Homebuilders across Europe face a bumpy ride as a host of external factors threatens to erode their margins in the next 12-18 months, says S&P Global Ratings.
The fast-changing macroeconomic environment, characterised by rising interest rates and inflation, will likely dent demand for newly built homes in Europe, a market which relies heavily on mortgage loans, the ratings firm says. In addition, the Russia-Ukraine conflict and worldwide supply chain issues are driving up homebuilders' costs and shortages, which will likely delay projects.
In its latest snapshot of trends in the European residential development industry, S&P Global highlights the surge in developers' raw material prices and labour costs since the beginning of 2022.
‘Property developers and their sub-contractors are notably exposed to steel, plaster, and cement prices, which have increased significantly since the Russia-Ukraine crisis began,’ says the ratings firm. While energy represents a lower share of property developers' overall costs, ‘its current price expansion is exacerbating inflationary pressure. Energy prices affect developers indirectly as they determine the cost of building materials and transportation that they use or sub-contract’.
Moreover, observes S&P Global, fewer people will be able to afford new homes as prices continue to increase faster than wages and interest rates rise further. As a result, developers which are already struggling to cut prices, will come under pressure.
Combined, these factors will continue to drag on European developers' capacity to deliver residential real estate in the coming year, the firm says.
‘Therefore, we anticipate that margins may squeeze, but mostly in 2023 because most costs with contractors are already secured for 2022 and the hit should be delayed toward next year.’
In an attempt to optimise costs and limit margin erosion, S&P Global believes developers may re-think their chain of sub-contractors, with a more proactive management of suppliers and lower use of master contracts.
However, most European property developers rated by the firm should withstand the headwinds and maintain credit metrics in line with the current ratings, thanks to their strong balance sheets and sound liquidity positions.
Development firms rated by the S&P Global include Aedas Homes and Neinor Homes in Spain, Altarea in France, Castle UK Finco and Maison Bidco in the UK, and Signa in Austria and Germany.
‘Given strong cash flow generations in 2021-2022, we expect the developers that we rate to maintain credit ratios within our current ratings expectations for the next 12-24 months,’ the firm concludes.
