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Does construction and real estate investment advance or retreat?

All scenarios have been affecting the market in one way or another.

Pandemic scenario (which won't let us go), war in Europe (and other places), energy crisis and other sectors, environmental pressure, interest and inflation rates, rising costs in the means of production...

The list seems endless. And for the real estate market?

Scenarios will affect consumer behavior.

Of that we can have no doubt. Whether it affects the behaviors of all consumers in the same way, that might be a different matter (we've covered that a bit in this post).

At the moment, the greatest pressure seems to still be on the investment and product development side.

According to what has already been stated, namely in news broadcast on TV and online, those who develop the projects (promoters and/or investors) find it increasingly difficult to close contracts and carry out the work.

As a result of all the circumstances, the volume of investment decreased year on year in this first quarter, according to the news that are already beginning to circulate, namely the analysis carried out by Savills and published in Hipersuper.

A variation with a decrease of 27% is something significant.

On the side of promotion, investment, construction

In addition to all the other variables that affect the market, a few more are emerging.

Despite being fair and relevant for companies to survive in the construction area, construction companies may start to review the costs of the works (whenever there are deviations of at least 20% in the costs) and present it to the owner of the work ( who may or may not accept the correction, of course). The legislation is being prepared by the government and may be published shortly.

In this legislative solution, it will also be possible to review the construction deadlines. This measure is related to the need to look for some materials in other parts of the world, since the territories in conflict are not providing or have sanctions. And longer deadlines are needed to get them to Portugal.

Naturally, this question raises some problems:

  • How will it be possible to define a sale price, and determine the break-even point, if the total cost can vary during the development of the work?

  • Profit margins, which have turned real estate into a desirable investment in recent years, to what extent will they change?

  • Will the development of commercial action in the initial and launch phase of a project be impossible? Will there no longer be "plan sales"? Because if there is, the first buyers may be buying with discounts above 20%. Will there be scope for this?

  • Will the profit margins that made this a desirable investment area be reduced?

  • Will foreign investment start looking for other areas of investment, especially if interest rates start to rise?

Many questions are beginning to be asked regarding the scenarios that lie ahead, and to that is added the questions related to interest, inflation, bureaucracy in the development of projects and bank financing.

Naturally, a drop in investment, regardless of the construction area (commercial, offices, logistics or housing, among others), could generate another wave of instability in the sector.

If an economic recession is triggered as a result of the macro scenarios we have, the situation will generate additional problems.

No matter how confident the actors in the sector are.

And even if there were already some expectations for a correction or leveling off of prices throughout the current year, the scenario does not seem to change. Even if stakeholders would like to recover (or generate) a return on investment.

And by the way, how will this affect the projects that are already underway?

On the demand side...

Consumers are starting to take a defensive stance when it comes to spending (or investing) in this area.

They already "think twice" before doing works or acquiring housing.

Also, with regard to works, the aforementioned legislation also applies to these cases (with the difference that customers have much less negotiating power).

As for the purchase of housing, and with the anticipation that there will be increases in interest rates, which banks already admit will affect loan installments (even if they claim to be a reduced impact), consumers assume the defense.

A natural behavior when the risk grows over the long term

The evaluation of the possibility of acquisition becomes a longer process, due to the need to evaluate the credit possibilities, as well as the possible acquisition options.

In fact, all the variables that we have been addressing are impacting the market and activity, both on the supply and demand sides.

Too much instability causes anxiety in the market and in all actors.

And what are the options for the economy and real estate?

Although the drop analyzed in terms of investment, in the referenced study, is mainly in the area of commercial real estate, it is still relevant.

Particularly at a time when the territory has witnessed recognition at various levels, namely as a space of choice to work and live (namely in teleworking), and which receives (for example in Porto in Lisbon) awards and news of the installation of various companies in the more varied types.

If all these projects continue, will the problems of supply, colliding with those of demand, have results that meet the needs of both parties?

Or will we have a reinforcement of alternatives in the forms of housing and living in cities?

The economic situation is tending to witness a deterioration phase, with volatility of all variables, and where making a forecast or prospective becomes increasingly complex.

At this stage it is imperative to remain vigilant and perform frequent analyses. Keeping a critical perspective and in all variables.

Many issues compete for the development of an investment, and even the demand side can influence decision making.

It will also be important to maintain perspective and openness regarding the variables that compete for the development of real estate solutions.

There are many variables around the value chain that lead to the development of this type of project.

Something that some stakeholders tend to overlook.

The economy (in different stages), material supply chains, labor, costs inherent to the pre-production stages (strategy, planning, engineering, bureaucratic acts, duration of preparation and development of solutions, etc.), and more other variables that affect and influence its development.

To which must be added the purchase behaviors and the variables that affect the consumers of these products.

However, in complex phases, all the added costs and other difficulties cannot be transferred to the final customer, under the risk of their "desertion" and a crisis phase in the sector.

All stakeholders must be prepared and aware of the sharing of risks and returns in order to maintain a "healthy" state of the market and its activity.

In a scenario where housing is a problem, despite the fact that there are more buildings than families in Portugal (a curious reality, but one that affects many of our cities), solutions may have to start looking for "outside the box", not in the traditional investment format.

For the analysis of strategic variables, you can always count on the collaboration of Imobintel.

Especially where the preparation of a project and its follow-up are increasingly relevant to maintain their competitiveness, positioning and financial health.

Do you think there are more situations/variables that we should consider when monitoring this market?

Leave your contribution.

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