An in-depth analysis of trends in the real estate industry

 “If construction costs and the price of materials continue to increase, and if communes insist on resisting the growth of their population because it is becoming harder to develop adequate infrastructures, we will never solve the issue of rising housing prices”. Alessandro Rizzo, CEO of EuroCaution, and Cédric Doppagne, its Chief Commercial Officer, have a very clear view of the real estate market. At their level, they are trying to contain inflation by maintaining stable and competitive guarantee rates, and by sharing with their customers their informed understanding of the trends driving this complex market:

How did material shortages impact the sale price of new constructions?

AR: In 2020, we were already talking about procurement difficulties that construction firms could expect. And today, we’ve reached that point: the price of materials is rising disproportionately, and construction costs have gone up by 30 to 40% in just under two years.

These problems stem for a poor understanding of the market by stakeholders in real estate development. Currently, the larger players are able to impose their rates by leveraging competition: it is in the interest of suppliers to build loyalty among this type of clients as they prepare for the after-shortage period. Smaller or medium-sized developers acquire materials at relatively high prices, unless they manage to negotiate their rates by swearing loyalty to their suppliers. The increase is therefore not felt evenly across the market…

CD: For us at EuroCaution, we are extremely vigilant when we analyse our projects, and we demand additional guarantees when we receive long-term quotes. Besides, we play a role in reducing sale prices, thanks to the stability of our rates and mandatory guarantees, such as the financial completion guarantee or the infrastructure guarantee. It allows developers to sell on the market at competitive rates.

Doesn’t this phenomenon further increase sale prices for new constructions?

AR: That is the case to some extent, however, this traditional development model is wavering now that prices seem to be levelling out. This phenomenon can be explained by two factors; firstly, the COVID-19 pandemic has encouraged key clients with significant budgets to adopt teleworking, instead of setting up shop in Luxembourg. Furthermore, employees are no longer ready to spend such a large chunk of their wages in small accommodations…

Besides, the offer seems ill-suited to the demand, which comes more from single buyers than families, looking for adequately sized housing. However, the communes are after a different profile. It is therefore time to review the principles guiding the issuing of planning permits and authorisations, in order to grant developers greater freedom in determining the number and nature of housing units to build on a given buildable area. If public authorities fail to loosen regulations, developers will have no choice but to adapt their prices to be able to sell, which will hurt their margins. This kind of strategy will rapidly lead to a decline in the quality of construction.

CD: If we want projects to be sold at lower prices, the price of construction, which represents 60% of the sale price, must go down. To achieve this, the scope of the PAG must be extended, so that land acquired for the same price by a developer yields more constructible square meters. But communes are trying to halt their rate of growth, as they fear that their infrastructures will not be able to withstand the growing population. Administrative red tape is also a source of inflation, because any investment in real estate must be turned to profit proportionally to the number of years “wasted” in administrative work.

What do you think of the solutions offered by the government to reduce the price of housing?

CD: With the “Pacte Logement” (housing pact), the State is contributing to the increase in prices by imposing a share of affordable housing units in new constructions. So, promoters must increase their margins on housing units for the normal market to turn a profit…

AR: The announcement by Prime Minister, Xavier Bettel, of reforms on the property tax will not, as I see it, have any impact in terms of the increase of sale volumes. Indeed, most people will prefer to hold on to land whose value is increasing, whereas others will never be able to sell constructible land located in a PAG area, which prohibits a profitable construction volume. Political decisions taken up to now influence, according to our figures, 35% of the current sale price of housing units…

How have EuroCaution’s activities evolved over the course of 2021?

AR: Thanks to our support to the real estate and construction industries during the COVID-19 crisis, we managed, in 2020, to double our revenues compared with 2019. This year, we will reach revenues 50% greater than last year’s results.

We have also invested in the development of “E-Cautio”, an intuitive solution that digitalises all our customer relations in one personal space. During a second phase, the tool will allow our clients to take it further, by filing all their requests on-line. Thanks to our speed of execution that has grown even faster in the issuing of guarantees, we are able to manage even more clients and requests. To maintain our fees and the quality of our services, we must rely on this intense digitalisation of our services.

CD: Finally, for our tenth anniversary, which we will celebrate in 2022, we have given ourselves a new visual identity to symbolise the renewal we instigated through the digitalisation of our products and services.

EuroCaution in figures:

• 50 employees
• 6.2 billion euros of current exposure in construction costs value
• 27’953 guarantee recipients

Interviewed by Martina Capuccio – LG Magazine November 2021