Half-finished shells of would-be homes have become a regular sight across the country. More than 1,000 companies involved in real estate activities have collapsed since 2022 as part of the fallout from surging construction costs and the rapid interest-rate hikes undertaken by central banks.
While those dynamics are widespread, the impact in Germany has been particularly severe because of the amount of capital that was invested in a market long considered one of the safest in Europe. Yield-hungry pension funds and major landlords piled in to finance developments and purchase residential portfolios, driving up housing prices. Ambitious acquisitions at high prices were fuelled by plentiful cheap debt from both bond markets and banks.
Unlike most other European countries, German developments could be undertaken with “little or (almost) no equity,” according to a presentation from PwC. This high leverage meant they were particularly vulnerable when construction costs surged and financing dried up.
Stalled building sites are a totem of the difficulties faced by Germany’s government to promote new construction in a market that’s not keeping up with demand. Deutsche Bank economists forecast that just 260,000 units will be completed in 2024 and 265,000 in 2025. Ripple effects are also showing up in associated industries, from furniture makers to chemicals producers.
Smaller construction firms will be hit especially hard by the recent drop in new orders, according to René Hagemann, deputy managing director of German construction association HDB, noting that decreasing interest rates alone will not be enough to revive the sector.
