Estonia’s Climate Ministry is preparing a pilot project to build modern apartments in smaller towns, where new housing construction has remained limited despite demand from local residents and employers.
The project would deliver around 1,000 new apartments across Estonia, with the pilot planned to launch at the beginning of next year, the Climate Ministry said.
Creating a financing model for smaller towns
The ministry is working with the European Investment Bank on a financing model that would combine new developments in smaller towns into a larger portfolio, writes ERR. The approach is intended to create economies of scale, reduce costs and encourage commercial banks to provide loans for apartment buildings.
The need for the project stems from the lack of new housing construction outside the Tallinn and Tartu regions. Around one-third of Estonia’s population lives in other parts of the country, where residents also want access to modern homes, according to the ministry’s assessment.
Ivo Jaanisoo, deputy secretary general at the Climate Ministry, said the aim is to make high-quality housing available across the country.
“The private sector currently does not build houses in places such as Paide or Põlva because construction work costs the same there as in Tallinn, while the sales or rental price of a new apartment remains significantly lower. In addition, the developer and financier fear that not all apartments may find tenants immediately or in the longer term,” Jaanisoo said.
Managing the risk of vacant apartments
A central issue is how to cover the cost of apartments that remain vacant. Under one possible model, a city or rural municipality could guarantee rental income to the developer while an apartment has no tenant. Developers, local employers or the central government could also take on some of the vacancy risk.
“There is also the possibility that the developer takes on the vacancy risk to some extent, but that is again a cost that could raise the rent to an unreasonable level. The financial risk could also be taken, for example, by a local employer. It could be taken in some way by the central government or the developer. We will reach a solution in the coming months,” Jaanisoo said.
The ministry has received proposals from local governments covering more than 100 plots across Estonia. Those sites must now be assessed, and each municipality will need to confirm whether it wants to participate in the project.
Once the financing model and project plan are in place, the state plans to launch a procurement process to find builders and operators. Many of the proposed sites already have detailed plans, which could allow developers to begin designing new buildings relatively quickly.
The first new apartment buildings could be completed within a few years, potentially by 2030. The project would create a pipeline of housing investment beyond Estonia’s largest urban centres while testing whether pooled development and shared risk can make smaller-town construction commercially viable.
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