Property in Estonia: Bright new star of the Baltic

This country has the world's fastest-rising house prices, so move quickly to buy a slice of the action. By Zoe Dare Hall

Stephen Barrett, a property investor, was surprised on his last property-hunting trip to Estonia. "I went to buy a town-centre apartment and came back with a 45-acre forest with bears and elk," he says.

Barrett's forest in Parnu, a beachside town of colourful wooden houses, is an hour and a half's drive south-west of the capital, Tallinn, and cost £59,000. He has also invested in a £45,000 villa at Parnu's Tahkuranna Beach and a £65,000 apartment in Tallinn, both through Churchill Oü.

"Once I get planning permission, I could sell the land for £100,000 profit. Or I could divide the land into 80 plots and sell them for £20,000 each, or develop it myself as a rural resort, which would be popular with holidaying Scandinavians," he explains.

Estonia is enjoying an economic boom, with 9.2 per cent growth last year and 30 per cent property price rises over the past year. It has the fastest-rising property prices in the world, according to the estate agent Knight Frank's global house-price index.

Tallinn, a burgeoning IT hub, is the focus of much of the investment. Once the new commercial and residential Twin Towers building goes up in the business district, apartment prices are expected to hit £5,000 per sq m.

Many people believe that Parnu will be the next Tallinn. "Tallinn's market is very tight but Parnu is the place to be," says Chris Tonkinson of Crichton Developments, which is selling apartments on a golf resort near a white-sand beach in Valgeranna, and in Audru, from £50,000.

Investors can buy shares in Crichton. "It's for people who want to make money from new developments in Estonia without the worry of owning a property," says Tonkinson. For each multiple of £7,500 up to £30,000, you get a 1.25 per cent share in the firm.

"I'm guaranteeing that investors will get their money back after one year and retain their percentage share in the development company," Tonkinson explains. "Then you are looking at returns in excess of 250 per cent within three years. You can only sell your share once it's built."

Plots of land are also being snapped up in Parnu. "You have to be here to get in quickly," says Stephen Barrett. Lee Williams, the MD of Churchill Oü in Parnu, reports that nearly all of his clients are British and most are after plots of land. He recently sold two hectares beside the river to a British buyer for £45,000 - its value should rise by 36 per cent a year.

"The land registry here has a sophisticated system that allows you to see aerial photos of the plot, so you know what you are buying," says Williams. "The house-buying process is quick and transparent, and it's so cheap to borrow money, with mortgage rates from 3.1 per cent, that most of our clients borrow up to 75 per cent. With prices starting low and rising fast, there is little to lose."

Although Tallinn has seen impressive property price rises since it joined the EU in 2004, David Laity of Property in Estonia predicts another big lift before Estonia adopts the Euro, provisionally in 2008.

"Money is flooding into Tallinn, but given the old town is a world heritage site, property is still reasonable, with starting prices of around £50,000 for a small studio in the centre," he says.

The snag, he adds, is that demand is so high that new apartments sell out as soon as they hit the market, mainly to Estonian buyers.

If you intend to rent out your apartment, being within a short walk of the old town is vital. Ilmarine is a new development in a prime position on the disused harbourside, which is being transformed into a cultural zone. The current phase, with studios from £31,000 for 31 sq m studios, has sold out, but the area is due to see more development. At Luha Street, a 10-minute walk to the old town, 34 sq m one-bedroom apartments start at £48,500.

"Estonia is seeing a boom without a big element of speculation," says Laity. "In five years, it will be one of the richest countries in Europe."

Crichton Developments ( chris@estonianproperty.co.uk; 01444 882 071)

Property in Estonia ( www.property-in-estonia.co.uk; 07976 693971)

Churchill Oü ( www.estonianproperty.co.uk; 00 372 447 0105)