Perspectives of the Estonian construction sector

Alari Purju
Visiting Professor
Estonian Business School

The construction sector could be treated as a broad cluster type collection of different activities or as a narrow construction sector focusing on building houses and civil engineering objects. The broad construction sector covers the narrow construction, the real estate activities, the manufacturing of construction materials and the architectural and engineering activities subsectors. The value added at factor prices of the broad construction sector in Estonia amounted to 5.7 billion euro or approximately 21% of Estonia´s total value added in 2021. The real estate subsector with 49% of the value added of the broad construction sector was the largest producer of value added, followed by the narrow construction with 32%, manufacturing of construction materials with 14% and architectural and engineering activities with 5%. The productivity in value added per employee in the real estate activities subsector was more than two times higher than in other subsectors, meaning that provision of services related to valuation, marketing and sales of assets was substantially more productive than production of new real estate assets. The total number of employees in the broad construction sector has been around 90000 or 13% of total active labor force of Estonia. In terms of hired labor force, the number of employees is largest in the narrow construction sector with 50000 people working in the subsector.

In the broad construction sector, the most international subsector is the manufacturing of construction materials, the most important products being concrete, crushed limestone, precast concrete products, metallic doors, windows and constructions, plastic pipes, foam isolation products, wooden doors and constructions etc. Exports created approximately one third of the output of that subsector. In traditional construction sector, exports contributed approximately 5% of the total output. Finland and Sweden are the main exports markets for manufactured construction materials and construction works. The architectural and engineering activities subsector has been highly innovative and relatively effective, but most of the bureaus are relatively small and that strangles their international competitiveness.

During the recent years, the output of construction sector fluctuated a lot. There was some decline due to COVID-19 related restrictions in 2020. All subsectors started to grow again from quarter II of 2021 and that growth continued into 2022. The quarterly growth figures were more than 10% higher in comparison with the respective quarter of the year earlier. The rapid growth of volumes and prices at the real estate market accompanied increase in the construction subsector. However, in summer 2022, the growth stopped and for the second half of 2022 the forecasts and business sentiments in the sector are quite sober. Representatives of companies in the sector considered the main obstacle for growth being rapid increase of costs of different materials used in the sector. The increasing labor costs are an important factor to hinder construction. Demand in exports market also showed marks of decline.

In the near future, the sector would meet important challenges. The construction of Estonia´s part of the Rail Baltic railway and infrastructure is one of those challenges. The project has been delayed and there are still problems related to its realization. It demands approximately 300 million euro annually (the total estimated cost of Estonia´s part of the Rail Baltic is 1.6 billion euros), which is approximately 10% of the narrow construction sector´s total capacity. The large project creates opportunities not only for Estonia´s construction companies but also for manufacturing of construction materials and architectural and engineering activities. The real estate sector is interested in this project because terminals under construction will be also trading places and perspective passengers will create additional demand for different services other than transportation.

The National Spatial Plan Estonia 2030+ envisages wider perspectives of Estonia´s construction sector. The strategy sets actions and initiatives involving both the public and private sector, including upskilling of the labor force, fostering use of ICT tools and leveraging public procurement as a tool to digitize the construction sector. The vision is that Estonia´s construction sector would be environmentally sustainable and efficient, fortified with the new technological solutions. At the same time, Estonia´s various future projects rely heavily on the EU funding and follow supply side approach. In several aspects, they do not take into account the demand side, self-financing capacities and willingness of consumers to pay. Estonia has not managed to construct 2+2 highway between its major cities Tallinn and Tartu, Pärnu and Narva. The countries with historically lower GDP per capita than Estonia today have managed to realize such kind of projects in the past. To use road tolls or other financial tools to create finances for road construction is not a very popular idea among the Estonian politicians.

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