Buying a Property in Estonia

The Country

Estonia is a relatively small country. At just over 45,000 = square kilometres it is roughly a fifth of the size of the United Kingdom and five times= as large as Cyprus. Estonia is the most northerly= of the Baltic states and the smallest of them. Over the centuries its brief periods of independence have been dwarfed by domination= by neighbouring countries including Denmark, Sweden, Germany and — of co= urse — most recently Russia. On the collapse of the Soviet Union in the = late 1980s Estonia became independent in 1991.

The population is about 1.4 million.

Estonia has a coastline of ov= er 3700 km and, off the coast, lie over 1500 islands. Within the country are 1400 large = and small lakes.

Estonia has the largest propo= rtion of marshes of any country in Europe but = nearly 50% of its area is covered by wooded hills and forests.

Tallinn, the capital city, has roots going back hundreds of years. It is a very attractive city in the Central European tradition. S= ee below for details.

As you would expect from its location, t= he climate is hardly tropical. S= ee below for details of the temperature and rainfall patterns.

The economy depends largely on telecommunications. Its main trading partners are in Scandinavia. It runs a substantial trade defici= t of about 14% of GDP. GDP per cap= ita is roughly half that of the UK, roughly double that of countries such as Bulgaria or Turkey.

Estonia has seen a steady dec= line in its population, mainly through immigration, though this is less acute than in some of its Baltic neighbours.

During the Soviet era Estonia= , like many of its neighbours, suffered from high levels of industrial pollution a= nd this has been reducing sharply.

The Republic of Estonia is a Parliamentary republic. It has proved keen to embrace the West and, in May 2004, joined both NATO and the European Union.

Getting there

Tallinn is served by air by Estonian Air, Lithuanian airlines, British Airways and easyJet. A direct return tick= et from London = for June 2005 is quoted at £283 by the Estonian Air. Single tickets are availa= ble on easyJet about £50.

Living in Estonia

As Estonia is a member of the European U= nion any citizen of a member state can enter the country without a visa in the s= ame way as they can enter, say, France or Spain. After 90 days they need to obtain = any residence document. Thi= s is a relatively painless procedure. After you have held a residence document for three years you can app= ly for permanent residents, subject to certain qualifications.

The language spoken is Estonian, though Russian is also widely spoken — particularly in the northern part of = the country where there are many ex Russian settlers. English is also spoken by many peo= ple, particularly in Tallinn.

As you would expect with a country where= the GDP per capita is about half that of the UK the cost of living is considerably lower though, at least in Tallinn, more than half the cost.

The currency is the Kroon (EEK). This is pegged to the euro. See below for an analys= is of the movement in exchange rates over the last few years.

Where are People Buying?

Very few foreigners are buying outside <= st1:City w:st=3D"on">Tallinn.

What is available and at what price?

There is always a huge range of prices i= n any property market. This one is = no exception. You need to rememb= er that, by and large, you get what you pay for. That is to say, a more expensive property is usually more expensive because it has some special quality abou= t it and, conversely, a very cheap property is usually very cheap because it has= a very poor location, it is built to a very low standard, it is in a bad stat= e of repair – or all three!

Prices have been rising rapidly. Some of our clients have seen grow= th of over 20% in the last year.

The table below attempts to show some ge= neral indication of prices as at January 2005.

Place & T= ype of Property	Low £	Mid £	High £
Tallinn – 1 bedroom apartment in suburbs, about 10 years old.=		£30,000
Tallinn – 3 bedroom house with garden		£37,000
Tallinn – 2 bedroom traditional terraced house in town centre=		£42,000

Why are People Buying? – Estonia as a Place to Invest

There appeared to be in the driving forc= es behind the decision of investors to put their money in Estonia= . Firstly, the historic city of Tallinn is a gem.= People believe that such rarities = are likely to increase in value. Secondly, there is a general belief= that - with the recent entrance of the Baltic states into the European Union - there will be upwards pressure on prices.<= /span>

Certainly, over the last couple of years= there has been upwards movement in prices. In 1993 prices increased about 12% and in 1994 about 15%.

This market should, however, be viewed w= ith some caution. Most of the investment there seems speculative. That is to say, people are investing with the intention of selling on quickly at a profit. There se= ems to me to be some doubt as to who the final buyers will be.

Estonia, like the other Baltic states, is not id= eally placed for trade. As a city aspiring to be a business destination, Tallinn seems likely only to be the base for trade within Estonia or the other Baltic states and for a certain amount of specialis= t tourism. It is true that it is also well li= nked to Scandinavia, but there is currently l= ittle reason to locate in = Estonia to trade there. Its pri= me strength will appear as and when the Russian economy reactivates but there seems little sign of that happening soon.&= nbsp; When it does happen th= ere may well be businesses thsat would prefer to lo= cate in the relative security of Estonia rather than in Moscow.

In the meantime, there is depopulation.<= span style=3D'mso-spacerun:yes'> Local people are moving elsewhere.=

The Climate as a Factor in Investment

Most British people buying abroad are motivated, in large measure, by the thought of a better climate. What is "better" depends= on your personal perspective. &nbs= p;

If the property is for retirement the bu= yers will want a climate that is acceptable all year round. If the property is a holiday home = the buyers will be looking for a climate that appeals to them at the time is wh= en they are most likely to use the property.&= nbsp; If the property is for investment and for letting to the holidaymaker they will be looking for a long rental season.

Maximum Temperature - Tallinn

Minimum Temperature - Tallinn

Rainfall - Tallinn

Sunshine

Growth of Gross Domestic Product as a Factor in Investment

A growing economy will produce more in t= he way of growth in the value of real estate than a stagnant or declining economy. The gross domestic p= roduct is one way of measuring that growth.

The Exchange Rate as a Factor in Investment

For us, one of the key indicators of any country where investment is likely to prove successful is either a stable exchange rate against other major currencies or a rate that is slowly impro= ving against other major currencies.

A common pattern for emerging market cou= ntries is that when they first get their independence the exchange-rate sinks rapi= dly, improves slowly and then stabilises or, if the country is doing well, slowly gains ground.

If the exchange rate is rising against t= he pound or the dollar the effect is that, in addition to benefiting from any increase in the value of the property you have bought, you also benefit from the increase in value of the currency.&nbs= p; The reverse is, of course, also true.

Tourism as a Factor in Investment

Estate Agents & Property Finders

Estate agents catering to the internatio= nal market are new. The market it= self has only really existed in any volume for the last two years, so you could = not expect anything else. =

Mortgages

At the time of writing, mortgages to buy property in Estonia<= /st1:place> are a relatively new phenomenon. They are, however, increasingly available from banks and from develo= pers themselves. They are availabl= e for both houses and apartments.

Over the last year interest rates in Estonia= have fallen. Mortgage rates start = at about 3.5%. Loan to value rat= ios of up to 70% are available.

The Process of Buying

The process of buying a property in Estonia= is similar to that in other Baltic and Eastern European countries.

Freedom to Buy

There are generally no special requireme= nts for foreigners wishing to buy real estate in Estonia. There are two exceptions to this.<= span style=3D'mso-spacerun:yes'> The first is the purchase of either agricultural or forestry land over10 hectares. In both these cases for the next s= even years there are going to remain a number of restrictions, despite Estonia= 's entry into the European Union. Agricultural of forest land can only be bought by foreigners who have been resident in Est= onia for a number of years and who are themselves engaged in agriculture. The second exception relates to co= astal properties where there are a variety of potential restrictions to trap the unwary.

Initial Steps

Once you have found a property that you = want to party you will be expected to sign some form of contract. This will generally either be a Reservation Contract or a Preliminary Purchase Contract. See the main section of the book f= or an explanation of these concepts.

Note that the title Preliminary Purchase Contract is misleading. It is actually a full binding purchase contract.

We recommend that, wherever possible, you insist on signing a Reservation Contract rather than a Preliminary Purchase Contract at this stage if at all possible.

Searches and Enquiries

Once you have signed a Reservation Contr= act your lawyer should make various enquiries.= He should check that the contract is fair, that the seller has good title and the right to sell to you, that the area is zoned for residential building and that the building being undertaken enjoys all of the necessary planning and building consents. Depending on the circumstances of your case there could well be other inquiries that also need to be made.

In Estonia it is quite common fo= r work to be started, illegally, before all of these steps are in place. It is also quite common for proper= ty to have a title that is defective. Sometimes these problems are fatal and should put you off having any involvement in the purchase. = On other occasions the risks are minimal and, provided you go into the transac= tion with your eyes open, might not put you off buying if you really like the property.

The Other Main Dangers

The main problem associated with buying property in Estonia<= /st1:place> is the fact that so few people have done it. This, inevitably, means that the procedures -- whilst relatively straightforward -- are applied somewhat variably. This tends to= be more of an aggravation than a danger, but it can make the whole process more time consuming and frustrating than would be the case elsewhere.

The Contract

Once your lawyer has checked out the pro= perty and found that everything is in order you are ready to sign the Preliminary Purchase Contract. This commi= ts you and the seller to signing the full contract transferring ownership shortly afterwards or, if the property is still in construction, once the property = has been fully built.

The Preliminary Purchase Contract contai= ns most of the clauses you would expect to see in an English contract. These will include a description o= f the property, a statement of the legal title to the property, the price to be p= aid, how it is to be paid, the deadline for payment and any other deadlines applicable, what should happen in the event of breach of contract etc. Many Estonian contracts are, by UK stan= dards, badly drafted. This is because there is really no history in Estonia of drafting contracts for the sale of land. The problem is exacerbated by the = fact that many contracts are drafted in English, which is clearly not the first language of the person doing the drafting.= As a result they are unclear or muddled. Specifications tend to be very "thin". The contrac= ts tend to be lacking in detail as to what happens if anything goes wrong.

At this point you will normally pay a de= posit 10% of the price of the property. In the case of a property under construction ("off plan") you will s= tart to make stage payments. The s= ize and number of these payments will vary from property to property. A typical scheme would provide for= an initial payment of 30% followed by two further payments of 30% as construct= ion progressed and followed by a final payment of 10% upon delivery. Occasionally schemes are found whe= re there is only one preliminary payment of, say, 30% with the balance being p= aid on delivery. This is obviousl= y very useful if you are taking a mortgage.

Signing the Contract of Transfer of Title

Once you are ready to take delivery of t= he house you will sign the Final Purchase Contract.= This is signed in front of a notary public, in the way described in = the main section of this book. It= is at this point that the balance of the money is paid across to the notary who w= ill release it to the seller once the property transfer has taken place.=

You do not need to be present in Estonia= to sign this document as your lawyer can prepare a Power of Attorney under which you can appoint somebody else to sign on your behalf. This is a sensible thing to do as = it saves the need for you to go to Estonia, often at short notice, to sign the final title.

Registration of Title

Once you have paid the balance of the pr= ice the seller will authorise you to register your ownership of the property in= the local title register. Once th= is has been done you -- or the local Estonian company that you have set up to own = the property -- will be the full legal owner of the property in much the same w= ay as you would be in B= ritain.

The Expenses of Buying

The main expenses of buying are as follo= ws:

Tax -- the equivalent of stamp duty R= 11; 0.075% of the price.

Estate agents' fees, if these are not pa= id by the seller, -- typically 5% of the price if you are using a local Estonian agent.

Notary's fees -- these will vary from ca= se to case but will typically not exceed 0.1%.

Legal fees -- these will depend upon whe= ther you use a Estonian or an English lawyer. The English lawyer's fees will inevitably be higher but you will be able to sue them if they get it wrong = and they will be able to give you lots of advice, particularly concerning the v= ital issues of who should own the property to minimise your tax and other proble= ms, which the local Estonian lawyer would not be able to help you with. They will range from about £= 350 if you use a local Estonian lawyer to £1500 if you use a specialist Engl= ish lawyer.

Fees to set up a company -- if you wish = to set up a Estonian company. This is likely to cost £500.=

Renting out your Property

If you are renting out your property you should make sure that you use a proper rental contract. Your lawyer will be able to supply= you with a draft that you can change as necessary.

Rental yields in Estonia are, at the moment, a little unclear. Generally, at= the moment, we would expect to see a net rental yield (i.e. net of all expenses apart from your finance costs and personal taxation) of about 4-5%. In the longer term I expect to see = demand increase but also supply to increase. These may well cancel each other out leaving yields more or less as = they stand today. The one factor t= hat it is likely to spoil this picture is the rapidly rising price of property. A person who bought an apartment f= or £50,000 and who rented out for £250 per week will be much happi= er than the same person who spent £75,000 on the same property and will = also rented out for £250 per week. When thinking of your rental yield we always suggest that you work it out on the basis of current value, not purchase value as that will allow yo= u to compare the performance of your investment with opportunities elsewhere.

Visas and Residence Permits

Estonia is now part of the Eu= ropean Union.

Taxes for Non-Resident Property Owners

Local Property Taxes

These are the equivalent of your English Council Tax or our old rates. Local property taxes in Estonia are very low. <= /p>

Management Charges

Management charges are not taxes but thi= s is a convenient point to think about them. If you live in an apartment complex or in a group of buildings that share a common facility (such as a swimming pool) you will have to pay a management charge to cover the cost of providing those common facilities. In the case of a block of apartmen= ts, those facilities will include the cleaning and electricity for the general areas, any gardening, the maintenance of pools, lifts, car parking areas et= c. Obviously the cost of the management charge will vary dramatically dependent upon the quality and number of facilities provided for you. £200 per year provides a lot= of facilities.

Income & Capital Gains Taxes

Both private individuals and corporation= s pay tax at 24% of their relevant income. For a non resident individual, only income arising in Estonia= is taxed. This, of course, inclu= des the income from any property located in Estonia.

Capital Gains Taxes

These are treated as part of your income= .

Wealth Taxes

None

Taxes for Resident Foreigners

This is beyond the scope of this book.

Double Taxation Treaty

The Double Taxation Treaty determines wh= at happens if, under local tax law and UK tax law, you are deemed to= be liable to pay tax in both countries.

The general principle behind all Double Taxation Treaties is that it is unfair that you have to pay the same tax tw= ice, so the rules are designed to help the two countries decide which of them sh= ould get what.

The treaties are long and complex. Seek advice as to their effe= ct in your case.