Merko Group

Dear Colleagues,

We are about to close the 2023 business year, and our minds are already in the future as we are drawing up plans for 2024-2025. Our group has had another operationally successful year for which I thank all our teams in all countries. 

Merko group is built on two main pillars – residential development and construction services. We have been successful in capturing real estate market growth in recent years and we are clearly among the top of Baltic residential developers by number of sold units, brand reliability, construction quality and variety of project offerings in Baltic capitals. At the same time the market has quickly turned from growth to downturn and, as a result, we have decreased our development volumes that will mean a decreasing revenue in coming years. To be clear – we continue with selective investments to launch new projects, to maintain our product offering to home buyers, but on a more limited scale. This is a logical strategy to maintain a balanced risk profile in an adverse market. We also aim to be flexible and quick, to respond swiftly when the market starts improving and opportunities arise.

High interest rates and inflation have had a negative impact also on investments in commercial real estate which means fewer private orders for general contractors, including us. While this is the case, on the back of a growing share of public tenders, we have signed a record volume of new contracts over the last 12 months and our contract portfolio stands on a record level. Defence and city infrastructure, wind parks, and public buildings make up the bulk of the group’s construction works ahead.

In the next years we expect the group’s revenue composition to change – the share of construction services will increase, and residential development will decrease.

In the next years we expect the group’s revenue composition to change – the share of construction services will increase, and residential development will decrease. The market situation requires us to adapt quickly and keep our eye on the future, not on the past. The tailwind in residential market has ended, investor-buyers have left, and in the new environment our sales and marketing effort needs to be the best. We must understand better which buyer segments have purchasing power, how to reach them with our unique selling points and what kind of apartment is the right product to offer. 

In construction services, we need to continue being selective in tendering – focus on understanding the client situation, analysing project design, work organisation and costs as well as ensuring a highly capable project management team. While construction prices seem to have stabilized, we must still be ready for and able to anticipate surprises in supply chains as well as be aware of the impact of regulatory costs, such as carbon taxation, on construction materials and energy. Our focus should be tweaked towards project profitability and risk management, not just volume. 

While we have been very successful in integrating our residential development and construction service business lines to add value to one another, they differ by nature and risks and the future will bring new regulatory challenges. Therefore, we took steps this year to operate development and construction activities under different legal entities within the group, along the lines of the structure we have had in Lithuania for over a decade. Close cooperation between the entities will continue.

The challenges in our home markets also differ – in Lithuania our focus is on managing the largest project portfolio in our history, but in Latvia we face a low-level order book at year-end and need to adjust the focus towards efficiency. In Norway, the market situation is tough that requires us to limit our risks and costs. In Estonia, our foundation is strong and stable, and we need to find the right balance between risk-taking and costs.   

In summary, we are having a long-term view on Merko’s business, our land investments provide an inventory of development projects at least for the next 10 years, our construction teams are strong, and our contract portfolio is solid. Merko brand is known and trusted. This is not a bad spot to be in current uncertain market environment. 

Merko brand is known and trusted. This is not a bad spot to be in current uncertain market environment. 

At the end of this year, my journey as the group CEO will come to an end, as I have moved to Berlin due to family reasons. I am very happy to pass the helm on to Ivo Volkov as the next group CEO and I am confident that, together with the whole management team, our ship will be in very good hands. I thank you all for the last 12 years that I have had the opportunity to work together with such a great team of professionals.

I wish everyone lots of energy and optimistic attitude looking into 2024.