We pay considerable attention to the volatility of input prices in the construction sector, which can make it difficult to budget for new projects and complete ongoing projects according to planned costs, and can also bring additional risk to fixed-price construction contracts and price pressure on project profitability. Therefore, we closely monitor economic developments as a whole and avoid taking excessive price risks in the supply phase.
One of the main sources of market risk for the Group is residential development due to the value of real estate. The real estate market is becoming increasingly selective, and before starting any project, the risk assessment focuses on the project location, development volume, planning solutions and target group. Due to the selectivity of the real estate market, it is important to set the right sales price for new development projects. To mitigate the price risk in a given region, we constantly analyse the price statistics available from our own and public sources.
Interest rate risk
Interest rate risk arises from changes in money market interest rates, which may result in the need to revalue the company’s financial assets and take into account future increases in financing costs. Most of the interest rates on the Group’s bank loans are not fixed, but are linked to the Euribor or the interbank money market interest rates of the countries where the companies are located. According to the management, there will be no such changes in the base interest rates in the foreseeable future that could have a significant effect on the Group’s financial position. All granted loans have a fixed interest rate, and therefore changes in the base interest rate have no effect on our interest income. In addition to the risk of Euribor changes, the refinancing of liabilities involves the risk of changes in the risk margin due to instability in the economic environment. This is most directly reflected in the potential need to extend overdraft agreements.
The Group’s economic activities are mostly conducted in the currencies of the countries where the Group companies are located: euros in Estonia, Latvia and Lithuania, and krones in Norway. Intra-group transactions are generally made in euros. To eliminate currency risks, we monitor the proportions of the company’s financial assets and liabilities in different currencies, and when concluding long-term construction contracts, we prefer the euro as the contract currency in the Baltic countries and the krone in Norway. Given the fact that the materials and services used in construction are generally supplied from local markets or from the European Union, the Group’s exposure to currency risk is minimal.