Brazilian Construction Costs on the Rise

By Lisa Flueckiger, Contributing Reporter

RIO DE JANEIRO, BRAZIL – With a booming housing market and huge, global events on the horizon, the costs of construction in Rio de Janeiro, and Brazil as a whole, are on the rise. New figures have highlighted the tight correlation between those costs and soaring asking prices across the country, fueling inflation fears.

Since the beginning of the year, construction costs, which are calculated from materials and equipment, services and labor, have increased by 7.18 percent according to the National Index for Construction Costs (INCC-M), compiled by the Fundação Getúlio Vargas. That figure is around one percent more than recent projections of this year’s inflation, but over the last twelve months, the figure has been as high as 7.99 percent.

The INCC index rose 0.43 percent in September after an increase of 0.31 percent in August. Out of the seven state capitals – São Paulo, Rio de Janeiro, Belo Horizonte, Salvador, Recife, Porto Alegre and Brasília – that make up the index, Rio saw the highest increases of 0.52 percent in September, mostly due to high materials and equipment costs.

“Construction costs are rising like everything else in Brazil due to inflation. If your project is delayed – I have one that has just been held up for eighteen months – you have to have everything re-quoted due to rising cost of materials, wages etc. It’s something that you have to factor into your appraisal more than in, say, the UK because construction here can be held up by any amount of red tape [or] problems,” James Lomas from investment company Indigo Invest, told The Rio Times.

Confidence in the sector for the coming months and expectations of construction companies are more negative than a year ago. The number of companies expecting an increase in demand has dropped from 33 percent in August to 31.6 percent in September according to FGV figures. Only 37.7 percent of companies surveyed expected their business to improve in the next six months, while 6.1 percent expect a worse result in the half year to come.

However, Lomas disagrees with the pessimistic outlook and those voices that see an end of the construction boom due to most projects for the 2014 World Cup and the 2016 Olympics having started by now.

“I think the construction sector will be fine, there is still a strong demand for new apartments as long as they are priced correctly and it is also an area where you can obtain mortgages more easily than against an older property.”

He does, however, see one particular area of difficulty for construction in Rio, saying; “There will be more construction to come, but possibly one of the main reasons why it may slow down is that, particularly in Leblon, Ipanema, Copacabana etc. there are no more areas [or] buildings left to develop. New building will continue but more out towards Barra, Recreio and areas where there is more space.”