The rising prices of building materials and the fear of a recession are driving a wave of panic through the Belgian construction sector. Entrepreneurs and developers negotiate in advance about the distribution of risk. “It’s poker at a very high level.”
‘We are forced to postpone the start of work scheduled for May, to August 2022, subject to a stabilization of the construction market.’ Ghent developer Wycreate reported this unpleasant message in a letter a few weeks ago that De Tijd could see. The letter was addressed to some of the (potential) buyers of the new Lieve Park project, where Wycreate is planning more than 100 homes.
But as with many other new construction projects in Belgium, interested parties will have to wait longer for their homes. After the corona crisis caused the prices of building materials to rise sharply and disrupt the supply of materials, the war in Ukraine gives further headaches to the construction sector. All kinds of raw materials and materials from Ukraine or Russia, such as steel or aluminum, have become scarcer and much more expensive in recent weeks. ‘Suddenly everything seems to be coming from Ukraine’, reads a frequently heard lament in the construction sector.
Contractors are constantly receiving price increases from suppliers, now also packaged as ‘energy surcharges’. Daily prices of building materials, such as in the fish market, are common. It poses major challenges for entrepreneurs. ‘Suppliers say: I no longer deliver even though there is a contract. Or they raise prices. That is the reality, “said Raymund Trost, CEO of the CFE Contracting construction group and chairman of the Association of Belgian Contractors of Large Constructions (VBA), at a press conference last week.” There are yards that are not finished because there are no doors.”
Suppliers say: I no longer deliver even though there is a contract. Or they raise prices. That’s the reality.
Due to the sudden price increases and the delayed deliveries, contractors working with thin margins risk getting into financial trouble. Entrepreneurs try to pass on the price increases to their customers, the developers or the initiators who develop the projects. A revision clause has become standard in record time in new construction contracts. But the big problem lies in the ongoing construction sites, whose construction contract – traditionally – required a fixed price.
Contractors and developers sit around the table to discuss the financing of the existing yards. The focus of the discussion is the ‘improvisation theory’, a variant of force majeure. According to the improvisation doctrine, which is (not yet) enshrined in Belgian law, a contract can be adjusted if unforeseen circumstances seriously disturb the balance that the contractor’s performance is unreasonably burdened. ‘No one can argue that these are unforeseen circumstances,’ says Trost. “In that case, both parties must work together to find a solution.”
An agreement is an agreement and must be respected.
Many builders do not accept this justification. ‘An agreement is an agreement and must be respected,’ says Rikkert Leeman, CEO of Ghent developer Alides. “We can not deny that price increases are skyrocketing and that it weighs on the contractor’s costs. But I can not help but notice that some entrepreneurs are trying to secure some of their profit margins. Contractors have, in principle, built up inventories. If 60 percent of the work is done, have you not already borne 60 percent of the cost? ‘
- Belgian contractors want to pass on the rising cost of building materials on existing construction sites to their customers, the project developers.
- Developers can not pass these additional costs on to their end customers, the private buyers.
- Both parties are forced to negotiate the distribution of risk.
- The big fear in the construction sector is that the market is stalling due to the great uncertainty and declining purchasing power.
The discussion puts a lot of pressure on relations in the construction sector. Both the Building Association, the Contractors’ Association and the Real Estate Industry’s Professional Association (BVS), the promoter club, sent their members model letters with which they can harass each other. According to a reputable Belgian real estate lawyer, who wishes to remain anonymous due to the great sensitivity on both sides, the contractor is in a de facto dominant position. Construction companies have the ultimate leverage to bring the builder to his knees. They can shut down the yard, however, with the risk of large fines and a troubled relationship with their client. ‘The contractor can say: I’m not coming, ge you can stand on your head ‘, says the lawyer. “Then the developer has to sue. But it jeopardizes the timing of a project. ‘
Moreover, there is a chance that contractors will be right if they invoke the doctrine of improvisation in court. The consultant Deloitte acknowledges in an analysis commissioned by BVS that De Tijd could see that the courts can qualify a ‘sudden, significant and unpredictable increase in construction costs as force majeure’. Therefore, according to Deloitte, builders should consider whether a possible prolonged stalemate and therefore stagnation of the land due to stalled negotiations or lawsuits outweighs a constructive renegotiation of the contract terms with the contractor, where both parties provide water for the wine. ‘
These negotiations are currently taking place around several Belgian shipyards. For example, promoters may allow expensive raw materials, such as steel, to be replaced by other, cheaper materials. Or they can agree to a variable but limited interest rate for volatile commodities. The real estate lawyer compares the negotiations to the game of looking each other in the eye: the one who laughs or blinks first is lost. ‘It’s poker at a very high level,’ the lawyer testified.
Developers are trying their best to avoid price increases on current projects. It is difficult for them to pass on the extra cost to their end customers, the private buyers. According to the Breyne Act, which applies to newly built homes according to plan, builders can only to a limited extent pass on additional costs if this is contractually stipulated. Few private buyers agree to a variable purchase price because they want certainty about their budget.
Anyone who has not yet signed a compromise on a newly built home will probably have to pay a lot more. Ghent developer Wycreate will ‘likely’ pass on part of the price increases on wages and materials in the proposed sales price for the Lieve Park project. “We assume that an increase of at least 12 percent will be inevitable for the apartments still for sale,” Wycreate wrote in the letter. For apartments where only a sales promise has been signed, the developer reduces the price increase by half.
Especially young beginners looking for affordable housing are at risk of falling victim to price increases and variable purchase prices. Anyone who has to cough up 230,000 euros for an apartment that would initially cost 200,000 euros can run into problems repaying a mortgage. The question is also how the banks will react to sudden price revisions.
In the Belgian construction and real estate sector, no one wants to use the word crisis. But panic is blowing through the hallways of many businesses. If demand for new homes declines or stagnates due to declining purchasing power and rising mortgage rates, it could have a contagious effect across the industry. Due to this precarious situation, the developers are already pulling the brakes. ‘We are postponing the offer of some projects until after the summer, because we assume that part of the boom at that time has calmed down,’ says Rikkert Leeman from Alides. ‘The big risk is that customers stop projects,’ says Trost. ‘Then we have a problem.’