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The rise in rates and materials puts the brick SME against the ropes

Date: December 3, 2023 Time: 07:13:59

In an environment marked by the rise in interest rates and the shortage of specialized labor, the increase in the price of materials and energy will be a drag on the activity and margins of construction companies this year, especially everything for the smallest and for those whose activity is focused on residential construction. The rise in the price of money from record lows to 3% at which the European Central Bank (ECB) placed it last February, puts added pressure on the sector with financing costs at a time when activity may suffer somewhat from the slowdown of the economy and the more than predictable of credit.

6.1% in February, a fact that has also occurred in other large economies, such as the French, among other things after the withdrawal of some of the measures that governments have been approving to combat rising prices. The increase in core inflation, which excludes the most volatile components (such as energy and unprocessed food) and which usually indicates more structural tensions in prices, worries the ECB, which has made clear its intention to continue supporting monetary policy to put a stop to it and that the annual CPI rate tends progressively towards its objective of 2% symmetrical in the medium term.

Vulnerable to this scenario are the construction companies dedicated to new residential construction, which will face a contraction of activity in their segment and difficulties in passing on the variations in the prices of inputs to their end customers, as warned especially by and Caución. On the contrary, the situation will be more favorable in public bidding, both in terms of activity and the sustainability of margins. The credit insurance company anticipates that both delinquencies and bankruptcies in the sector increased throughout this year.

In February the dissolution of companies rose 9.8% compared to the same period of the previous year, although if the first two months of the year are taken into account the increase is even higher, 12%. The destruction of the business fabric is concentrated in Madrid (30% of the total), Andalusia (12%), the Valencian Community (12%) and Catalonia (6%), with construction and real estate companies being the most affected, since they represent practically a quarter of all those that have disappeared, according to the data handled by Iberinform. They are followed by commercial companies (19%) and those dedicated to providing services to companies (14%).

Activity slows…and materials keep rising

An indicator that clearly reflects the extent to which activity in the sector is slowing down is the Real Estate Activity Registry Index (IRAI) prepared by the College of Registrars, since it incorporates both real estate transactions and mortgages registered in property registries ( offering demand data) as well as the commercial activity of the construction and real estate sector (supply approach), so that it offers a complete picture of the activity of the sector. The value of the index fell to 121.4 points from the 124.0 it had reached the previous quarter.

If seasonal effects are eliminated, the index stands at 118.9 points between October and December compared to the 117.9 it had marked throughout the previous quarter. If the data for the second half of last year are taken as a whole, a slowdown in the recovery of activity is observed, which has been growing since the second quarter of 2020. This slowdown is due to the decrease in the number of sales (-9.5%) and the number of mortgages (-3.4%).

Added to this softer activity is the increase in the cost of construction materials, a problem that the sector has been dragging on since the pandemic -due to breakages and bottlenecks in the supply chains, which caused shortages- and which worsened as a result of the Russian invasion of Ukraine more than a year ago. Despite the fact that there has been some price containment in recent months, this is still insufficient to offset the strong increases that the basic raw materials for this sector have registered previously.

The latest update of the general cost index prepared by the Ministry of Transport, Mobility and Urban Agenda (Mitma), with data up to November 2022, shows a much higher rise than the average inflation of most of the basic materials beginning since from last year. Thus, hollow glass shoots up 27.8%, the price of plaster 20%, lime 19.7%, gypsum derivatives another 17%, concrete 13.8% and cement 13, 2%.

Companies will have to weather this rise in production costs in the middle of a scenario of deceleration in the volume of purchases and sales due to the increase in the cost of credit and the loss of purchasing power of consumers, something that for the smallest (those that have less financial muscle) is going to be a major challenge. Operations could fall by around 10%, according to calculations by the consulting firm Gesvalt. This phenomenon, which will also produce a range of residential prices, “will also imply a shift in demand towards the rental market,” they point out.

* This website provides news content gathered from various internet sources. It is crucial to understand that we are not responsible for the accuracy, completeness, or reliability of the information presented Read More

Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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