27. June 2022
Do people interested in buying an apartment need to worry about rising prices? In the last weeks and months, majority of leading developers have already announced that they will be adding inflation clauses to their client contracts. At Penta Real Estate Slovakia, as one of the last developers, we did not add inflation clauses to their client contracts. We consider it a fair approach to their clients to state the final price of the property in the contract.
Due to unstoppable price rise of materials and construction work, many developers are trying to insure themselves with inflation clauses. If such clause is agreed in client contracts, it allows the developer to additionally increase the price of the purchased apartment by their rising costs, or inflation. At the current inflation rate, the increase under the inflation clause can easily exceed 10%. This leaves the client with no certainty that the final price of the apartment will remain as stated in the contract. For example, as a result of an inflation clause, it can happen that the client will end up paying 30,000 Euros more for a three-bedroom apartment in Bratislava. In case the buyer is not able to pay the difference from their own resources, they are left with two options. They can either apply for a mortgage approval for the new amount and a new interest rate or they can apply for a consumer loan with a higher interest burden. This puts the client into a great risk as the final property price, in the event of unpredictable market development, becomes literally unknown.
“The price is often the decisive factor when buying a real estate property. The uncertainty of the final apartment price can discourage clients from buying all types of real estate properties, not just those intended for investment. A significant price increase can also pose a huge risk and uncertainty for clients who are looking for bigger, family apartments,” says Alexandra Grič, the Sales Director at Penta Real Estate Slovakia.
Clients who buy an apartment as their primary residence count on a certain income when financing a real estate property. With a significant increase in the final price, they may not be able to pay for the property in the end. For investment clients, such project can easily lose its profitability and sense.
“The absence of the inflation clause in contracts is currently an exception on the real estate market,” explains Michal Rehák, the Business Development Director for residential projects at Penta Real Estate Slovakia. “By including the inflation clauses in Futures Contract, the business risk is being transferred on to the client which we do not perceive as a fair approach. An experienced developer should be able to reflect the development of input costs in the apartment prices when setting a sales strategy. For these reasons, our clients will not find the inflation clauses in our contracts.” Michal Rehák concludes that this is also one of the important factors when choosing a real estate property from the Penta Real Estate Slovakia project portfolio.