Construction market in Latvia 's light at the end of the tunnel

  • 2009-09-03
  • By Olga James

READY FOR WORK: Analysts say Latvia' s construction recession may have bottomed out.

RIGA - Emerging market experts and analysts see construction, logistics and the financial sector as pillar industries that are fundamental for maintaining positive economic momentum in the Central and Eastern European Region. Further development of the housing and construction market is an essential element to economic growth and sustainable improvement in the quality of life in the Baltic States. Even now, after more than a decade of rapid building market development and construction booms in Latvia, Lithuania and Estonia, the countries still face a number of significant problems such as poorly constructed and maintained housing stock, lack of adequate financing and shortage of affordable housing.

As recently as 2007, the construction sector in Latvia was still going strong. Almost 85% of managers at the largest Latvian construction firms positively viewed the situation in the industry and provided optimistic assessment of the ongoing market climate. Over 65% of respondents expected the market situation to improve in the coming 12 months, while only 4% anticipated a downturn in the near future. The robust growth of wages at the construction companies (as much as 30-40 percent year-on-year for some specialists)  as well as a workforce increase in the building industry along with the steady rise in prices of building materials and number of issued construction permits served as evidence of strong dynamic growth of the construction sector across the Baltics.

The regional construction was developing just as robustly as the building sector in the capital city Riga. For instance, the abundance of projects in Daugavpils, the largest city in the region of Latgale, created such shortage in qualified workforce that hiring a professional crew for a building job became a legitimate worry. This situation gave rise to the crews of scam artists who were taking advantage of the homeowners desperate to get their projects completed. At some point, hiring a construction crew was akin to taking part in a wild gamble, when the client was liable to get stuck with the damaged property, huge cost overruns and construction delays. At the peak of the construction boom the workforce had to be imported from Riga- and paid the capital city- type salaries to boot. 

On the consumer level, growing wages and availability of relatively easy credit have been fuelling domestic demand for residential properties as well as office spaces. Office workers optimistic about the future as well as young families were first in line to obtain a loan for the new apartment or the house.
However, an adverse change in the ongoing cycle of the construction sector has become increasingly evident since late 2007. The number of projects have fallen sharply, construction outputs dropped, the expectations of uninterrupted price increases began to be corrected and the financing opportunities came to a sharp halt.

In the 2Q of 2009, the construction market in Latvia continues the freefall. In the second quarter of 2009 the volume of construction plummeted by 32.4% year on year- compared to the 1Q 2009 the drop constituted 9.1%, reports Latvian Architecture And Construction Agency. Girts Bergmanis, a construction professional who works for a mid-sized building firm in Cesis district, comments on the current market situation, 'People just stopped building, and it happened almost overnight. Most of my clients, even those who have not been affected by the crisis, are still cutting down on all the 'extras'- and that includes building and renovation expenses.' 

The negative effects of the global financial crisis are being felt across the entire spectrum of the construction industry. Overall, compared to the first two quarters of 2008, the decline in construction volumes constituted a stunning 71.6%, which is a sign that the problems facing the nation's builders are far from over. More specifically, a drop in the construction of manufacturing and warehousing facilities amounted to 78.3%, which can be for the most part explained by the distressed state of the manufacturing and logistics industries across the Baltic States.

On the housing and accommodation front, the construction of residential buildings fell by 47.3%, while the drop in the building  of engineering facilities constituted 15.8%. Since the real estate market in Latvia has been almost frozen for some time, and the vast majority of the deals had been concluded on 'buyers' terms,' the construction of new buildings in a 'no-buy, no-rent' environment has been significantly hampered. However the analysts are saying that the bottom of the market has been reached, which gives hope for a positive outlook for residential and construction industries going forward.

In line with the overall state of the building industry in EU 27 member states, the construction of commercial buildings in Latvia went down by 41.7%, while the infrastructural construction fell by 44.1%. The strength in 2Q 2009 came with the 162.1% rise of bridge and tunnel construction,  19.2% increase in the construction of transmission and communication lines and 18.3% rise in medical and social construction.

The negative effects of the crunch can be seen in different parts of the country. Frozen or postponed projects, where the developers had originally hoped to have the construction underway but had their plans scrambled by the fallout in the housing market are becoming a familiar part of the landscape. The developers are faced with the tough choice, as there are situations when it is more expensive to suspend the construction than to complete the building. Besides, massive investments associated with the real estate business will not be recovered in case of the termination of a project. Even on a smaller scale, the terminated projects create problems for the builder as well as the client. Mr. Bergmanis has had a client who had to abandon the remodelling of his two-family rental house after he lost his job at the local forest recycling plant. "Basically, we had to abandon the project - half painted walls and all. Right now the client's family lives in the unfinished house, but we are not getting paid, so no one wins in this situation.'

On the upside, even though the pickings are slimmer, there is still demand for quality construction work out there. And while competition for that work is much tougher than it has been in the past, most of the clients value quality and on-time execution over low costs. Another developer in the Cesis district reached for this story has said that he had replaced 70% of his construction crew with more qualified men. According to him, there is currently no shortage of professional workers, and will not be in the foreseeable future. Also, highly qualified builders are returning to Latvia from Ireland and the United Kingdom thus supplying the market with fresh professional workforce. The times when  young adults were skipping college in order to make easy money mixing cement and laying bricks are gone, and now crew leaders have more confidence in their teams and the quality of their work.

In order to survive and operate at a profit in the current market conditions, right now is the time for the owners of the Latvian construction companies to identify their unique strengths on the Baltic market. The changed rules of the game necessitate a drastic change in the business paradigm, whereas highly specialized companies provide value-added services and outsource certain functions to competing firms. A number of construction companies that have been contacted for this article have undergone drastic restructuring and are no longer able to provide multi-functional services across the entire construction spectrum. However, such firms can significantly expand their client portfolio through speeding up the project completion timeline and moving on to the next client.

Specialization and increasing the professionalism level helps the company to obtain the strategic placement that will enable it to move forward in the positive direction even in the time of a crisis. The key to financial success is providing a superior service for the same price charged by the competitors, never compromising quality for short-term gain and focusing on long term goals despite temporary difficulties. In "Build a Strategic Framework: Mission Statement, Vision, Values…," Susan M. Heathfield at writes: "Effective organizations identify and develop a clear, concise and shared meaning of values/beliefs, priorities, and direction so that everyone understands and can contribute."