German builders warn of crisis as they scrap record number of projects

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Cancelled building projects and financial distress among landlords and builders in Germany have hit their highest levels since reunification three decades ago, intensifying the construction crisis in the EU’s biggest economy.

Hit by rising interest rates, soaring costs and weaker demand, 20.7 per cent of construction companies said they had been forced to scrap a project in August, up from 18.9 per cent in the previous month, according to a survey of 500 businesses by researchers at the Ifo Institute in Munich.

“The probability increases month by month that more and more firms will go out of business,” said Klaus Wohlrabe, head of surveys at Ifo, a think-tank, warning that almost 12 per cent of residential construction companies were reporting financing difficulties — the highest level since its survey started 32 years ago.

The proportion of construction companies reporting a lack of new orders also rose to 44.2 per cent in August, up from 40.3 per cent in the previous month and 13.8 per cent a year ago.

Wohlrabe said the crisis was particularly severe among mostly smaller construction companies that focus only on housebuilding. “Some businesses are already struggling to keep their heads above water,” he added. “Fortunately, many firms also cover other aspects in construction — roads, commercial construction. This allows firms to diversify in some way.”

Soaring borrowing costs, following an unprecedented rise in the European Central Bank’s policy rates in the past year, have suppressed demand for new mortgages and reduced house prices.

At the same time, inflation has sharply raised the cost of building new homes. German construction costs are 38.5 per cent higher than before the pandemic hit in early 2020. Ifo said tougher energy efficiency regulations had also reduced government subsidies for builders.

Several German developers have filed for insolvency in the past few weeks, among them three Düsseldorf-based commercial real estate groups Gerch, Centrum Group and Development Partner, as well as Euroboden of Munich and Project Immobilien Gruppe of Nuremberg, which build both residential and commercial property.

Big landlords such as Vonovia and Aroundtown have announced big writedowns of their property portfolios.

Coupled with higher borrowing costs and weaker growth — the German economy is widely expected to shrink this year — this led to a sharp drop in new building permits in the country, which plunged 34 per cent in the second quarter from a year earlier.

While the issuance of new permits has declined throughout the wider eurozone, Germany has witnessed a speedier drop.

German construction companies’ overall output remained flat in July from a year earlier.

A survey of purchasing managers in the sector by S&P Global, published last week, suggested a rebound in civil engineering activity was compensating for the biggest slump in German housebuilding activity for more than 13 years.

Wohlrabe said: “Many firms live on the current stock of orders acquired before the rise in interest rates.” He warned a majority of German building companies expected further declines in new business in the next six months.

Last year only 295,300 dwellings were built in Germany, well short of the government’s target to build 400,000 homes a year. Industry executives expect the numbers for this year and next to be even lower — bad news in a country that is facing a shortage of 700,000 homes, according to the German Property Federation.