Even as the German construction industry managed to survive the COVID pandemic relatively unscatheed (in fact, astonishingly well, in REFIRE's opinion), the evidence is mounting of the huge difficulties now being faced by project developers across Germany in pushing ahead with new-build projects.
In housing development, countless projects are now being put on ice, or outright cancelled. The combined effects of the war in Ukraine, the ongoing pandemic, soaring energy prices and bottlenecks in numerous supply chains, including a shortage of skilled labour, are effectively making it impossible for developers to fulfill their commitments - let alone take on new projects. There has been a savage deterioration in overall conditions within the space of the last two months, forcing many developers to radically revise their plans for this year and beyond.
A survey carried out by national housing association GdW in April among 174 of its members involved in social or affordable housing returned very sobering results. Nearly two-thirds (64%) have had to put new construction projects on hold, while a quarter (24%) have been forced to completely abandon the planned construction of new apartment buildings. More than two-thirds (67%) have had to put climate-friendly and age-appropriate conversion of their apartment holdings on hold, with 13% giving it up altogether.
The surge in costs for construction and heavy burden of new energy-efficient products and materials immediately effect 58,000 apartments under construction, about 92,000 housing units undergoing age-appropriate and climate-friendly modernisation, and ongoing maintenance in more than 1.5 million apartment units belonging to socially-oriented housing developers.
GdW's CEO Axel Gedaschko commented: "It's become absolutely impossible for housing companies to calculate - and that's not just because of the global crisis situations arising from Corona and the war in Ukraine. Many of these problems are home-made."
From other sources, too, word is reaching us of a radically changed environment. A survey carried out by Stiftung Familienunternehmen, a foundation for family enterprises, showed that 46% of its members were planning to reduce their investments. In a letter to the federal government from the presidents of the Association of German Construction Industry (HDB) and the German Asphalt Association (DAV), they wrote, "A triage in construction, of projects, has already begun."
A survey by the HDB of its members showed that, of 328 companies, 29% are affected by order cancellations, and 80% by delivery bottlenecks. This was significantly worse than in an earlier survey in March, the previous month.
Even before the Russian invasion of Ukraine, building projects were rapidly escalating in price, particularly commercial properties, which had risen by 10-15% over the previous year. Construction timber had risen throughout 2021 by 61% over the previous year, as had structural steel, which has a current price of €2,000 per tonne, as against €650 per tonne two years ago.
In housing construction, where demand nationwide is still high in anticipation of even higher interest rates coming down the pike, in addition to other materials the cost of roofing tiles has risen by up to 40% this year alone, according to the German Roofers Association (ZVDH) in Cologne. Tiles are very energy-intensive, as they have to be heated to 1000 degrees Centigrade or more, and are subject to much higher energy costs, with particular dependence on Russian gas.
While last year other critical building materials had risen by 12% on average, this year alone has seen producer price rises of 85% for reinforcing steel mesh, for bitumen for waterproofing of 69%, construction timber of 57%, and for flat glass, copper, insulation boards and plastic pipes of between 28% and 46%.
A further problem is emerging as a result of a court decision in North Rhine Westphalia, Germany's most populous state, and a big local producer of gravel. Gravel is a key ingredient in concrete, but the raw material is scarce and its extraction is ecologically controversial. Now North Rhine-Westphalia's highest court has blocked the further expansion of gravel and sand extraction from quarries, saying a stipulation in the State's Land Development Plan of 2019 was invalid. The interests of environmental protection and agriculture groups were not being sufficiently consider, the court decided. This could have a serious effect on materials supply for housebuilding, several interest groups have protested.
Felix Pakleppa, the head of the ZDB German Construction Industry Association, whom we find ourselves citing now on a regular basis, commented: "It cannot be that we are dependent on imported building materials when we have large quantities of mineral building materials in our own country." Along with the housing industry, he has been calling for more gravel, sand and gypsum to be extracted in Germany itself, which has an abundance of the materials, and which are not subject to great price fluctuations.
Listed companies withdraw guidance, reschedule bond payments
Early this month the SDAX-listed housing developer Instone shocked the markets when it was forced to completely withdraw its forecasts for 2022, and said it was not in a position to offer any new guidance. The stock price promptly fell by 40%. Instone is widely considered to be one of the most professional project developers in Germany, with a broad programme of building, including a good proportion of 'affordable housing'. Its stock price generally merited a premium versus its competitors. That has just got wiped out, as a public company. Its competitors may not even fare that well.
Instone CEO Kruno Crepulja blamed material shortages, increased construction costs and interest rates that "affected the affordability of the Instone product for individual buyer groups". Instone feels "financially well cushioned", Crepulja said, but some competitors could come "under pressure". That's already beginning to sound like a major understatement.
Meanwhile, Düsseldorf-headquartered LEG Immobilien likewise withdrew its highly-publicised expansion plans to boost its target of new-builds from 500 to 1,000 units annually as part of its 'social commitment'. Those plans have now been scotched for the foreseeable future, thanks to - as CEO Lars von Lackum put it - "higher construction and financing costs and a lack of reliability about federal funding programmes." He added: "New construction is part of LEG's overall social commitment, but it's not our core business."
Another company facing difficulties with its project planning is Terragon, a market leader in developing houses for senior living. Chairman Michael Held was forced to ask his bond creditors to defer an interest payment coming up shortly due to an "unforeseen liquidity bottleneck" of €6.5m due to "several cumulative problems with some large projects". In other words, delays as well as massively increased raw material and construction costs, which were leading to banks demanding increased equity into the projects.
Peter Axmann, the head of real estate lending at Hamburg Commercial Bank (HCOB) and a genuine veteran of the German property lending scene, said in a recent interview with business daily Handelsblatt that these cumulative problems, plus the recent interest rate rise of at least 1% in the last two months, were putting lots of business plans under real pressure.
He pointed to surveys showing that about 70% of developers expect price increases across the board of 20% or more, with nearly half expecting rises of up to 30%. "Assuming that the total costs of a project development are divided roughly equally between land and construction costs, a calculated profit of 15% on average is already tight. In addition, there is the risk of construction delays due to procurement bottlenecks and labour shortages," he said.
The effect of the higher interest rates are still moderate, he said, but in view of the "ultra-low starting level, they already mean an increase in financing costs of 30% to 40%. And almost all experts expect a further increase in the coming months. As a result, we are observing that around 30% of project developments in the planning stage have already been postponed, or in some cases even put on hold completely, because they no longer make economic sense.
"If the current development of construction prices and interest rates continues, unfortunately we will have to expect insolvencies in the project development sector."
How are other banks reacting to all this? Markus Kreuter, managing director of financing platform Zinsbaustein.de, says the banks have become much more selective and are now looking for a lot more security, particularly for new project developments. Their loan-to-costs now have to sink, while developers have to bring 5-10% more equity into a deal, in addition to often subjecting themselves to much tighter controls, often from third parties, and higher cost buffers. "If in the past between 10% and 15% of the construction costs had to be kept in reserve, now it is frequently 20-30%", said Kreuter.
Developers are doing their best to comply with the banks' more stringent requirements, but can't always do it with hard cash. Instead they may try to get the bank to agree to 'softer' solutions, such as raising the pre-letting ratio from 30% to 40%. So far many banks have been taking an understanding approach to the industry problems, but it's not clear how long they will be prepared to be so open to compromise.
With demand for housing still very strong, less new construction means, of course, greater focus on existing properties. Jürgen Michael Schick, president of the German Property Association (IVD), says this is likely to mean a further rise of house prices in this year of 6-7%, before being held back in the next two years as likely interest rate rises scare off investors. Along with - hopefully - a recovery in the construction sector, critical to adding new supply.
