Civil Construction Inflation Risk

How can Civil Construction Inflation Risk be avoided in Brazil?

You buy a property still under construction, and your monthly installment increases, even after adjusting a payment plan with the construction company … But how is this possible?

When you purchase an apartment still under construction in Brazil, a monthly increase percentage fee will be applied to the pending debit in addition to the payment schedule plan agreed with the construction company. This is related to and calculated on the cost of civil construction in Brazil, the INCC.

The INCC (National Civil Construction Cost Index) monitors the evolution of civil construction costs. It is calculated considering the purchase of materials, equipment, and labor used in this sector. The index is an essential indicator in purchasing and selling properties, as it serves as a parameter for adjustments to real estate contracts based on properties still under construction.

However, the amount spent to correct the increase in materials, labor, and equipment is not lost but is transferred to the property’s value, which becomes an asset appreciation. In addition to this appreciation, the value of the property increases after construction is finished due to market reasons.

To illustrate how this increase happens, we can consider a hypothetical negotiation involving a building that would be delivered in the future:

1- In October 2019, an apartment was sold for R$2,000,000.00

2- By June 2022, the amount of R$1,090,000.00 in the payment plan had been paid.

3- Considering the INCC adjustments, the outstanding balance is R$1,270,000.00

4- The total cost of the property for the client in June 2022 is equivalent to R$2,360,000.00

5- It is estimated that the market value of the property close to delivery is R$2,750,000.00

Thus, the R$360,000.00 spent on INCC may seem high at first glance, but at the time of the project’s delivery, it will be included in its market value of R$2,750,000.00, added to the appreciation that occurs with buildings moving from “under construction” to “ready” status. Thus, the index is used in favor of the buyer.

For information purposes, below are the annual INCC rates measured over the last 12, 24 to 36 months (data taken in July-24):
3.77% previous 12 months
8.22% previous 24 months
20.94% in the last 36 months – a more significant increase observed due to the coronavirus pandemic period.

Attention to and analysis of the numbers and indices above will be crucial to good planning during the negotiation to buy your in-construction property.

Finally, adding a historical case and let’s go back to the period of the Coronavirus Pandemic:

According to the Brazilian Institute of Geography and Statistics (IBGE), inflation measured by the Brazilian National Civil Construction Index (Sinapi) rose 2.46% in June 2021 after advancing 1.78% in May.

It is the highest rate ever recorded in the historical series, which began in 2013. With this latest result, the indicator accumulates a historical high of 20.92% in 12 months.

In May 2021, the national construction cost per square meter was R$1,387, of which R$810 was for materials and R$577 for labor. One month later, in June, this cost totaled R$1,421, R$829 for materials, and R$592 for labor.

According to FGV, this increase is due to the price of materials, mainly iron and steel pipes and connections. Additionally, these materials are priced in dollars, and the reflection of last year’s dollar increase is coming now.

The leading causes of these prime materials price increases were the coronavirus pandemic, the reduced material inputs, and the demand for materials increased due to the high number of new property launches.

So, if you are currently looking to buy an apartment or house under construction in Brazil and can pay in full directly without any financing, you will avoid the risk of any price adjustment because of continued increases in construction costs. It is also common for a property to increase around 20% in value after construction is complete so you can end up with a good profit.

We at Penthouse in Rio carefully analyze the business case of any property purchase our clients make so that you end up with a clean purchase with no negative surprises. Our core strength and central differential is our end-to-end property transaction process, designed to give you peace of mind.