According to the latest analysis by Finora Bank, the development of residential and commercial real estate projects remains slow across the Baltic countries. However, the construction sector is finding new opportunities through Rail Baltica, other railway and road infrastructure projects, green initiatives, and increased investments in national defense.
Although the residential and commercial real estate markets in the Baltic countries are stagnant, large infrastructure projects are providing much-needed momentum for construction companies. The volume of these projects is expected to grow even more in the coming years.
“Construction companies, most of which are small and medium-sized businesses, employ over 130,000 people in Lithuania. In Latvia and Estonia, this number is about half as much. Last year, the construction sector performed differently in the Baltic countries: Lithuanian and Latvian companies did more construction work, while Estonian companies did less,” says Vaidotas Šumskis, Chief Analyst at Finora Bank.
The overall economic situation and consumer mood vary significantly across the Baltic countries. Lithuania’s economy is rising again, Latvia’s economy is stabilizing, while Estonia’s economic outlook is not as positive for this year. This is reflected in consumer behavior and the volume of construction work.
“In the first quarter of this year, retail sales in Latvia and Estonia decreased by 2% and 5%, respectively, compared to the previous year, while in Lithuania increased by 3%. Additionally, service sector revenue in Estonia decreased by 1%, in Latvia by 3%, while in Lithuania grew by 12%,” explains V. Šumskis, noting that these figures already account for the impact of inflation.
Real Estate Market Declines Across the Baltic Countries
“Although Lithuanians are spending more confidently than Estonians or Latvians, this confidence seems to disappear when it comes to buying homes. In the first half of this year, the number of apartments purchased in Lithuania and Estonia was 12% lower compared to the same period last year, and in Latvia, it fell by 23%. This shows that the residential real estate markets in all three countries are still shrinking, mainly due to the decreased affordability of housing caused by historically high Euribor interest rates and apartment prices. High interest rates and a stagnating economy also reduce the demand for commercial real estate and its investment appeal. As a result, the construction of new homes and commercial buildings is not recovering. In the first quarter of this year, compared to the first quarter of last year, building construction volumes decreased in all Baltic countries: Lithuania saw a 5% decline, while Latvia and Estonia experienced significant drops of 22% and 18%, respectively,” continues V. Šumskis.
New Opportunities for Builders: Rail Baltica, Green Initiatives, and National Defense
Large infrastructure projects are providing more work for small construction companies, according to Finora Bank. The state is becoming an increasingly important client for the construction sector, a trend seen across all Baltic countries. Projects like the Rail Baltica railway, the construction of wind farms and other renewable energy facilities, and national defense projects are creating and increasing job opportunities.
“Infrastructure construction work volumes in Estonia increased by 6% in the first quarter of this year, by 7% in Latvia, and by 26% in Lithuania, where the Rail Baltica project is gaining momentum. It appears that infrastructure construction will continue to be funded due to EU commitments and strategic defense plans,” emphasizes V. Šumskis.
Public procurement in the construction sector is expected to grow even more in the coming years as Rail Baltica and national defense projects progress. “This is a very good counter-cyclical support. Hundreds of smaller companies related to the construction sector will benefit, helping them to survive,” adds V. Šumskis.
Construction Companies Encouraged to Adapt
“It seems that the purchase of new homes is currently being postponed until housing becomes more affordable, as residents do earn enough income for consumption and smaller investments. This is shown by the significantly increased demand for travel and tourism this year across the Baltic countries and the growing amount of bank deposits and financial assets,” says V. Šumskis.
It is expected that the demand for residential and commercial real estate will start to grow as the Baltic economies recover, geopolitical tensions decrease, and asset yields become comparable to the current yields on popular bonds. “This will take time and lower interest rates. During this period, construction companies should adapt their profiles, update their equipment, invest in technology, and focus on public sector contracts so they can participate in the next boom phase of the real estate sector,” recommends V. Šumskis.