In Spain the construction sector continues to show the high activity in the launching of new residential properties on the market. However, today the possible freeze of new projects development is not ruled out because of the inflation possibility in the construction costs.
Although events in Ukraine can reduce potential price increases, this increase has serious risks of exceeding 5% by the end of this year.
The 5% level is extremely important because it marks the threshold beyond which the construction of new real estate is no longer profitable. Even real estate developers, whose business goes well today, will be forced to stop ongoing projects and reconsider their development strategies.
Representatives of one of the leading Spanish real estate developers emphasize that the rising construction costs and general inflation are their main cause for concern at the moment. This may lead to more complications than the possible increase in interest rates by the European Central Bank.
They emphasize that inflation will become a serious problem if it stabilizes above the previously mentioned 5% (note that the inflation rate reached 3.1% in 2021).
Companies will have to reduce the pace of projects development due to their low margins under this alleged scenario. We will see this effect on properties under construction in the second half of 2022. But it will be recorded in financial reports only in 2023 due to the non-responsiveness of developers.
Market sources note that these concerns reflect the general mood in the construction sector. Price inflation was already on the move in the middle of last year as a result of the accumulative effect of the pandemic consequences.
On the other hand, one of the largest construction companies in the Spanish stock market takes a different position: “The growth in construction costs remains mild for today”, and also “Inflation does not affect the margins of construction, as it is absorbed by an equally mild increase in market prices.”