By Joan Feliz Valoys
Special for El Inmobiliario
The construction sector in the Dominican Republic has experienced sustained growth in recent decades, driven by housing demand, tourism development, and a surge in foreign investment in real estate. However, this growth has been accompanied by economic and financial challenges, particularly regarding the volatility of construction material prices.
One of the mechanisms that construction companies have implemented to mitigate these risks is the indexation clause in real estate purchase agreements. While this practice aims to guarantee the viability of projects, its incorrect or opaque application can generate distrust among buyers, affect the credibility of developers, and ultimately impact the real estate market.
A sector in constant evolution and inflationary pressure
The Dominican Republic has maintained solid economic growth in recent years, with GDP expanding by 4.9% in 2023, according to the Central Bank. The construction sector, in particular, has been a key pillar, representing approximately 10% of GDP and generating thousands of direct and indirect jobs.
However, this growth has not been without its challenges. Global inflation, rising shipping costs, and supply chain disruptions have led to a significant increase in construction material prices. According to the National Statistics Office (NSO), the Direct Housing Construction Cost Index (DHCCI) has shown a cumulative increase of 28.7% between 2020 and 2023.
Some of the most affected materials have been:
Cement: Increase of 35% in the last three years.
Steel: Increase of more than 50% between 2021 and 2023.
Wood and wood products: Price increases exceeding 40%, due to scarcity and speculation.
Aluminum and glass: Impacted by the global energy crisis, with increases of more than 30%.
Faced with this situation, construction companies have resorted to indexation clauses as a strategy to protect themselves from these unexpected increases.
What is an indexation clause and how does it work in the Dominican Republic?
An indexation clause is a contractual provision that allows the final price of a property to be adjusted based on increases in the cost of construction materials. In theory, its application aims to prevent the construction company from incurring losses due to unpredictable increases in key inputs.
In the Dominican Republic, these types of clauses have become common in pre-sale real estate projects, especially in residential tower developments, tourism projects, and growing urbanizations. However, their implementation is not always entirely transparent, which has generated controversy among buyers and industry stakeholders.
Risks of improper application
While indexation can be a legitimate adjustment mechanism, its misuse can undermine market confidence. Some of the main risks are:
1. Lack of clarity in contracts: Often, the clauses are not detailed precisely, leaving room for subjective interpretations and surprises for the buyer.
2. Lack of reference to reliable indices: In some cases, indexation is based on internal criteria of the construction company, instead of official indicators such as the Construction Cost Index (ICDV) or the Consumer Price Index (CPI).
3. Disproportionate increases: Without established limits, indexation can result in excessive increases that make housing much more expensive than expected.
4. Loss of credibility: If buyers perceive that the clause is used to justify arbitrary price increases, the developer's reputation may be affected and interest in future projects may decrease.
Good practices for fair and transparent enforcement
For indexation clauses to be perceived as a legitimate mechanism and not an abusive practice, construction companies must adopt an approach based on transparency and fairness. Some key recommendations include:
Clear explanation from the first contact: Indexing should not be a surprise. The buyer should be informed from the first meeting and how it works explained in detail.
Linkage with reliable indicators: It is recommended that adjustments be based on data from the Central Bank, the National Statistics Office or associations in the construction sector.
