Development of Tallinn Hospital would be historic in volume and cost

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A rendition of Tallinn Hospital. Source: Tallinn City Government

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. ERR took a look at who will begin developing the mega-hospital, what will the effect be on construction prices and the market in general and what will become of Tallinn's current hospitals.

The construction of a central hospital in Tallinn's Lasnamäe 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 m2 and the hospital complex will cost €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 Lõunakeskus shopping mall is 1.5 times smaller.

Ülemiste 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 m2, but the cost of the development was much less than that of the hospital. The Porto Franco development, while spanning 150,000 m2, should only cost €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 today's conditions," said Nordecon board chair Gerd Müller.

Müller'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 Müller explained by comparing the effects to the turnovers of major companies. "The building's cost is some €450 million, according to public info. Let us divide that over three construction years, it then makes up about 10-12 percent of the sector's capacity of regular building development. It does not sound too bad, but Estonian construction companies make up less than 10 percent, so the yearly turnover of this building is larger than large Estonian companies," Müller 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 €100 million a year, it is still 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 by 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 timeframes are very-very ambitious. Even organizing the design contest in two months in this capacity and projecting it in two years is a very-very great challenge. No building in Estonia is built at that pace," Nordecon chair Gerd Müller said. "These large things do not tend to delay, as we can see from Rail Baltic."

Müller 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, starting with materials, transportation, everything to ending with yes - the people," Müller 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 Müller said it is 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 one percent construction volume is €5 million and it is very simple to sway 1 percent," Müller explained.

A rendition of Tallinn Hospital. Source: ERR

Danger of overheating in construction sector

Swedbank analyst Tõnu Mertsina told ERR 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 will also affect the capital city's rent and real estate markets as builders must live somewhere for all those years, whether they come from Ukraine, Belarus, or back home from Finland.

Tallinn will not sell current hospital buildings

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 building is delayed, forcing the hospital to use up ambulance resources for patient transport.

Mayor of Tallinn Mihhail Kõlvart (Center) said it is still early to say what will come of the hospital and policlinic buildings, but he does not support selling the real estate as land is a more valuable resource for the city than money.

"The buildings on Ravi tänav 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 - ed). The first thing to consider is potential interests for the city," Kõlvart 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.

Kõlvart noted that the timeframe provided by the European Commission is tight, which is why a procurement for the initial design was announced before a positive decision is made. Kõlvart promises that if the project is green-lit, the city will follow due dates and the building will exist by 2027.

"It must certainly be one procurement and one major project. If there is partial financing, we can plan accordingly," Kõlvart.

A rendition of Tallinn Hospital. Source: ERR

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Editor: Kristjan Kallaste

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