In Finland, Another Large Developer Went Bankrupt. We Asked The Expert What Is Happening With The Market Of New Buildings In The Baltic States

Several subsidiaries of the Finnish developer Lehto Group, one of the largest players in the market, have declared bankruptcy. This was the biggest collapse in the Finnish construction sector in recent times. We asked the expert what is the reason for such a crisis not only in the Finnish market, but also, in general, in the European market of new buildings.

Thesis about what happened:

On February 6, 2024, the companies Lehto Asunnot, Lehto Tilat and Lehto Korjausrakentanmen, covering the entire construction business of Lehto Group, declared bankruptcy. Their activities formed lion’s share of the group’s turnover.
In 2022, the turnover of Lehto Group amounted to 345 million euros, and in 9 months of 2023 — 154.5 million euros. The company also reported an operating loss of 23.4 million euros.
In 2018, Lehto’s turnover exceeded 720 million euros, but then the recession began.
After the news of the bankruptcy, trading in the company’s shares on the Nasdaq Helsinki stock exchange was suspended.
One of Lehto’s subsidiaries has two unfinished residential complexes in Oulu and Helsinki. Their fate is still unclear.

Recall that in 2023, Finland recorded a record level of bankruptcies over the past 25 years, with many bankrupt companies from the construction sector.

For example, on August 28, 2023, Jukkatalo, which had existed for more than 50 years and was the second largest developer in Finland, also declared bankruptcy. This came as a shock to many, as the company was known for a solid portfolio of orders.

However, bankruptcy was inevitable due to unprofitable projects. The company could not continue to supply housing at prices that would make them profitable. Losses of 4.6 million euros on revenue of 95 million euros in 2022 led to this crisis.

According to Helsingin Sanomat, in the first six months of 2023, bankruptcy proceedings were initiated against approximately 270 construction companies. By the end of August, this list had grown to almost 390 companies.

Due to the downturn in Finnish construction, workers from Estonia began to return home, but the situation there is not easy. Estonian construction companies are also the leaders in the number of bankruptcies.

The bankruptcy of the Lehto Group was another indication of the deep crisis in the construction industry in Finland and neighboring countries.

Roman Golubev, editor of the Latvian magazine “Square Meter” and the portal, shared his expert opinion with us varianti.lv :

— I am an expert primarily on the Latvian real estate market, but I try to keep an eye on what is happening in the neighbors. I can say that the main trends and factors affecting the industry are quite similar here.

The main thing that we are currently seeing in the Baltic States and In Scandinavia, there is a sharply increased cost of money and a decrease in demand. The increase in the value of money was primarily due to the fact that Europe began to struggle with the rapidly increased inflation in 2022, which at one point reached 20% in the Baltic States, and in Scandinavia — about 10%.

And they began to fight with the help of one tool — an increase in interbank loan rates. This step has hit everyone hard, since business development is often conducted with borrowed funds, and buyers are also actively using loans. We also do not forget that in 2022, the cost of construction in our region increased significantly, as the usual logistics chains were interrupted due to the geopolitical situation.

And what happened: the construction business in Finland (and, as far as I know, in Sweden too) developed actively, companies built a lot, but the demand from buyers decreased significantly. After all, the cost of new apartments has also increased, and people have begun to study more carefully how much they have to pay for a mortgage monthly. Due to the increase in Euribor interest rates, these payments have increased significantly.

I’ll give you some examples. If in Latvia a person who took out a loan for 20 years for 80,000 euros until 2022 paid about 450 euros a month on it, now he pays more than 600 euros — an increase of 25%. And his financial situation has not changed much. In Finland, people could pay a mortgage, for example, 1500-2000 euros per month, and when this payment increased by, say, 700-1000 euros, it certainly hit their pockets, since household incomes did not grow as rapidly.
I would like to note that real estate prices in Finland are very high, by our Latvian standards, and therefore the trend with bankruptcies is more pronounced there. For example, in the center of Helsinki, the price per square meter is about 2.5–3 times higher than in Riga: if we have a square meter of new housing costs 2,000— 3,000 euros, then in Finland it costs 6,000-9,000 euros, or even more expensive.

Therefore, people evaluate whether they can pull a mortgage. And many people realize that they can’t — it’s too expensive. Many potential buyers in Finland, Estonia and Sweden are taking a wait-and-see attitude, waiting for Euribor rates to decrease (these rates are based on the average interest rates at which European banks lend to each other). For reference: in the zone EU Euribor rates have been negative for more than 8 years, and now they are just below 4% (there were periods when they even exceeded this value).

How to buy a property in Finland: a detailed guide

— But if the buyers can wait, then the developers can’t. They have already built facilities, but there are no sales, and there are financial obligations. This leads to forced bankruptcy. I know that in Sweden, the situation in some regions is like this: even if a developer agrees to give a 15-20% discount on his property, it still does not guarantee him a deal.

With such selective demand, construction companies find themselves in a difficult position, unable to fulfill obligations to banks. And you need to understand that in the EU construction business, in principle, low liquidity — 10% is considered an achievement. Many were happy and 5%. And when expenses grow faster than income, developers start working in the red.

Regarding Latvia, I would like to note that we have not had such a rapid increase in real estate prices, so the situation in the segment of new housing is somewhat better. The fact is that in Latvia during the crisis of 2007-2009, prices fell sharply and then did not grow so rapidly. Thanks to this, the situation here looks a little better than in neighboring countries. Now they say that the Latvian market is more stable and healthy compared to Estonia and Lithuania, where prices are 20-30% higher than ours.

Therefore, to summarize, I repeat that the most painful increase in interest rates hit countries with higher real estate prices.