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Building Value in Uncertainty

By Bruno Lobo, Managing Partner S+A Capital

Rising construction costs and interest rates present challenges and opportunities for real estate developers, contractors, and consultants to jointly implement innovative strategies that balance the need to control costs and schedules with the creation of value to ensure the viability of projects and address sustainability requirements.


The current international context of the conflict in Ukraine and the constraints caused by the COVID -19 pandemic have led to an increase in inflation and a disruption of supply chains for construction materials.

These factors have led to a loss of consumer purchasing power, volatility in construction costs, a reduction in supplier inventories, and an increase in the shortage of skilled labor.

To combat inflation, central banks have raised interest rates, which has increased the cost of capital from investors and lenders for development finance and the acquisition of housing.

This context favors investment in income-producing assets due to the increase in yields and inflation protection; and existing owners, by making it more difficult to buy new homes, especially for young families with low incomes, creating the need to rent for longer periods of time.

However, there is a significant imbalance between supply and demand in the housing market, particularly in the middle-income segments, not enough new homes have been completed in the last decade.

Thus, there is still a need to increase the supply of new housing to contain price increases and address the growing demand from buyers for new housing formats that provide flexibility, convenience, and age-specific amenities and customer service.

Therefore, the current context does not have to lead to a slowdown in the sector, as it also offers the opportunity to introduce innovative strategies to contain costs throughout the lifecycle of projects and to optimize the institutional framework of the construction and real estate sectors.

Challenges and opportunities

Rising construction costs and interest rates can affect the business plans of both new and ongoing projects, impacting contractor margins and investor returns.

For ongoing projects, we are seeing the introduction of price revision models and the search for alternative solutions for lower-cost materials that are locally available locally and can be installed more quickly.

On new projects, there is an increase in contingency levels and shorter validity periods in construction budgets, while contractors are increasingly unwilling to provide fixed-cost guarantees.

Furthermore, new sustainability challenges arise as the current context must be balanced with the commitments made by investors and the potential changes in priorities for buyers/tenants facing a loss of purchasing power.

The rise in interest rates and uncertainty about construction costs and timelines is also leading to an increase in the cost of capital from investors and in more stringent conditions for construction financing and lending for home purchases.

In the UK for example, after the recent Government announcements, the market responded with circa 25% of mortgage products being pulled from the market.

These factors are leading to more conservative business plans for new projects, where their viability depends on the reduction of land values, higher revenue growth rates, lower construction costs, and shorter delivery periods

Given the inelasticity of land values and challenges to underwrite revenue growth rates over long periods of time, this situation increases the need to reduce construction costs, value-engineer designs, and optimize the institutional framework.

The current uncertainty leads to greater sharing of risk between the different parties, which requires collaborative structures during the different phases of the project to guarantee the certainty of cost and execution required by investors and lenders.

Such structures require a multidisciplinary approach with a long-term view and the same capital stack from land acquisition to operations to ensure alignment of interests and sharing of both risk and reward.

In the design stages, it is necessary to further optimize the efficiency of floor plans and adapt common areas to the requirements of the various age groups, and the specifics of each market segment.

It is also necessary to increase the use of standardized, modular, and prefabricated solutions using Modern Methods of Construction that help provide greater certainty of costs and deadlines while maintaining the quality of the projects.

Strategies to limit construction costs and schedules and create value

Design Strategies

– Optimization of floor plans and functional organization of buildings;

– Adaptation of common service typologies and areas to new preferences;

– Repetition and modularization of elements such as openings, facade panels, kitchens, fixed furniture, and bathrooms;

– Reduction of cantilevered balcony areas;

– Use of “digital twin” BIM (Building Information Modeling) models.

Selection of Materials

– Sustainable building materials with high energy efficiency and renewable energy;

– Use of local materials that are easy to transport and assemble, have a better weight/resistance ratio, and reduce costs;

– Industrialized construction processes based on off-site manufacturing;

– Use of “dry” building systems such as plasterboard walls and ceilings, and dry screed floors.

Delivery Methods

– Focus on the pre-construction phase and selection of contractor;

– Collaboration and constant exchange of information between design consultants, contractors, and developers from the beginning;

– Flexibility in the procurement of materials;

– Transparency in terms of fees, costs, and profit margins;

– Mechanisms for sharing risks and aligning the interests of developers and contractors.

Institutional Context

– Mechanisms to regulate and control rising construction costs;

– Simplification and shortening of the planning process with more certainty;

– Updating building codes and technical requirements;

– Adjustment of taxes and fiscal incentives;

– Support for training and incentives to increase the number and availability of qualified construction workers.


The rise in construction costs and interest rates is helping to exacerbate the consequences of existing inefficiencies within the construction and real estate sectors in the design phases, delivery methods, and institutional frameworks.

A joint approach between the public and private sectors is needed to implement collaborative strategies that address the various phases of the projects in an integrated way while reducing institutional costs.

The current situation increases the need to implement these strategies to provide a competitive advantage to market participants, increase the supply of affordable housing, and improve the sector’s ability to attract new investment.

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