be completed is phase I of the biggest office complex in Estonia – Ulemiste City, which will shake the market scene – offering 160,000 – 200,000 sqm of modern office space within 2007/2009. The total office space coming on to the market in Tallinn in the next 3 years will be 238,500 sqm.

A full magazine

Life is not easy for entrepreneurs looking for available industrial or warehouse space in Estonia. All they are offered are mainly old, seriously dilapidated buildings from the Soviet era. Such offers are accepted only by small companies new on the market, appreciative of low rents and the relatively large areas available. Increasingly popular now are developmental projects that renovate old warehouses and add new storage space. This is how the largest warehouse centre in Estonia, the Logistics Park Liiva Centre (50,000 sqm) was created, as well as another park owned by a large warehouse operator, Schenker Logistics (20,000 sqm).

A specific form observed on the Estonian modern warehouse market are developments combining both built to suit and stand alone projects. The idea is as follows: a developer purchases a large plot, provides the necessary infrastructure and road connections and then divides the land into smaller plots and sells it to other developers, who already hold preliminary lease agreements with tenants. This way the development risk is minimized as the buildings will suit the tenants’ needs in respect of the leased area. Examples of such development projects are Juri Technological Park and Tanassilma Technological Village, to name but two.

Tallinn is also the unchallenged national leader in this sector, with the country’s 12 largest warehouse centres, having a combined area of 268,000 sqm, being located either in the city’s suburbs or on its outskirts. The geographical location of the capital city enables easy access to other towns in the country and in the region via the ‘Via Baltica’ highway – the route for vehicular distribution of most of the transported goods. Tallinn has an additional positional advantage in that it is a port. Three more warehouse projects are being planned near Tallinn, mainly extensions to existing schemes. These will add 69,000 sqm of warehousing space to the market by 2010.

Tomasz Cudowski