RIGA - The structure of Latvia's building industry is set to shift from private to public financed projects this year as the housing market continues to cool down, industry experts said.
Demand for residential space will fall, according to Ivars Geidans, a top executive at Merks, a Latvian subsidiary of an Estonian construction firm, while orders for state and municipal property development will increase.
"If most of the projects in 2007 were residential apartments, in 2008 these could be industrial construction like roads, bridges, infrastructure objects that are very necessary to further development of Latvian economy development," Geidans told the Baltic News Service.
The new government, for instance, has already announced that the country needed to build two new power plants, one fired on natural gas and the other on coal.
Geidans estimated that competition for taxpayer-funded projects will increase, particularly since the trend began in the second half of 2007.
"If earlier two or three companies participated in the tenders, now their number has grown to 10-15. The competition for state and municipality funded projects will continue growing this year as well," he said.
The shift in trends occurs after several years of hyper-activity in the real estate market, leading some economists to claim that an asset bubble had formed in Latvia.
Thankfully, the government pricked the balloon last year by introducing capital gains taxes on property sales and making it harder for individuals to acquire bank loans for buying houses.
Last year prices for new houses grew 10 percent, while supply increased 30 percent, according to Latio, a real estate firm.
Vita Gudkova, a Latio director, said that last year the number of new housing projects increased by 3,000, or 30 percent more than in 2006.
More tellingly, there were still 3,500 housing projects unsold at the end of last year, which is 130 percent more year-on-year.
The 10 percent price growth, Gudkova said, was low compared with previous years. "If we take into account that the price still depends on the stage of a project's construction, such an increase can actually be considered a drop in price," she said.
Gudkova said that the demand for new housing is not only in Riga, but also in Sigulda, Jelgava, Ogre and Latvia's largest cities such as Daugavpils and Liepaja.
Regarding industry costs, which in the past two years have grown out of control, there was no reason to believe that they would either rise or fall, Gudkova said. According to current estimates, demand for construction materials in the first half of the year will decline, while competition among traders and producers would grow.
Geidans did say labor and construction materials costs could be affected by an increase in fuel and electricity prices. "It is difficult to predict what will affect construction costs the most 's growth of labor, construction materials costs or energy resources prices," he explained.