Economic View

On current building trends and foreign participation

What are the main forces driving construction growth in Colombia?

DIEGO PRADA: In recent years, the housing deficit has been progressively reduced as a direct result of policies promoted by the former administration. Yet, despite demographic shifts and changing trends in family planning – with people choosing to have smaller families – the deficit stands at between 800,000 and 1m units. 

Demand will remain strong at the low end of the spectrum as long as the government continues to incentivise home ownership through social programmes – such as Mi Casa Ya (My House Now) and providing subsidies on interest rates – and commercial banks maintain relatively attractive mortgages rates. Conversely, demand at the higher end of the spectrum has been depleting in the last few years, and is expected to remain stagnant for the time being. The same applies to office space, as we wait for the market to absorb the oversupply that resulted from the construction boom of recent years. 

Beyond housing demand, another force driving growth is government policy. Recently, there have been a number of reforms based on Colombia’s chronic lack of social infrastructure, such as hospitals, educational establishments, penitentiaries and so on. Likewise, the government budget for 2019 puts a strong emphasis on education and health, supporting our belief that these segments will remain a driver of building activity for the coming years. 

Growing consumer confidence and spending have prompted the construction of a number of shopping malls as well, both in major and intermediary cities – a trend that should continue in the short term. The construction of industrial areas has also been propelled by a more conducive business environment. 

How attractive is the local construction sector for foreign investors?

PRADA: Colombia’s construction sector is dominated by nearly 30 skilled and well-equipped companies that control over 80% of the market. Entry barriers are high, with stringent labour laws, high fiscal requirements and an opaque regulatory environment. Acquiring construction permits and navigating the bureaucratic process require in-depth knowledge of the system and a strong corporate structure, which is prohibitive for many firms. 

Moreover, as banks become more rigid with their lending policies, securing local funding can be challenging without a proven in-country track record. Building in Colombia is cheap and margins remain low, with most companies operating on strict cost structures and margins of 10-15%, while others come away with less. When put in dollar terms, even the most ambitious projects in Colombia would be considered small for companies operating in more developed countries, rarely justifying the investment in a foreign corporate structure.

Indeed, this has put strain on the industry’s ability to weather the recent economic downturn, leaving only those that have a diversified portfolio of projects and strong capital buffers standing. 
Therefore, while a call for tenders does not arouse much interest among foreign players, those seeking to participate in Colombia’s construction industry have begun investing in the equity of local firms. 

Increased regulatory oversight of the financial sector and added caution by local banks have created room for foreign investment targeting specific projects or sectors. International institutional investors or private funds have thus begun eyeing the sector, expecting a comfortable return of approximately 6% per year. While the industry presents more challenges than opportunities when it comes to greenfield investments, it offers hefty returns when partnering with local players. 

To what extent have construction methods been evolving?

PRADA: While the use of technology and new construction methods have had a strong impact on the public works and infrastructure segment, the industry remains traditional on the real estate side. The high availability of local labour and low associated costs make the use of technology less of a priority than in most developed markets. 

However, the use of sustainable building techniques has been blossoming in recent years. Virtually all new major projects adhere to sustainable construction methods, as companies increasingly seek certifications and quality assurance. In this context, Colombian law is one of the most conducive in the region, with recent reforms providing tax breaks and incentives for the construction of sustainable infrastructure. In turn, we are seeing this technology – which was previously used primarily for high-end projects – being utilised in social housing programmes across the country.