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The war in Ukraine is beginning to raise the first blisters in the real estate sector. With construction costs and energy bills skyrocketing, a war on European soil has already meant a delay in signing new contracts and instils fears about a possible paralysis of some works.

“At the end of last year, costs were close to maximum and were expected to be corrected during 2022. However, the impact of Russia and Ukraine will unfavourably change these prospects, although the impact is still uncertain,” says Samuel Población, director of Residential and Land at CBRE.

Housing developers are among the most affected by the situation. Still, at the moment, the vast majority maintain a tense calm and send reassuring messages to the sector and the end customer. “It is too early to say how it will affect because it depends on the duration of the conflict. We are monitoring the evolution of construction costs due to the effect of raw materials and energy, which have been rising in recent weeks. We have to see how long this situation lasts and at what levels material costs stabilise,” says Juan Carlos Calvo, director of Strategy and Investor Relations at Metrovacesa.

“Construction companies are experiencing problems placing metal, cement, and stoneware orders.”

On the other hand, some construction companies are more pessimistic and recognise more problems since the outbreak of the war. “Construction companies are experiencing problems when placing orders for metal, cement and stoneware,” they slide from the construction company Nevo.

According to testimonies, companies dedicated to building custom and more personalised houses are the ones that could be suffering the most from problems in their construction chains. “The truth is that the situation is very worrying and affects us significantly.

“Inflation, the supply chain and the shortage of professionals in the sector are already impacting terminations, deadlines and costs. And we do not believe that it will improve on the contrary,” adds a senior manager of a listed real estate company in this regard.

Stop the building?

The sector sees the global situation from different points of view, but what can this scenario entail? Some point to a paralysis of the works if the conflict spreads over time. However, there are different reasons: some indicate that it will be the shortage of materials, and others point to the price. Precisely, the population opts for this second option. “The lack of materials and making them more expensive causes delays in supply chains and, therefore, in the execution times of promotions. Stopping the works is not so far the reason for delays in materials, but rather the increase in their price,” says the director of CBRE.

“The construction companies will see their profits diminished and lead to losses that can lead to the insolvency of some smaller ones.”

In the worst-case scenario, Población emphasizes that there could even be the bankruptcy of a smaller construction company. “The construction companies will see their profits diminished and lead to losses that can lead to the insolvency of some smaller ones. 

“As for the promoter, it will affect him with a negative impact on the business plan, and they will cause delays in some of his projects. In the works under study, the construction companies will increase their budgets to cover possible unforeseen increases in materials and execution times. So the promoters to increase budgets and review the project’s viability, including a possible rethinking of the strategy,” says the soil director of CBRE. A company’s senior manager also shares this theory: “We will see resolutions of safe contracts,” he says.

Asprima, an association that defends the interests of the promoters in Madrid, is more optimistic. However, they warn that this may change in days or weeks if the war continues. “If the situation continues, we understand that the start of some projects will delay in a few weeks. Nevertheless, we trust that the situation will be clear. The main industries will recover their activity,” say Asprima.

” The signing of new contracts delayed,” they say. Metrovacesa, one of the four significant developers in this country, believes that it is “doubtful” that the conflict will result in the paralysis of their works. They assure that they are not observing a lack of materials in their projects so far.

However, other factors such as the forecast to overcome setbacks come into play in these complicated scenarios. “We have not yet had to stop any work, but we have delays in delivering material. Will housing prices rise?

Once the situation has been reviewed and its possible impact on companies in the sector, it is now the end customer’s turn. Is the housing price going to increase due to the war in Ukraine? The vast majority believe that it will affect, although not everyone dares to give estimates. Only Calvo de Metrovacesa stands out from the rest of the voices. “The housing price is expected to rise, moderately, during the year 2022. But the fundamental reason is because of the relationship between demand, which continues to grow strongly, and the supply of new housing, which is growing more slowly. And we think that this situation will continue to be favourable in the coming years, regardless of construction costs,” he says.

“I’m sure it will affect housing price, but it still doesn’t determine how much it could increase.”

“The cost of raw materials impacts the price of housing, mainly new construction. From CBRE, we hope that, for this year, the price of accommodation will continue its progress, led by the increase in new housing. At the aggregate level (New and Second Hand Works), we anticipate that 2022 will close with a price increase of 4.5% compared to the fourth quarter of 2021. Existing tensions on global supply chains will start in 2023.

“Yes, it will affect the price of housing. However, we estimate that it will not increase by more than 3-5%,” they add from the construction company Nevo. “I’m sure it will affect the housing price, but we still can’t know or determine how much it could increase,” they add from PMP Prêt-à-porter Casas.

In addition, Andimac (National Association of Distributors of Ceramics and Building Materials) also warns of an increase in prices in housing reform.

“Many construction companies can collapse and drag back into the entire sector.”

“At present, there are no forecasts, only a great uncertainty that requires maximum prudence in the management of risks by companies. Suppose to the limit tension caused by the increase in prices we add the cost of paralysing a work or keeping it idle. In that case, many construction companies can collapse and drag the entire sector back. To avoid this, the Government must take urgent measures,” explains the general secretary of Andimac, Sebastián Moliner.

Steel, fired

Within these increases, the production of steel, aluminium and copper could play a critical role due to their high energy cost and because Russia is an exporter of these. “Construction materials are energy intensive, which is why energy will be the factor that will directly affect the construction sector in Spain. In addition, aluminium, steel, and copper are highly demanded materials in the real estate sector. We are already observing production problems and price growth. Russia is also a large producer and exporter of them,” says Población.

“The biggest increases occur in some raw materials, especially steel, aluminium or ceramic products. Therefore, the situation is more about rising prices rather than a shortage of products. Furthermore, it is important to note that we have agreed on a closed price with the construction company as a developer. Therefore, the risk does not occur so much in the works in progress. The cost of the works planned to start in the coming months,” they point out from Metrovacesa.

“The work cost has increased by 20% in the last 24 months.”

For their part, Nevo also points to cement as a material that could affect the escalation of housing prices. “Metal and cement could increase their price further, and stoneware could be scarce,” they say. PMP Ready-to-wear homes continue to point to the cost of energy. “All those materials that need electricity for their production: steel, cement, ceramics, crystals, wood…” says the promoter.

For his part, Enrique López Granados, president of the Caledonian developer, also denounces the rise in construction costs. However, he warns that it is a situation that has been ‘cooked’ for the last two years. “Aluminum is skyrocketing, and transport costs have doubled… It all started little by little, but it has gotten out of hand. The cost of work has increased by 20% in the last 24 months,” he says in this regard.

Note that some sites stopped in Madrid, according to ABC. Specifically, the construction of 14 educational centres has had to stop due to a lack of materials. However, they point out that this problem has arisen due to the transport strike.

The promoters of Alicante stand up.

The Association of Real Estate Developers of the Province of Alicante (Provia) has raised in its Board of Directors the possibility of agreeing on a temporary cessation of activity in the face of the sharp escalation of the prices of raw materials. Furthermore, the entity warns that the price increases in certain raw materials are not adequately justified; some suppliers have detected even speculative stockpiles and withholdings.

In this situation, a generalised temporary cessation of activity is the option. Companies have already taken action in this situation to cool the price spiral. First of all, some promoters have decided not to start new projects. The employers recognise that many new construction visas processed between October and February are not active. The start of new promotions stopped due to the unjustified increase in construction costs. Suppose there is no progressive return to normality. In that case, the real estate developments will experience a sharp rise in the sale price.

Secondly, other companies that have works in progress could raise the price of pending sale homes. This increase could even exceed double digits. In addition, thirdly, developers who have construction sites have slowed down the pace of work, waiting for a progressive return to normality. Finally, some promotions may be, which will delay delivering homes to buyers.

Stoppage inactivity, they explain from Provia, will have a substantial economic impact. If this situation continues, they estimate that 1,525 homes will no longer start. 

It means a loss of investment in the province of more than 326 million euros, a direct impact on employment of 3,700 jobs and a decrease in tax collection, both tax and social contributions, of 142 million euros.

“This proposed cessation of activity would be preventive. If the situation persists and the increase in the prices of basic materials continues, a fear of a speculative bubble on construction costs becomes real.

“If there is no trust in the system, the system becomes a machine to paralyse activity. We are seeing it in other critical sectors, and we cannot rule out that it will also occur in ours,” they conclude from Provia. Therefore, the promoters will continue to analyse the evolution of market prices to decide if the escalation in costs continues to rise.