The construction sector is mired in an apparent contradiction in Spain. Although it puts homes on the market a much slower pace to which new homes are created, although the development companies have been warning for years against a serious residential deficit and although the value of the square meter does not stop climbing, fooling around Already with the values prior to the great brick crisis, today brick is not a business especially attractive in Spain.
At least if we look at its profitability.
What has happened? That something doesn’t fit in the construction sector. The indicators of the cost per m2 they don’t stop increasingreal estate agencies warn that the apartments last just a few days in the market before finding a tenant or buyer and the developers warn of a growing housing deficit. And yet, despite all of the above, several analysis centers insist that construction in Spain has a serious profitability problem.
It’s not just that your current indicators are far below of those that managed the sector two decades ago, before the brick crisis that sank the market, is that its values are lower than those of other neighboring EU countries. In fact, despite the fact that the price of residential m2 continues to become more expensive, in reality brick is a business much less sexy than that offered by other sectors, such as air transport or information services.
What does the data say? There are several sources that help us complete the ‘photography’ of the sector, as I remembered a few days ago The World. One of the most interesting is left by the University of the Hespérides, which in a recent report issues a warning to sailors: if new housing is barely being started in Spain despite the constant escalation of prices, it is due, in part, to the fact that “construction continues to be unprofitable.” Or at least not as much as other industries.
After studying the sector, assessing the profitability of assets and the cost of financing liabilities, Hespérides technicians came to the conclusion that in 2024 the profitability of construction stood at -0.1% compared to the 2.7% average of all economic activities in Spain. In fact, it detected 68 economic activities more profitable than erecting buildings.
Is it the only indicator? The truth is that no. A few weeks ago BBVA Research published another report about the real estate sector pointed in a similar direction: “The profitability of Spanish companies is lower than the European average in the main activities of the economy, although the differences are particularly pressing in construction.”
Although in other sectors, such as hospitality, transportation or manufacturing, the ROE (return on equitythe profitability ratio most used by analysts) Spanish is lower than that of companies from countries such as Germany, France and Italy, this gap is especially pronounced when we talk about brick.
“In 2024 the ROE of building construction was 4.1%, about 12.5 percentage points (pp) less than that registered by the sector in the historical average of France and Germany,” explains BBVA Research. Added to this is that in 2024 the profit margin of this activity in Spain was 1.3 pp lower than in 2000-2003. “Investment does not increase, largely because it is not profitable,” they warned in November Miguel Cardoso and Félix Lores, from the analysis center.
And what is the reason? There are several. However, there is one that analysts frequently point out: the times that are managed in the sector, which lengthens promotions, slows down turnover and forces construction companies to bear the cost of high-cost land that only pays off in the long term.
“Although margins have recovered, companies take years to build, maintaining assets (land) that do not generate income on their balance sheet, the report states signed by Cardoso and Lores. “They have to finance their purchase with their own resources, which puts the sector at a disadvantage compared to others.”
Does it influence that much? Both experts warn that the procedures to be able to build on land are “long, expensive and often uncertain”, which has a direct impact on the financial costs borne by companies.
These complications also make certain promotions less attractive to investors and financial institutions that can turn on the credit tap. “The consequence is an accumulation of land on the balance sheets of companies that do not generate value. These are idle assets that immobilize resources and reduce debt capacity,” they add.
The National Construction Confederation (CNC) calculates that taxes, fees and urban planning charges usually represent about 30% of the sales price in new homes. This represents a handicap for both those who want to buy and those who sell and must decide the price and distribution of costs.
How does that affect the sector? The analysis by Daniel Fernández, professor at the University of the Hespérides, speaks directly of an “artificial scarcity of land” due to restrictions at the urban planning level, which directly contributes to the increase in land prices and, ultimately, to construction costs.
According to their calculations, in Spain only 2.1% of the land is available for short-term construction. 1.3% are in the medium term and 0.9% in the long term. The report also warns of the effect that the regulatory changes in recent years have had, especially since the revision of the Technical Code in 2020.
Are there more factors? Yes. It’s not just that companies are slow to take advantage of the land. If the profitability of the sector in Spain is below that of other European countries, it is because their companies, in a certain way, are also different. Cardoso and Lords remember “the reduced size and atomization of the Spanish productive fabric”, which explains why they also have more difficulties when it comes to supporting large immobilized assets. In short: companies are smaller, so they have less muscle and resilience.
Its characteristics also directly affect the ability to financial leveragethat is, going into debt to invest. According to their calculations (based on 2023 data) in Spain the value of sales does not reach 40% of assets, very far from the 80% it represents in other countries.
In your latest report BBVA Research warned that the sector’s financial leverage has evolved downwards in recent years and remains well below the 2000-2003 average and the average for Germany or France.
Does it all come down to debt and land? No. Factors such as production costs enter the equation, which may be affected by the Middle East conflict just as they already have. a few years ago for the war in Ukraine.
The brick sector is also not immune to inflation and its possible effect on the savings capacity and purchasing power of families. Internally, the construction sector also deals with another handicap, beyond the abundance of small and medium-sized companies less prepared to deal with a “low asset turnover”: the shortage of relief and qualified labor.
Images | Frames For Your Heart (Unsplash) and Mike Hafin (Unsplash)
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