Profiting from the construction boom
For many years residential building in Germany was bobbing along at a low level. For the last two years, however, there has been an increase in people building and renovating – particularly in the agglomerated areas. There is a lot to indicate that this boom will continue, given that the completion figures, building permits and restoration rates are still well below what would be required even to maintain the current inventory.
From Sarah Sommer
Germany has rarely seen as much block-laying, insulating, digging, laying, installing and renovating as today. The country had hardly gotten over the worst of the financial crisis, and the construction industry began to grow at an astonishing rate. Order inventories climbed to the highest level since the reunification of the country, and in 2011 construction investment grew more strongly than any time since 1994. Initially, even experienced stakeholders in the sector could hardly believe their luck: such good sentiment in the property market could only be recalled by those construction companies that had been around for the steep but short building boom immediately after German reunification. After that, the construction industry spent more than twenty years being blamed for putting a brake on the Germany economy. It is, therefore, no surprise that, despite the rapid growth, the representative organisations of the construction sector remain cautious. They have pointed out that an unusually warm winter allowed building companies to begin work earlier than would usually have been the case. The growth, they say, is due mainly to catching-up effects following the economic crisis. But now it’s official: the building boom is continuing. “The positive trend is continuing, although not at the same pace as last year,” says Heiko Stiepelmann, deputy managing director of the German Construction Industry Federation. In the meantime, economic analysts in Germany now regard the construction sector as one of the last pillars of growth in an economy plagued by the Euro crisis.
PROFITING FROM THE CRISIS
And, in fact, it is not least of all the Euro crisis itself which is driving the construction boom. While many other sectors are suffering due to the uncertainty caused by the European debt crisis, and seeing their earnings plummet, the construction sector is actually profiting from the tense situation. This is because Germany’s stable economy is regarded as one of the few safe havens left in Europe, while many building owners and investors see real estate as one of the last remaining safe options to invest their money. “The fundamental macroeconomic conditions are continuing to provide support mainly for residential construction,” says Norbert Irsch, chief economic analyst at the German development bank KfW, one of the leading and most experienced development banks in the world. “The interest on bank loans is still low, the low level of unemployment and a generally positive labour market situation are leading to rising incomes, and, not least of all, in the context of the Euro crisis there is a major interest in investing money safely in domestic real estate.”
Construction companies, the construction materials industry, tradesmen, suppliers, service providers, architects and engineers are profiting from the fact that, due to the current low interest rates, many people are opting to invest their money in the construction or purchase of a home or in a new floor, a modern bathroom or a fashionable fitted kitchen rather than put it in the bank. After the continuous decline in real construction investment between 1994 and 2009, in 2010 it rose by more than two per cent, and in 2011 by almost six per cent. The number of building permits issued for new buildings rose sharply by almost 15 per cent, driven mainly by new residential construction, which rose by almost 21 per cent. For 2012 and 2013 the leading economic analysis institutes expect a further increase in construction investment and in turnover in the sector, the majority of which will be due to residential building.
The German Building Materials Federation (Bundesverband Baustoffe) expects that in the building materials, stone and earth sectors, particularly those companies involved in residential building will profit accordingly from the building boom. “We expect production to rise by at least two per cent,” says association’s president Artur Kissinger. “The improved economic situation is also allowing companies to pass on some of the cost increases for raw materials and energy to their customers.” Due to the Euro crisis and the current real estate boom, the construction sector has received the initial stimulus necessary to tackle the backlog in construction and renovation. “If we are talking about a building boom now, we must not forget that this boom is primarily a recovery and starting from an extremely low base,” says Kissinger. The completion figures in residential construction are in fact still lagging behind the actual residential building requirements. “In order to fully meet the demand, Germany would actually need 300,000 completions per year,” explains Kissinger. Despite the current upswing, the residential construction sector is still far from achieving this figure. According to the Federal Statistics Office, the completion figures had bottomed out in 2009 with 159,000 home completions. By 2011 they had bounced back to some extent with around 180,000 home completions. “We expect that this year 200,000 homes will be completed, with an increase of another 15,000 in 2013,” says Kissinger.
BOOM IN THE METROPOLISES
This is reflected in the fact that the number of building permits granted is continuously rising. However, there are large regional differences. It is mainly the four large, economically powerful agglomeration regions that are attracting investors. At 52 per cent, the growth in building permits for Berlin, Hamburg, Frankfurt and Munich was almost twice that of the market as a whole. Real estate prices in these centres are reaching ever new highs. In rural areas, however, which do not lie within the affluent suburbs of the large metropolises, residential building is stagnant. In view of the enormous price fluctuations, some observers are already talking about a property bubble. “Trends like this quickly bring back bad memories – after all, the global financial crisis began with turbulence on the American property market in 2008, plunging Ireland and Spain into recession when the over-inflated price bubble finally burst,” says Michael Hüther, director of the German Economics Institute (IW). We can only really speak of a bubble, however, if the current high prices were based solely on the speculations of investors betting on a higher resale price in the future and thus fanning the flames of demand. This is not the case in Germany. In fact, the demand for apartments and houses in the boom regions actually exceeds the supply, because too few apartments are being completed.
The building boom in Germany is, therefore, not just a flash in the pan. “The general need to catch up on the backlog in residential construction is so large that the demand for new houses will continue to rise in the long term,” asserts association’s president Kissinger. “For a long time the politicians have been using the declining population and the movement of people away from some rural, economically weak regions as an excuse not to provide funding for residential building,” he says. But despite the decline in population, the demand for housing is rising. “On the one hand, the number of workers coming from abroad has been higher than expected,” explains Kissinger. “And, on the other hand, we have far more single households than used to be the case. The number of households and the size of the living areas per capita are increasing.” This means that there will have to be a lot more building in the coming years, particularly in the agglomerated areas. The construction sector is already preparing itself for this growth phase and extending its production capacities. The number of employees working in natural stone production and processing companies rose by around four per cent in 2011.
But it is not only new building that will create a lot of new business. Three quarters of the construction volume in Germany is accounted for by work on existing buildings, i.e. repair and renovation orders. Some people are also hoping, in particular, that the state-subsidised energy-efficiency upgrading of homes will also boost growth. “If the German government is to meet its climate targets, around 25 million residential units will have to be upgraded,” says Kissinger. Around 800 billion Euro of investment will be required up to the year 2050. “The construction materials share of the investments would probably be around two billion Euro per year,” says the association’s president.
Studies carried out by the German Natural Stone Federation (DNV) show that natural stone facades are ideal for the energy-efficiency upgrading of buildings. In addition to this, the use of natural stone enhances the value of a property and could therefore be the material of choice for many restoration projects, according to DNV managing director Reiner Krug. This is certainly one of the reasons why in recent years natural stone has gained significant market share compared with other floor covering and façade materials.
But the industry must not be under any illusions, according to Kissinger. “The restoration potential will not be fully harnessed by any means.” Almost half of the 37 million inhabited apartments in Germany are occupied by the owners themselves. “Many of these cannot afford to have the desired renovations carried out.” The restoration rate in Germany today is just over one per cent. So there is plenty of room for an increase. “Although funding will continue to be available in the future, the criteria for the receipt of such funding are very strict,” says Ludwig Dorfmeister, property market expert at the ifo economic research institute. “Many home owners would rather carry out partial restorations now. Building will remain expensive in Germany. The price-benefits ratio is a decisive criterion for the choice of building materials. High-quality, durable materials have every chance in this situation.”