Margus Välling, head of sales and procurement at Stell Eesti AS, has given his opinion concerning the recently published report on competition in the sector of real estate management and maintenance, and he finds that the operating profit in the sector as a whole will be decreasing, numerous previously profitable companies will be facing losses, and customers will be looking for reliable partners.
How have companies in the sector generally been coping with the pandemic crisis? To what extent do currently ongoing mergers result from this particular crisis?
How companies in our sector have coped with the crisis ranges enormously. Among the companies that received aid from the state last year, there are major, medium-sized and small-scale enterprises of our sector. The crisis affected and, apparently, is still affecting each one differently. The differences between the companies mainly stem from the length of their subcontracting chains or how various services are structured in their portfolio.
Looking at Stell, we can say that the crisis has certainly had a significant effect on us and will keep affecting the prospects for 2021. In this difficult time, the investments that have paid off are those we made in order to increase our capacity and to decrease the share of subcontracting in our business. This, in its turn, has ensured flexibility in service management, which our clients have greatly valued during the crisis.
As far as mergers are concerned and as to the question of whether they have been taking place in our sector due to the pandemic crisis, I can say for sure that Stell has stayed true to its long-term strategy despite the crisis. This means we are still making decisions with the future in mind because the crisis will be over. We believe that those who have managed to preserve competent teams today, during the crisis, and to stay true to the goals set for the future are creating a competitive advantage. What staying true to our goals means is that we are investing in our company, developing certain lines of business and acquiring companies which fit our strategy.
Now, nearly one year and a half after the beginning of the crisis, we are finalising the acquisition of two companies. Both acquisitions were strategically right future-oriented choices. This is why Stell’s example demonstrates the acquisitions do not necessarily result from the crisis.
What do mergers bring about in the sector as a whole? The sector’s long-term problems have been low salaries and labour shortage. How and to what extent could these problems be alleviated through mergers? How to increase the availability of workforce in the sector?
What mergers result in is the creation of a more stable market which clients can easily navigate. The problem of our sector is that numerous companies cease operation every year, and numerous new companies start operation. Consequently, clients might be left with the negative experience of having been forced to handle the problem of their property management and to look for a new partner again. Stell aims to save real estate owners the trouble of managing their property and to provide them with an option of a bundled service, catering for all the needs of the real estate owner/tenant. The bundled service involves appointing an individual manager to organise all the necessary maintenance and administration of the site.
The market is developing in the direction of consolidating small-scale companies into larger ones. This has been a long-term trend in Scandinavia, and Estonia tends to keep up with Scandinavia in general.
Mergers are certainly not going to solve the problem of labour shortage and pay rates in the sector. As I have already mentioned, Estonia keeps up with Scandinavia, and the general trend in the sector is that the real estate owner does not hire a management team but outsources the service. This, in its turn, means that the market is growing, and the recent decade has shown that real estate management is growing steadily. Even if we look at the fiscal data of 2020, the decrease in the sales revenue of major companies in the sector was smaller that that of Estonian economy. In other words, while Estonian economy in general was declining, our sector was growing. Of course, we need to wait until the end of July when the actual results of the financial year are available, and only then can any specific conclusions be made.
Labour shortage is characteristic of our sector despite the crisis, and nothing can be done about that. This is why salary pressure has not decreased. Our sector is fighting for labour force on many levels which might not even occur to people outside the sector. A large share of the struggle involves the entire service sector, including postal employees, warehouse personnel and cashiers, but, in addition, we can say that technical maintenance specialists and certified managers are not easy to find either. It is because of these issues and labour shortage that salaries in our sector are not exactly meagre. This is market economy in action: when there is a shortage, prices go up, and when there is a surplus, they go down.
Statistics show that the turnover of the sector in the last four quarters has reached the level where it had been before the pandemic crisis. Is this enough to feel good about? What are the next steps that companies in your sector are planning?
The years of the crisis have put numerous companies of our sector in a predicament, and many are struggling to survive. Even after the markets have somewhat recovered, adverse effects will still be felt in our sector in the upcoming years. For example, some of our clients used to operate in the HoReCa sector, and these services have been essentially terminated.
If all facilities are reopened soon, and people can go to spas again, our service prices will certainly be expected to have become lower. At the same time, we will be facing a problem because salaries in the sector will have increased and selling our services cheaper than before will not exactly be an option. So, it might happen that our sector will have to be selling its services at a loss, and profit expectations will have to be postponed. In its turn, this will mean companies will have no resources to invest and develop their services, which might result in stagnation in the sector.
We would in fact have to wait until the summer of 2023 to make any conclusions about how the crisis that started in March of 2020 has affected our sector. My forecast today is that the total operating profit in the sector as a whole will have decreased, numerous previously profitable companies will have experienced losses, and customers will be looking for reliable partners. If companies experience losses, clients will obviously not receive the service they expect. In its turn, this will result in additional unforeseen costs for real estate owners at a later stage in the life cycle of the buildings.
Still, I would not like to make a conclusion on a negative note. Rather, I hope that our competitors have also established long-term goals and are currently busy developing their companies and, consequently, the sector as such. At Stell, we are doing exactly that, and I hope we will be able to bring an interesting piece of news or two to the market soon.