September 14, 2023 9:24 am

Germany’s construction industry downturn is a harbinger for broader distress to come

German construction companies are crumpling under the combined pressures of persistently high interest rates, strong increases in construction costs, skilled labour shortages and escalating withdrawal of lenders willing to refinance or extend new loans. At the same time, a precipitous slump in buyer demand has driven caused residential property prices to fall leading to the sharpest decline in construction activity since 2011, according to Federal Statistical Office of Germany data. Apartments building permits plummeted 27% during H1 2023, compared to the same period last year. The data paints an “extremely gloomy picture in housing construction”, according to Tim-Oliver Müller, head of the German Construction Industry Federation. “An improvement is not in sight.” The decline in building permits is a worrying sign for the German economy.


The construction sector is a major driver of Germany’s economic growth, and a sustained decline in activity risks dragging the economy into a recession. The economy is concurrently struggling from depressed manufacturing export demand, as firms adapt to the absence of cheap Russian gas. German business activity suffered the steepest decline for more than three years in August, according to latest S&P Global PMI survey, as a deepening downturn in manufacturing output was accompanied by a renewed contraction in services activity, as persistent inflation continues to bite. All told, the data suggest the German economy will contract again in the third quarter.


Hat-trick of insolvencies

Three German construction companies – Development Partner, Project Immobilien and Euroboden – all filed for bankruptcy in early August, amid growing signs that the interest rate-sensitive industry has entered a major downturn. First, Development Partner, primarily active in the office market, filed for insolvency at the District Court of Düsseldorf on 4 August. SGP Schneider, the commercial law firm Geiwitz, acting as provisional trustee over Development Partner described demand as having “come to a standstill in almost all project areas” while there was an “enormous reluctance of financiers to grant loans” as valuations slump. The developer is responsible for projects in Cologne at Rudolfplatz, the IBM campus in Ehningen near Stuttgart, the Elements project in Berlin, and on Uerdinger Straße in Düsseldorf. Second, Project Immobilien Group, which manages around 60 real estate projects across Germany, filed for bankruptcy on 14 August in Bamberg. Schultze & Braun, the law firm acting as provisional insolvency administrators over Project Immobilien Group and related entities, said the firm’s insolvency stemmed from “the enormous increase in construction costs as a result of the Ukraine war”, adding: “It was not possible to pass on these cost increases to the customers.” Project Real Estate Group, a subsidiary insolvent entity, currently manages 118 projects across residential, commercial, land sale and existing properties, including residential buildings with 1,852 apartments under construction. The group’s construction projects are spread over Germany. The focus is on Berlin and Potsdam, Hamburg, Düsseldorf, the Rhine-Main area, the greater Munich area and the greater Nuremberg area.


Third, Munich-based high-end residential property developer Euroboden GmbH said in a statement on August 11 it had filed an application with the District Court of Munich to open preliminary insolvency proceedings due to a deterioration in the company’s financial and liquidity planning and sales outlook. As a result, Euroboden is unable to fully meet future interest and repayment obligations. It has €115 million in outstanding bonds and faces credit rating possible downgrades, Reuters reports, while an emergency sale of several plots of land fell through, preventing an escape from insolvency. Bondholders are braced for significant losses.


Trouble ahead

These August construction bankruptcies may prove to be the canary in the coalmine for a wider reckoning across the German and European construction sector, which has implications for the outlook for commercial real estate. There is a potential for spiralling defaults in the German construction sector. As the cost of building projects continues to rise and demand for new homes slows, some developers and builders may find themselves unable to repay their debts. This could lead to a wave of bankruptcies and job losses in the sector. Germany is both Europe’s largest economy and biggest real estate investment market on the Continent. The property sector accounts for roughly a fifth of Germany’s economic output and one in 10 jobs.


In early August, Vonovia, Germany’s largest real estate group, wrote down the value of its properties by €6.4 billion in H1, attributed to a rapidly subdued transactional activity due to higher building cost inflation and interest rates in the context of more limited and expensive financing. The backdrop has widened the gap between buyers and sellers price expectations, creating a negative feedback loop of ever decreasing transactional activity.


German real estate developers are sitting on a large land stock that cannot be developed under the current market conditions. “This situation then – without further income – leads to liquidity bottlenecks and, in the worst case, to insolvency in the foreseeable future, and in this respect we are only just seeing the tip of the iceberg,” explains Sebastian H. Lohmer, a fund expert and advisor to institutional investors in Unternehmeredition. “The prices that can be achieved for the plots will be much lower, if buyers can be found for them at all. The damage is borne by the developers and especially their financiers.”


There are also growing delays to planned development schemes across Germany. Almost one-quarter (23%) of all space will be completed at least six months than the originally planned date, according to Development Monitor which tracks 4,641 projects across Berlin, Hamburg, Munich, Frankfurt, Stuttgart, Cologne and Düsseldorf. A further 12% of space was postponed. The slowdown varies between sectors, with most delays in office development projects, as it remains “very difficult for developers to calculate and the economic viability of [office] projects,” while fewest delays in logistics schemes as “developers assume that demand will remain high in the future,” according to Development Monitor.


The German government is cognisant of the problems facing the country’s construction sector and is considering measures to support the industry, including providing financial assistance to developers, builders and homeowners, as well as easing regulations on construction projects.


On September 25, Germany’s housing summit provides an opportunity for the federal government to address industry challenges alongside State and local government. Germany’s construction trade association has lobbied branches of the government to introduce:


  • an expansion of KfW’s interest rate reduction program (a government-backed initiative to stimulate homeowners to invest in their homes by offering reduced interest rates on loans for energy-efficient improvements)
  • improvement in depreciation allowances
  • reduction in the real estate transfer tax
  • an investment allowance for public housing companies; and
  • the suspension of the EH40 standard for public funding programs.


Market participants are waiting to see the outcomes from the closely-watched meeting. It is too early to say whether the German construction sector will be able to weather the current storm. The headwinds facing the sector are significant and may yet trigger a wave of insolvencies and defaults across the German economy and beyond. The outlook for the eurozone’s largest economy has revived an unwelcome decades-old moniker, that German is once again on track to becoming the sick man of Europe.

This post was written by Timur Peters

Timur Peters is the founder of Debitos GmbH. He holds a diploma in finance and law. He has more than 10 years’ experience in the range of finance.
Before Founding Debitos Timur Peters was responsible in the distribution of Software for Banks and Financial Institutions for Comarch for the D/A/CH Region. Next to this he has worked for several years as a self employed Project Consultant in the area of Financing of Litigation cases, Peer2-Peer Credit Marketplaces and other online projects for financial institutions.


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