Significantly more attention is being paid to potentially major volatility of input prices in the construction sector that could complicate the budgeting process, completion of projects at planned costs, cause additional risks in carrying out fixed-price construction contracts and weaken projects’ profitability. Therefore, the overall economic development is being closely monitored and taking excessive price risks already in the bidding phase is avoided.
The residential development is one of the main sources of market risk arising from the value of real estate for Merko Ehitus group. The real estate market has become more selective and in pre-launch risk assessment, consideration is given to such important aspects as the project’s location, development volume, planning solutions and the target group. Taking into account low interest rates on loans, increased savings and limited supply on the market of new apartments, in the first years after crisis the demand and transaction activity on the apartment market has grown moderately. Due to the selectiveness of the real estate market, setting the right sale price for new development projects in the given region have become very important. For hedging the area’s price risk, price statistics collected by the group and available from other public sources is being constantly analysed.
Market risk that is partially related to financial risks also includes currency risk and interest rate risk.
Interest risk arises from interest rate changes in the financial markets as a result of which it may be necessary to revalue the group’s financial assets and take into consideration higher financing costs in the future. Most of the group’s bank loans have floating interest rates are not fixed, but related to Euribor or the interbank rates of the countries of incorporation of the entities. The group management maintains a moderate share of interest-bearing liabilities in the group’s capital structure and hence the impact of changes in the interest rate environment to be insignificant for the group’s results over the next 12 months.
FOREIGN EXCHANGE RISK
The group’s economic activities are conducted mainly in the currencies of the countries of location of the companies: euros in Estonia, Latvia and Lithuania and krones in Norway. Transactions within the group are conducted in euros as a rule. To eliminate foreign currency risks, close track is kept of the proportions of the company’s assets and liabilities held in different currencies and, when it comes to entering into long-term construction contacts, the euro is the preferred currency in the Baltics, and, in Norway, the krone.
Considering the fact that the materials and services used in construction are generally from the local market or supplied from within the EU, the currency risk in the group is currently minimal.