The iceman cometh

By Richard High19 March 2008

Steady economic growth, rising population levels and heavy demand for houses, offices, roads and power means Iceland's construction sector is booming. Richard High reports.

According to Lofter Arnason, managing director of Icelandic contractor Istak, expansion of the country's infrastructure has gone “hand in hand” with the population “explosion” seen over the last few years. In 2000 it was just under 283000, this year it is expected to hit 305000 – an +8% increase in seven years.

Expansion of the country's infrastructure, added Mr Arnason, is being propelled by cheap energy, which draws in foreign companies such as aluminium manufacturer Alcoa, which in turn boosts the economy: more jobs, more taxes, more government funds available for infrastructure.

Mr Arnason told CE there is now a more international business environment in Iceland. This has pulled in more foreign investment and seen more inward investment by the country's business community.

“You could look at Iceland as the perfect logistics supply centre. We're well placed mid-way between Europe and the US [and] this will lead to a further expansion of our ports, airports, roads and the population, which means more infrastructure expansion. And so it goes on,” he said.

While Iceland's economy is still heavily dependent on fish (fish and fish products accounted for 70% of its exports last year) it has been diversifying into manufacturing and service industries in the last decade. And new developments in software production, biotechnology, and financial services are taking place, while tourism is also expanding.

This has helped GDP growth improve, with the economy turning round from a -1% fall in output in 2002 to a growth of +8% in 2004. Predictions for 2006 are that GDP will grow by +2.6%.

Residential Demand

This newfound wealth is supporting not only government-backed investment in the country's infrastructure but also an influx of private capital into the residential and non-residential sectors.

Páll Gudjónsson, director site developments Eykt, told CE the country has become a “melting pot, a crucible”, thanks in part to the privatisation of the banking sector; it's now easier to find a mortgage and consequently Reykjavik is “expanding phenomenally”.

There is also talk of a “capital area” around Reykjavik, said Mr Gudjónsson. In the future 85% of Iceland's population will live in this area, so we have started buying land within an hour's drive from the capital, which is where we see the major expansion of the residential sector with all the facilities associated with that – schools, shops, etc.

“We will put in the infrastructure, do the planning get the plots ready for building. We may build some ourselves, but we don't want to be a property developer. We are first and foremost a construction and planning company,” he added.

Eykt's latest development, an 80 ha, IKS 50 billion (€ 604 million) 'city' 20 minutes from Reykjavik on Highway 1, which will have schools, shops and about 900 residential units: 50% family housing, 25% apartments and 25% attached houses.

It will take 12 years to fully develop the site, said Mr Gudjónsson, which has been 12 months in the planning. With 2300 inhabitants it will be a “huge development on today's scale”. Eykt will build 60 to 80 houses a year, and with Iceland's population expanding at about +2% per year, Mr Gudjónsson believes “that's an achievable number”.

Inner City Development

It's not just “greater” Reykjavik that's undergoing expansion, there's also inner city regeneration and a plethora of “new build” developments springing up all over the city. One of the largest residential schemes currently under construction is the Höfðatorg Quarter (see box story), which will link the financial district to the old town centre.

The country's non-residential sector is also undergoing a transformation. According to Gunnar Sverrisson, president and CEO IPC (Iceland Prime Contractor) the country is “now thinking about bigger, more iconic projects”, such as the Icelandic National Concert & Conference Centre and Hotel.

Located next to Rejkjavik's main harbour the project, known as the East Harbour Project (EHP), is situated on 6 ha of land and will cover 200000 m2 - 50% below ground, 50% above ground. A Private Finance Initiative (PFI) project, IPC will operate the Concert Hall and Conference Centre for 30 years.

“The aim is to make this an icon for Reykjavik. It's hoped the EHP will establish Iceland as a world renown cultural centre,” said Sigurdur R. Ragnarsson, IPC's managing director for the EHP.

The complex will also include a 5 star hotel, the first in Iceland, and the headquarters of the country's largest banking group, Landsbanki, who also own the project. There will be 1600 car parking places, shops, cinemas, a spa and a “possible” new quay for large cruise ships, added Mr Ragnarsson.

Rental Market

The supply of construction equipment needed to build all these iconic projects means Iceland's contractors are now looking at renting rather than just buying equipment.

Hjalti Mar Bjarnason, CEO at rental company Mest told CE, “Rental is getting more and more accepted. As construction companies in Iceland get larger they are starting to consider outsourcing the running of their equipment and this means good opportunities for rental companies.

With the Icelandic rental market is just starting to take off, according to Mr Bjarnason, companies are realising that owning equipment is not necessary. Mr Bjarnason told CE they are also becoming more professional in their decision making process; calculating the total cost of owning a piece of equipment and comparing that to the rental rate over an extended period of time.

Mr Bjarnason estimates demand for rental equipment will double within the next five years. At present containers for site accommodation and storage are the biggest growing market. Demand for tower cranes is also high.

“In the future I think we'll see heavy demand for formwork, medium class excavators – 11 to 20 tonnes – scaffolding and aerial lifts, with safety legislation influencing this. It's good for the market, good for the workers and good for us,” said Mr Bjarnason.

However, he also told CE the affect of large projects like the Kárahnjúka Dam (see CE June 2007) can distort the market. “One such project might double the demand for equipment while it is being built, which means swings in market demand and utilisation levels can be very dramatic to say the least.”

Outlook

There is no doubt that Iceland's construction sector is booming at present. But some see clouds on the horizon.

“I think there's an over supply of houses and flats, which could mean a downturn in the market. Besides this, the office market has also reached a peak and I believe some investors will start withdrawing from the sector soon, if they haven't already,” said Istak's Mr Arnason

As a subsidiary of Danish contractor Pihl, Istak has something of a natural safety net against domestic downturns. However, Mr Sverrisson sees potential much farther a field, perhaps in China, where it would “consider project managing something there.”

Like other contractors IPC also sees opportunities in the Baltic States, Eastern Europe and the CIS. “There's lots of infrastructure either being built of under planning in these territories thanks to investment from the EU and it's an attractive proposition, with lots of opportunities in the housing market,” said Mr Sverrisson.

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