Inflation and Ukraine crisis driving real estate prices up by double digits in 2022

Mihai-Alexandru Cristea 21/04/2022 | 14:50

The Romanian residential sector saw a 16 percent increase in the average price per square metre in 2021, and the trend appears to have continued since the beginning of 2022. Last year, price hikes were supported by the high demand for apartments and houses, but now they seem to be a consequence of the rising cost of construction materials.

By Aurel Constantin

 

Prices for construction materials rose by about 50 percent last year, leading to a 20-25 percent increase in construction costs. The outbreak of the conflict in Ukraine has added to the unpredictability of this industry, and today it is unclear how prices will evolve in the face of rising bank interest rates that push up the cost of credit.

“Unfortunately, although earlier this year we were estimating a rise of up to 10 percent in the prices of construction materials, this threshold is very likely to be exceeded due to the very complicated geo-political context. While there is still a fairly high demand on the market, people prefer to wait and avoid making decisions at the moment, which is understandable,” says Tinu Sebesanu, CEO at Impact Developer & Contractor. “So, there will be an exponential increase in construction costs, which will lead to a rise in selling prices, including for completed residential units. The challenge is finding the balance between our need to raise prices immediately—because we’re buying the goods now—and customers’ pace of absorption, which can be much slower.”

Prices of construction materials had been growing since 2020, and they peaked at the beginning of this year. Although we had started to notice a price moderation at the end of last year, especially for steel-based products, this year we are facing a different scenario that would have been impossible to foresee a few months ago. For example, going back to steel products, we saw their prices grow by about 30 percent within just a few days at the beginning of March,” explains Razvan Parvulescu, Business Development Coordinator at BTDConstruct & Ambient.

A major issue right now is the lack of predictability in the prices of both construction materials and energy. “At the moment, it is difficult to predict future pricing levels for these resources, given the global context that involves a continuous rise in inflation coupled with an energy crisis and the unavailability of some regional manufacturers or raw material suppliers due to the recent events in Ukraine. Another aspect to consider are the stock shortages that might occur, which would eventually lead to even higher prices,” Parvulescu adds.

 

Careful planning for future buildings

Big developers are affected by the rising cost of materials too, albeit not to the same extent. “Though we are one of the biggest players in the industry, we are also affected by this price increase. I would say that prices have risen by 20 percent on average, but I want to point out an important difference. Compared to small developers or those with boutique projects, contracts for the development of Cosmopolis are signed in advance, and we buy large quantities, so the financial impact is not so significant. We build hundreds of units each year so customers are guaranteed to move in immediately, homes are completed on time, and part of the cost of materials can be offset by carefully planning the development process,” said Ozan Tuncer, CEO of Cosmopolis.

But prices for new buildings will be higher this year. “The new prices must also take into account the cost of land and labour, so our estimate is that prices will rise by about 15 percent this year. But here at Cosmopolis, we’ve managed our construction materials very well, and we’re looking at only increasing prices by one digit,” Tuncer notes.

“Construction prices will undoubtedly follow those of materials, because the entire economic context is pointing us in that direction. However, we are not expecting increases to be that sharp. The resulting chain reaction will probably push the overall prices of new properties up by about 10-12 percent,” says Razvan Parvulescu, adding that the market is still under the influence of the initial shock generated by the state of affairs and that the entire construction industry needs more time to readjust.

The situation is not much different on the office segment. While demand is still high, rising costs are driving up the prices of new buildings, while the global turmoil is putting transactions on hold. “Normally, there would still be a very high demand on the market, which could not be covered by the development pace of recent years. But given the delicate global situation we are going through, people are currently in waiting mode. In the first few months of the year, the trends of the pandemic period were maintained. People still want more spacious homes and a complete living experience, which means not only a comfortable home, but also having easy access to various services,” says Tinu Sebesanu.

 

Investments will continue

Many construction projects in the public sector have stalled due to the rising prices and the fact that legislation does not allow changes to be made to older contracts that specify certain prices which were much lower than today’s. But the private sector is much more flexible and it can mitigate costs in various ways, so construction projects should not get stuck. “In the short-medium term, we do not expect the industry to come to a standstill. The pace of construction might slow down, but this will mainly depend on investor perspective and flexibility. Meanwhile, we are optimistic about the upcoming support measures and policies that will be implemented at the EU level for a swift economic recovery in all affected industries,” Razvan Parvulescu notes.

And while smaller market players may be hesitating, big developers are confidently sticking to their plans. “Cosmopolis has always been a special project, and this has probably allowed us to become leaders so quickly. We are a real estate developer with more than 14 years of experience on the market, and we’ve taken all the right measures to be prepared for this situation. In 2020, when the pandemic changed everyone’s lives, we could either be scared or remain resilient. We chose to buy more land, continued investing, and followed our master plan. In 2021, many were talking about the economic crisis. And while others got scared, we did our homework and continued to invest, and even budgeted additional investments for the infrastructure of the neighbourhood, we opened a medical clinic, and we increased budgets for social responsibility projects,” Ozun Tuncer explains. “Today, I see no reason to stop investing. We are now working on the master plan for the expansion of the residential area on the land we own, and the development of Cosmopolis will continue through to 2034. We are going to have more than 11,000 housing units and a community of over 30,000 people, a population comparable to that of towns like Campina, Campulung Muscel or Sighisoara,” the head of Cosmopolis adds.

Even though it is quite difficult to make accurate estimations for the coming period amid the delicate circumstances we are all facing, including higher inflation, rising energy costs, and the conflict happening near our borders, investments in construction projects will continue as demand will remain high. “Despite these uncertainties, the real estate market continues to be one of the safest options for people who want to invest,” Tinu Sebesanu concludes.

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