BMI Industry View
BMI View : The only real growth stories of note in our outlook for the Estonian construction sector are a relatively strong residential housing subsector, driven by rising house prices and high demand, and developments at the country's ports with further trade routes and partners being targeted. While 2015 will be a return to growth after two years of contraction for the construction sector at 3. 5 %, the long-term outlook is unspectacular low single-digit growth .
Although business confidence is still relatively weak - owing to cautious recovery in the eurozone, there is significant optimism in the household sector. As mentioned, the dominant residential building sector will be the main driver of construction growth to the end of our forecast period. Building permits for dwellings, mainly block of flats, increased in Q214 by 50% y-o-y to 1,333, with the number of dwellings being completed rising by 147 on Q213 to 631. We see the residential and non-residential sector only growing in dominance of total construction value over our forecast period, rising from 65.2% in 2015 to 72.2% in 2024, at a value of EUR1.5bn (USD1.9bn).
Key developments in the sector included:
Eesti Bank, Estonia's central bank, announced that the median square metre price for housing stood 20% higher y-o-y in Q114, but still 21% lower than the 2007 peak. In a statement the bank said that a steep rise in demand has been caused by the younger generation and people restrained by the financial crisis entering the housing market, and a growth in single person households. Furthermore, due to the quantity of houses and flats built 30-40 years ago, people are now looking to upgrade to more modern homes, and not just in Tallinn, but these trends have been spreading throughout the country gaining independence from Russia and joining the EU. Although price increases and demand are set to continue, local lending banks have reportedly assured the central bank that they will not start providing cheap or low condition loans to counter low wage growth and aggressively lend, in an alleged lesson learnt from the financial crisis.
A major project nearly ran aground in October 2014. The planned liquid natural gas (LNG) terminal and pipeline between Finland and Estonia ran into problems when Finnish gas utility Gasum and Estonia's Alexela Energy failed to agree commercial terms amid uncertainty over the portioning of EU funding. However, a month later the governments of Estonia and Finland stepped in and reached an agreement to build two LNG terminals - a large regional terminal in Finland and smaller facility in Estonia - connected by a pipeline across the Gulf of Finland by 2019. The Finnish government earlier in the month had taken control of Gasum to drive the project forward. The project is forecast to cost EUR500mn, with the EU funding 75% as part of its trans-European energy network (TEN-E) initiative.
Estonia, a low risk, high reward country in our Central and Eastern European Risk/Reward Index, remains second, with no scores changed, although its rating is flattered by the high ratio of government spending as a percentage of GDP and the strong macro-fundamentals (stronger economic growth following the 2008-2010 recession, lower debt burden than other EU member states and relatively stable political environment). However, in view of the country's small size, scope for further growth is also relatively limited, which has prompted local companies to shift base to foreign countries.