Boom year excesses squeezed out in slump

RIGA - Construction workers are leaving for Sweden, as that’s where the work is. The building industry is quite strong there as the country wasn’t hit by the global economic crisis in the way Latvia has been. These are the words from one Swedish construction company manager working in Riga.
He adds that, though there are fewer projects going on now in Latvia, there aren’t an abundance of workers around, as many have left the country.

The building and construction sector in all three Baltic States is facing difficult times, and companies have to adjust to this new market. Over-building due to easy bank credit, up till the end of 2007, has left an excess of office and residential buildings scattered around the countryside.

Cemex Latvia public relations and Marketing Manager Laura Mikelsone says that, though they don’t have to face problems that local builders do, as their financing comes from the “mother company,” she has noticed that “our customers are struggling in their relationship with banks, both when it comes to returning the loans and also [in] getting new ones.”
The construction industry today is littered with projects that are being “stopped before completion, while new projects are being postponed indefinitely; this goes for both the public and the private sector. This rapid stoppage has led to a decrease in the value generated by the sector as well as to a decrease in [number of] workers employed in the sector, and a decrease in wages,” reports tcdbaltics.

With the private sector facing difficult financing choices, and slack demand from end users, many of the buildings under construction today are local or state municipal projects, where government budgets can still allocate spending.
Even government projects aren’t always assured. The Riga City Council had no extra funds for continuation of the Dienvidu (South) Bridge construction work, reported daily Diena. The report said that, contrary to expectations, construction of the bridge’s ramps on the Pardaugava side of the river will not receive 7 million lats (10 million euros) from the European Union it had expected. Judging from what Riga Mayor Nils Usakovs (Harmony Center) said, “There is no money for this project in the Riga budget, either. Therefore, the project will most probably be put on hold in the coming months.”

The downturn in the sector has lead to a decrease in construction costs; this means that the cost of constructing and renovating buildings and facilities has decreased. Throughout the Baltics, experienced and well educated workers have been laid off, or have had to accept decreased working hours, and lower wages.
Employment in the construction sector peaked in 2007, at around 140,000; employment levels are sinking fast now and are at around 70,000, reports Latvia’s statistics office.

Costs have dropped for infrastructure projects and building construction, by anywhere from 15 percent up to 40 percent, from two years ago. Wages have dropped much faster than material prices, however. One local builder cautions that, as much of the building material is imported, from countries where there still is plenty of construction activity, material prices haven’t come down as much as would be expected here in Latvia.
Mikelsone says, regarding Cemex costs, that “When it comes to our production, we have witnessed a decline of 7 – 10 percent during the last couple of years.”

With many construction company order books empty, this means that the competitive situation has changed, and companies are forced to produce offers that barely reach profitability. With Latvia’s economy still soft, not much is expected to change in the near future. This is especially true as long as banks hold back from lending for construction at realistic terms.
Looking at 2010, Mikelsone expects that “it will be similar to 2009. There are several projects which have started in the [previous] years and still continue, however, we do not have high hopes for too many new projects this year. We are focusing our efforts on expanding activities in the export markets and looking forward to the recovery of the local economy.”

There is today a higher focus on energy efficiency in buildings, more than there was just a few years ago. For example, in Lithuania, it is now required for newly constructed commercial buildings to hold an energy performance certificate stating the building’s energy efficiency and the building’s emission level of carbon-dioxide. If a tenant or buyer of a commercial building requests the energy performance certificate, the owner is obliged to produce one. To achieve a better rating and thereby increase the property value and attract tenants, buildings need to be renovated with the correct materials, such as insulation, pumps for the heating system, windows and other energy efficient materials.

Foreign companies could find reasons for acquisitions in Latvia, and local companies in a difficult position could find reason to merge. A foreign acquisition could give a competitive edge of being present in the market, compared to other foreign companies without a local presence, when the financial situation turns. The attractiveness for the buyer could be that many Latvian companies are equipped with modern production systems capable of delivering high quality to a demanding and changing market.

Outsourcing, with local companies producing for foreign markets, offers opportunities for companies which now have available capacity, at lower cost, at their production facilities.
Not only are local market forces working against a quick turnaround for the industry, but with the severe budget crisis attracting attention, government leaders haven’t done much to devise a realistic recovery plan, not just the usual call for lower taxes, but in sending clear signals on where the economic development should be headed, with specific proposals on how the government will provide long term support.

“One of the biggest problems,” says Mikelsone, “is the lack of predictability from the government. Both people and companies are not sure about the future policy imposed by the government (e.g. taxes), thus they cannot plan their expenses in a strategic manner, and therefore most of the industrial projects are either on hold or have been cancelled. The government should come up with initiatives and provide ‘vitamins’ for the economy, and one of the most efficient ways would be to initiate infrastructure projects, which would provide demand for the construction industry, people would have jobs, taxes would flow in the budget, and so on.”

Much will depend on how the rest of the world, especially Western Europe, comes out of recession. As demand picks up abroad, foreign interest should return to Latvia, as a source for manufacturing, locating services, or as part of a strategic portfolio investment. This will all need space.
Mikelsone adds that “We believe that this year will still be a tough year, but we are not giving up, since the crisis will not last forever. Meanwhile, we are focusing all our effort on expanding our participation in export markets (the Baltics, Scandinavia, Russia, Belarus) and at the same time maintaining our presence in the local market, offering our products and services (cement, ready-mix, aggregates).”

The year ahead will be one of consolidation and managing existing operations until the environment improves, and one in which the search for growth could be to markets abroad.