If the Tallinn Hospital project was given a green light by the European Commission, it would set multiple precedents, starting with construction volume and cost.
The construction of a central hospital in Tallinn’s Lasnamae district would be an ambitious endeavor to say the least, one that has no equivalent in Estonian history. The planned area of the hospital is 127,000 square meters and the hospital complex will cost EUR 520 million.
For comparison: the Estonian National Museum is a large building in Tartu, yet it is still five times smaller and seven times cheaper than the hospital. Tartu’s Lounakeskus shopping mall is 1.5 times smaller.
Ulemiste Keskus is comparable in size but it has been developed over time. True, the T1 Mall of Tallinn, along with its parking building, spans 130,000 square meters, but the cost of the development was much lower than that of the hospital. The Porto Franco development, while spanning 150,000 square meters, should only cost EUR 200 million. There are still major uncertainties about the development, however.
“There has never been a building like this in Estonia. It will be a major-major challenge. Not just for construction, but for the preparation and management of the development. It is hard to compare with anything in today’s conditions,” said Nordecon board chair Gerd Muller.
Muller’s words are echoed by the board chair of Merko Ehitus, Ivo Volkov: “The building will undoubtedly be a landmark for Estonia and Tallinn.”
To comprehend the effect of the development on the construction sector, Gerd Muller explained by comparing the effects to the turnovers of major companies.
“The building’s cost is some EUR 450 million, according to public information. Let us divide that over three construction years, it then makes up about 10-12% of the sector’s capacity of regular building development. It does not sound too bad, but Estonian construction companies make up less than 10%, so the yearly turnover of this building is larger than large Estonian companies,” Muller explained.
Merko Ehitus, the company responsible for the T1 development, does not consider the Tallinn Hospital as draconic, however.
“We are dealing with one very large object. But you have multiple years to build it. Meaning, there is a large number of people and companies working in one place for a long time. I do not think it will stuff up the construction sector in any way,” Ivo Volkov said.
“In the end, there are billions in developments each year, even if there was construction for about EUR 100 million a year, it would still be a small part of the entire sector,” he added.
Tallinn will have to work fast for the hospital, however, as the European Commission has still not made a decision on the project. If the decision were to come out a positive one, the EU’s COVID-19 recovery fund would have to be put to use until 2027. If the funds are not realized by then, Estonia will have to pay the money back. This puts the entire sector under major pressure as it is expected to operate at a very fast pace.
“The time frames are very ambitious. Even organizing the design contest in two months in this capacity and projecting it in two years is a very great challenge. No building in Estonia is built at that pace,” Nordecon chair Gerd Muller said. “These large things do not tend to delay, as we can see from Rail Baltic.”
Muller does not see the project being built without foreign workers. He does not rule out that the project could be very attractive to foreign companies, based on volume alone.
“It will certainly need workforce from the outside, that is obvious because life does not stop elsewhere. Other buildings will still be developed, roads will be constructed. It adds to the sector as a major supplemental force, from materials, transportation, everything to people,” Muller said.
Ivo Volkov assesses that Estonian workers might be enough to complete the project.
“I do not predict that it will cause a scary explosion in our housing or construction market. Given the nature of the construction business, I think there are enough good builders, companies in Estonia, who should manage,” he said.
He does not deny that Merko hopes to get the construction procurement.
“If the construction procurement comes out, I promise we will look at it in detail and make our best offer,” Volkov said.
Gerd Muller said it was a very common practice in Estonia for one company to take complete responsibility, developing the building at a fixed price. At prices this high, however, it may become a risk.
“In this situation, I just cannot imagine it – the cost of 1% construction volume is EUR 5 million and it is very simple to sway 1%,” Muller explained.
Swedbank analyst Tonu Mertsina said that the construction must be viewed from a broader perspective.
“Multiple major construction objects fall around that same time: Tallinn Hospital, Rail Baltic, four-lane highways, and if there were to be any residential buildings. It is hard to estimate how much one object might eat away at the other, meaning that if Tallinn Hospital is developed, how much it will affect residential developments, it certainly will. The same with Rail Baltic versus highways,” Mertsina said.
He notes that the construction sector might indeed overheat, which would make it sensible to spread some major projects over time and to develop some during a difficult economic phase.
At the same time, there are large investments coming.
“There is an important shift coming, trying to make the economy more green, there will be large investments. Large investments will also come to Ida-Viru County through the EU Just Transition Fund,” he pointed out.
Mertsina added that the Tallinn Hospital development would also affect the capital city’s rent and real estate markets as builders must live somewhere all those years, whether they came from Ukraine, Belarus or back home from Finland.
The current healthcare establishments in Tallinn are more than 40 years old, some even go back 70-80 years. Many of them are also depreciated. At the same time, some investments have been held up in hopes of the Tallinn Hospital project receiving a green light from the European Commission. For example, a connecting gallery corridor between two East Tallinn Central Hospital construction is delayed, forcing the hospital to use up ambulance resources for patient transport.
Mayor of Tallinn Mihhail Kolvart (Center) said it was still early to say what would come of the hospital and policlinic buildings, but he did not support selling the real estate, as land was a more valuable resource for the city than money.
“The buildings on Ravi tanav are very depreciated, but I certainly do not support selling them as a first option now. You can already see that some buildings should continue to be used for healthcare services, an even larger rehabilitation center could be developed for the Magdaleena hospital (a unit of the East Tallinn Central Hospital). The first thing to consider is potential interests for the city,” Kolvart said.
He considers it important to maintain healthcare centers as primary medical service providers in all city districts. The city does not plan to cover deductibles themselves and prefers to borrow funds instead.
“We are currently going off the city having a good financial position, we can take out a loan and our debt burden currently allows it. Our rating gives us an option to receive the loan at good conditions,” the mayor said.
Kolvart noted that the time frame provided by the European Commission was tight, which is why a procurement for the initial design was announced before a positive decision was made. Kolvart promises that if the project is green-lit, the city will follow due dates and the building will exist until 2027.
“It must certainly be one procurement and one major project. If there is partial financing, we can plan accordingly,” Kolvart. (ERR/Business World Magazine)