Between 2022 and the first half of 2023, some 60 construction companies have gone bankrupt in the southern country. High housing prices, high bank rates and increasing financing requirements, in addition to low investment due to the political and economic uncertainty that exists, make up a complex panorama for the sector.
One of the popular maxims in economics is that construction is a good barometer of how a country's finances are doing.
“It is the first thing that is affected and the last thing that is recovered,” says Chilean civil builder Rolando Cáceres, CEO and creator of iBuilder, a platform that optimizes processes to lower the costs incurred by construction firms. His company advises hundreds of projects in the country, which allows him to know firsthand some of the main problems in the sector.
And for a year or more, the Chilean construction sector has been warning of a generalized bad situation for its industry.
In July, Juan Armando Vicuña, president of the Chilean Chamber of Construction (CChC) acknowledged that building permits are at their lowest level since there are records.”
There are multiple factors that explain this situation. "From the stoppage and delay of works as a result of the social outbreak (2019) and the pandemic, through the increase in the price of materials and delays in client payments, to the difficulties in accessing financing.
All this in a difficult international and locally uncertain macroeconomic context.
"We must move forward in solving more structural aspects, such as the excessive and costly paperwork and bureaucracy, considering a modernization of the contracts whose principals are the Ministry of Public Works, so that they are flexible and can adapt to the new conditions that have been registered. in recent years. Added to this is the loss of legal certainty and the problems of rigidity and imbalances that are present today in the relationship between the State and its contractors," the president of the CChC said in the local press.
The clearest example of a crisis is the bankrupt construction firms, such as Claro, Vicuña y Valenzuela (CVV) in 2022 and more recently the construction company Cosal, with 40 years of history. Other local firms that have made headlines are Proyekta, Buildtek, M3, Basco, Cerro El Peñón, Davjo, Queylén, Las Magdalenas, MO Constructora, Marazul, and Engineering and Construction Olivares y Utjes SpA.
According to an analysis concluded at the end of last year - with data issued by the Superintendency of Insolvency and Re-entrepreneurship (SUPERIR) - 244 companies in the construction sector had requested bankruptcy during the last three semesters to that date.
This corresponded to 58 companies in the sector that went bankrupt in the first half of 2021, to which were added 76 in the second half of that year and 110 bankrupt companies during the first half of 2022.
“Construction is divided into two large items: materials and labor that. In general, both tend to represent 50% and 50% of a construction company's expense. Mining requires much more machinery and less labor,” explains Rolando Cáceres.
“If a construction company did poorly with a project, when it takes on a new one it has a certain injection of capital flow to move and cushion that project that did poorly by compensating it with new projects where it is doing well. But without new projects it is difficult to move forward,” summarizes the CEO of iBuilder.
REAL ESTATE SWINGS
Global economic stress and the logistical jam that followed during the pandemic drove costs up more than 30%. And since the construction companies' contracts are free of hand, that is, at a fixed price, if costs increase, the risk must be assumed by the company.
The CChC says that, adding to the complexity of the scenario, in Chile new works take more than 12 months to start, and that increases prices even more.
In their relationship with the Chilean State, many construction companies must assume the increase in prices because long-term contracts do not contemplate adjustment systems for this reason, as occurs in the private sector.
The sector's complaint is also directed at what has recently been called "permissology", that is, a number of permits and procedures with the State that are perceived as bureaucratic, in addition to the tax increase announced by the Boric administration, which They accuse of lack of investment.
“There is no investment in Chile, unlike what is happening in Mexico where it is increasing in the construction sector, and one wonders why. The answer is for investment to exist, the conditions must be in place to make our country more competitive and those conditions have to do with legal certainty. So, as we are in a process of political crisis since we are changing the Constitution and the rules of the game are being changed, it is difficult for investors to want to take risks,” claims Cáceres.
The CChC estimates in its quarterly report on the sector, called Macroeconomics and Construction (MACh), that in the first three months of the year there was an annual loss of 46 thousand jobs and projects that investment in construction would fall 5.9% in 2023, mainly due to the significant contraction of investments in productive infrastructure, both from the private sector and autonomous state companies.
By 2024, the growth rate of sectoral investment is expected to converge from below to its trend level, in line with the consolidation of the economic adjustment process and dissipation of some relevant shocks. This means that investment in construction will vary -0.5% annually in 2024, consistent with the lower amounts of sectoral investment registered in the CBC and a drop of 0.7% for the economy's aggregate investment.
Meanwhile, for the year, it is projected that investment in infrastructure would fall 5.8% annually due to a 1.3% increase in investment in public infrastructure in twelve months – although as of March the budget execution of the Ministry of Public Works showed an annual decline of 36% in the amount executed – and a severe contraction, of 13.3% in twelve months, in investment in productive infrastructure.
Regarding this last point, the Capital Goods Corporation indicates in its most recent report that this year productive investment would be 34% lower than in 2022, that private productive construction spending would contract 43% in relation to last year and that spending in the public productive sector and autonomous State companies would decline 12%.
In housing, meanwhile, an annual drop in investment is projected where public housing would contract 4.4% in 12 months, while in private housing the decrease would be 6.6% annually. In this way, and after the 29% decline in 2022, annual growth rates between 22% and 17% are expected in 2023 and 2024.
At the government and basic housing level, the Minister of Housing and Urban Planning, Carlos Montes , highlighted the Housing Emergency Plan, according to which 64,355 homes have been delivered, which is equivalent to 24.8% of the 260,000 that the Government is seeking. address the Chilean housing deficit.
However, the executive director of the Deficit Cero corporation, Sebastián Bowen , estimates that housing deficit between 650,000 and 700,000 homes. “Which is, more or less, 10% of the homes in Chile today,” he says.
"That figure includes the camps, the population that lives in close quarters or in overcrowded conditions, homes that cannot be expanded and people living on the street. We published a study a year ago, which showed that at that time there were 641,000 families, and today we are approaching 700,000 units," he added.
For Bowen, if the known current factors are added - social outbreak, pandemic, price increases and impoverishment of the population - it is making housing even more expensive.
For Bowen, this crisis is also an opportunity to create, for example, “an eight-year strategy to build 1 million homes and cities that can generate not only housing for families, but also promote the inclusive economic development of the country,” he proposes.
REACTIVATION IN SIGHT?
Despite the gloomy outlook, some are already seeing green shoots.
According to the report called InfoConstrucción, prepared by the firm IConstruye , the entry of new works in June reached 31 projects, of which fifteen correspond to infrastructure initiatives and another ten to residential projects, which represents an increase of 55% compared to to May, while, in relation to the same period in 2022, the average increase was 41%.
In relation to the total active works, 70% of them are residential, 14% are infrastructure projects, such as roads, maritime, ports, mining and health, followed by 9% commercial works, which include offices, retail , educational, hotels, plazas, gyms and stadiums. For its part, 7% are minor works.
Isabel Pinochet, commercial manager of ICONSTRUYE comments that "the start of new projects is excellent news for the industry. Optimism is positioned as a fundamental state of mind to instill confidence in investors, however, it is important to recognize that we are still "far from reaching the level of 100 works that were in operation before the various crises we have faced."
The report also showed that, in terms of works in progress throughout the country, in May there were 1,022 active projects, of which 55% are in completion, 22% in heavy work, 21% are in previous phases and 2% in foundations.
Regarding the average amount per transaction, that is, the value of materials and supplies, the report shows that, at the end of June, it increased 1% compared to the previous month, placing it -2% below the 2022 average. Regarding As of 2019, this month's variation remained 36% below the same pre-pandemic period.
Along these lines, the manager explains that “this is a reflection of the changes in the purchasing processes that have been adjusted to have greater efficiency and care for construction budgets. While, in relation to the prices of materials and inputs, these have stopped their increases, a trend that should be maintained given the control of inflation driven by the UF, and which for the first time in a long time has shown a downward trend ”.
On the other hand, the report indicates that the total purchase orders (PO) at the national level increased by 9% compared to May, maintaining a gradual decrease in relation to the averages of previous years; In 2022 the variation was -4%, while in 2019, that is, pre-pandemic, it was -32%.
The year also brings positive news: the decline in the prices of materials and inputs used by the industry. Thus, during the first quarter of the year, prices increased 5.9% annually, which compares favorably with the average increase of 25.1% annually recorded in 2022.
Additionally, the market consensus is that the announced lowering of Central Bank rates creates a very favorable scenario for investing in properties, albeit brief.
In this regard, the proptech Property Partners assures that adjustments have been seen regarding the publication values of used properties by 10%, mainly in the segments that had increased the price after the pandemic and in those properties that have not been sold for a long time.
On the side of the new property market, there has also been a drop in prices, which is mainly due to the fact that real estate agencies faced lower demand than projected, which has particularly put pressure on immediate delivery units, generating price drops. and better commercial conditions, to attract buyers.
“Prices [of housing] have effectively gone down due to issues of inventory liquidation by real estate companies that have been going on for 18 months or so since the central bank's rate hike began, which is transmitted to the rest of the market from when the price began to slow down.” real estate activity and today something happened that does not happen often, which is that the real estate agencies have completed the projects and have unsold stock . With that scenario, they began to make discounts, which is something strange," says Ferencz Delarze, director of Property Partners to AméricaEconomía .
Delarze's firm has a direct relationship with real estate agencies for the sales of its proptech , and the outlook is that the total number of properties traded fell 26%, observing a decrease of 33% in new homes and 23% in used homes.
The executive explains that the demand for housing grows at constant rates, in sync with the pace at which the population increases, and that it is only slowed down in periods of uncertainty or difficulty in accessing credit, as is happening in the country since mid-2021. According to the expert, a “dam effect” then occurs, where demand accumulates because housing transactions fall, but interest in buying does not.
“This compressed demand returns with force when credit conditions are reestablished and/or uncertainty is cleared,” he assures.
Delarze affirms that this entire scenario makes it very likely that property prices will rise again “so the recommendation for those who can access credit or have their own resources is that today they go out and invest in this market that should rebound strongly. , because when this happens it will be much more difficult to find opportunities” he concludes.
In any case, the Boric government came out in July to publicize its portfolio of public works tenders for the coming years, trying to give a sign of optimism with new projects evaluated at US$5,882 million.
The Minister of Public Works, Jessica López, announced that "between now and the end of the year we will be busy mainly with road and airport projects, which we hope to be able to complete," she said.
López also addressed the concerns of the concessionaires, discussing how to reduce processing times for public works in general. "Today there are significant times for studies, bidding, awarding and execution, which take many years, so we have to work to reduce those times," said the authority.
