Estonia plans to build 1,000 new apartments in small towns and rural areas

Estonia's Ministry of Climate plans to launch a pilot project early next year to build about 1,000 modern apartments in small towns across the country. The construction will not be subsidised from the state budget. Outside Tallinn and Tartu, the two largest cities, new residential buildings are practically not being built, and the ministry wants to help address the problem, according to the Estonian public broadcaster ERR.

Ivo Jaanisoo, deputy secretary general of the Ministry of Climate, says the aim is to make good-quality housing available throughout the country. He explains that private firms do not build homes in places such as Paide or Põlva because construction costs there are the same as in Tallinn, while prices of new apartments and rents are considerably lower. Developers and financiers also fear that tenants could not be found for all the flats at once, or in the long term.

A new financing model

Together with the European Investment Bank, the ministry is developing a new financing model that would allow housing construction in small towns to be included in a larger portfolio. The ministry expects that savings achieved through scale would reduce construction costs and encourage private banks to lend for apartment buildings.

Local governments have submitted proposals covering more than 100 plots of land across Estonia. A selection must still be made, and the municipalities will have to confirm that they really want to take part. This is expected to happen early next year.

Who covers the risk of an empty flat

The key question is who will pay for a vacant apartment for which no tenant is eventually found. One option is for the city or rural municipality to guarantee the developer the lost rental income. According to Jaanisoo, this is not the only option: the developer could bear some of the vacancy risk, the financial risk could be taken by a local employer, and to some extent by central government. The ministry hopes to find a solution in the coming months.

Once the plan and financing model are agreed, the state will announce a tender. Many of the plots already have approved detailed plans, which allow developers to start designing quickly. The first new apartment buildings could be completed by 2030.