Germany's construction industry has had a glorious decade, but there is mounting evidence that the next couple of years will see a major slowdown in the sector. Although building never stopped as a result of COVID, in contrast to many neighbouring countries, growth this year will be negligible.
A new study produced by strategy consultancy EY Parthenon sees stagnation (+0.1%) in the current year followed by a recovery next year, but with much weaker growth overall. The main reasons cited are: falling rental yields, capacity bottlenecks, increasingly scarce building land, and the associated rise in construction costs.
In common with other European countries, Germany has been experiencing a dramatic shortage of building materials over recent weeks. Of the 800 companies surveyed by EY Parthenon, 43.9% reported in May that they were having real problems getting building materials - up from 23.9% in April. Prices are also rising rapidly.
The consultants are expecting total building volume of €253.2bn for new construction and renovation in 2022, up 1.4% on this year. For 2023 they are predicting a further price-adjusted rise of 1.5%. This is a far cry from the heady growth rates of earlier years, with growth rates of between 2.5% and 4.5% between 2016 and 2019.
In 2020 the most noticeable decline was in commercial property construction which fell by 3.5%, with renovation work on existing properties falling by 2.5%, although residential construction continued to rise. The main engine driving construction was the state, whose building volume contracted rose by 4.9%, unaffected by the COVID crisis.
The study's authors are assuming a steady above-average rise in construction prices overall for the next few years, exceeding the general rate of inflation. There will be higher costs for building materials, capacity bottlenecks and skilled labour shortage, and a higher burden of bureaucratic and political regulation, for example for accessibility or thermal insulation and energy efficiency.
Johannes Zuberer, partner at EY Parthenon, said the modest growth in the next couple of years was likely to come from refurbishments as against new projects. Growth should benefit from an increase in property sales and delayed refurbishments as well as the new demands imposed on buildings as part of Germany's climate change resolutions, he said.
Of real immediate concern to construction companies is the dramatic rise in the price of building materials, which REFIRE suspects may not be fully reflected in the EY Parthenon study. Klaus Dieter Müller, CEO of building association Fachgemeinschaft Bau, said last week, "Material prices are rising at a rapid pace and there are increasing supply bottlenecks and construction delays. We fear serious consequences from this explosive price development for the construction industry, along with standstill on construction sites, as we see no relief in sight over the coming months."
The biggest shortages are in steel, tiles, wood, plasterboard, insulation material and paints. "We're seeing situations where price increases of 20% have occurred within 24 hours," Müller said. "It is "almost impossible" to carry out larger building projects which use timber... In the area of insulation materials, nothing is available at all, while steel has delivery times of six, eight weeks."
Anecdotal evidence suggest wood is up to 20% more expensive, while reinforcing steel for concrete is 30% dearer. The price of mineral wool has gone up 15%, while delivery times have risen from seven days to as much as four months. Bitumen is 21% more expensive, Drywall profiles are up 100%, and plasterboard as much as 170%. Anything based on oil, including plastics, is affected by the 12-month rise in the price of a barrel from $20 a year ago to about $70 today.
There seem to be many reasons for the outbreak of material shortages and hefty price rises, but many DO seem to have their roots in the corona pandemic. As a result of COVID, manufacturers lowered their production and are now having difficulties supplying the trade. While shipping lines lowered capacities at the outbreak of the pandemic, there are now long delays in accessing containers. The USA and China are ramping up production faster than Europe, and securing supplies ahead of European customers. European wood, for example, is being sucked up by the US and China, and leading to higher prices. The ports in Hamburg and Bremerhaven are said to be full of German wood, waiting for exports. Even the recent blockage of the Suez Canal is having an effect on global supply chains.
With many of Germany's Länder now calling for restrictions on exports to support the domestic construction industry, the issue is going to be high on the agenda of June's meeting of the Länder's sixteen economic ministers.
