No end to the crisis in the German construction industry
The German construction industry is in the midst of a profound crisis. The significant decline in construction activity, rising material costs, supply bottlenecks, a shortage of skilled labour and bureaucratic hurdles are presenting numerous companies with challenges that threaten their very existence. "We expect insolvencies in the construction industry to rise by between 10 and 15 per cent this year compared to the previous year," says Michael Karrenberg, Regional Director Risk Services Germany, Central and East Europe at the international credit insurer Atradius.
The negative sentiment in the construction industry is primarily being driven by the current situation in residential construction, but also in commercial building construction - particularly due to the lack of new orders, a shortage of labour, higher prices and financing costs as well as an increased risk of default by property developers and project developers. In 2023, the number of insolvencies in the construction industry rose by around 21 per cent year-on-year to 2,900 business failures. This exceeded the pre-coronavirus level by a mid-single-digit percentage - in 2019, the number of insolvencies in the construction industry was 2,770. "Existing order backlogs were processed in 2023 and there is a lack of new orders," says Michael Karrenberg. Companies in the small and medium-sized segment are currently the hardest hit, as they have fewer financial resources.
To make matters worse, the German government's ambitious goal of combating the housing shortage by building 400,000 new homes every year is far from being achieved. According to previous figures, only around 245,000 homes were completed last year. "This is unlikely to change much this year or next. I fear that the wave of bankruptcies will only really materialise this year," predicts Michael Karrenberg. After all, downstream sectors such as building materials dealers, kitchen builders, tradespeople and sanitary system manufacturers will also suffer from the falling demand with a certain time lag.
Major challenges in commercial construction.
In addition to residential construction, commercial construction, i.e. the production of buildings for industry and commerce, is currently problematic. "In view of rising costs, projects can often no longer be completed profitably," says Michael Karrenberg. The crisis is particularly affecting project developers who bought and marketed properties during the low interest rate policy and developed one project after another without paying attention to profitability. Against this backdrop, project developers who have not built up sufficient financial substance are particularly affected by the shakeout in the sector.
Positive outlook for the sector despite problems.
In view of the continuing and even increasing demand for housing, the expansion of the energy infrastructure and the mobility transition, the outlook for the construction industry remains positive despite the current negative dip. "We need a functioning and well-positioned construction industry for the future," says Michael Karrenberg, adding: "The current market shakeout is not healthy." Ultimately, the industry is losing numerous companies that are actually needed in the medium and long term due to the existing challenges.
In order to make the industry fit for the future, it therefore needs support from politicians as well as the companies' own responsibility. The government has already introduced measures such as better depreciation options (declining balance depreciation) for residential construction, raising the income limit for home ownership subsidies for families from 60,000 to 90,000 euros per year, a multi-million euro subsidy programme for climate-friendly new builds and a subsidy programme from the Kreditanstalt für Wiederaufbau (KfW) for the conversion of vacant commercial properties into residential space. However, Atradius believes that further measures are necessary, such as a comprehensive interest rate programme for affordable housing construction, faster approvals or the promotion of serial, modular construction. In the latter, building parts or modules that can be produced several times are prefabricated in whole or in part in a factory, as in a car factory, and then assembled on site. This saves time and costs. Michael Karrenberg: "In the midst of this crisis lies an opportunity for reinvention and adaptation, which is defined not only by overcoming current hurdles, but also by embracing digital transformation and sustainable construction methods."
