By YOURI KEMP

Tribune Business

Reporter

ykemp@tribunemedia.net

THE Bahamian Contractors Association’s (BCA) president says “the chickens have come home to roost” with post COVID- 19 inflation presenting a “huge challenge” for banks in financing residential and commercial construction.

Leonard Sands told Tribune Business that banks and other commercial lenders have “never wanted to understand the dynamics with construction”, with fixed-sum mortgages and other secured forms of lending proving inadequate to cover costs in an environment where building materials prices have increased by an average 60 percent within months. As a result, many projects have stalled, often near completion of the work.

“If you had a contract in late or mid-2020, fixed price and the mortgage was $300,000, and you were doing that house throughout COVID-19, by 2021 prices rose by 60 percent. So a $300,000 contract went up by 60 percent. Let’s call that $35,000 to $40,000,” Mr Sands explained.

“What happens if contractors were not able to bridge that on their own? Many of the contracts, they collapsed. The collapse was short, and banks had nearly-completed projects that weren’t able to close out. Clients were unable to move in and/or in very, very unique situations, the bank extended them additional credit, which is not the bank policy.”

Estimating that this has affected 70 percent of construction projects, Mr Sands said that while some banks were “running away” from mortgage-backed construction projects, others have worked out how to be “creative” and jumped into the construction market despite the wide price fluctuations.

Mr Sands said: “There’s still money in construction finance because who can finance a house out of their pocket? If the banks decide to stop doing construction finance they will lose up to 50 percent of their business because, in The Bahamas, construction financing is most of the business. So if you decided you are going to lose 60 percent of your business, then go right ahead.”

The BCA chief said there needs to be more performance guarantee and insurance tools, such as performance bonds, which he added the BCA has been seeking for more than 30 years. But the “people in the system don’t want to have that conversation”.

Performance bonds, Mr Sands added, will help address project cost overruns including those driven by inflation and building materials price rises as has occurred post COVID-19.

He said: “The chickens have come home to roost because the banks never wanted to understand the dynamics with construction. They treat construction financing as this simple thing where people only want a few dollars to build a home. They don’t understand that external factors affect the fixed price.”

Because most of the Caribbean imports construction materials from the eastern US, if there are supply shortages there it will trickle down to the region. “But the time the ink dries on a contract, something can happen that could cause the price of materials to change,” Mr Sands said.