Flats and roads drive the German construction market
Despite a deteriorating macroeconomic environment, the construction industry has been a key driver of Germany’s economic growth in 2016. Compared to Spain, France and Italy, the economic confidence of the German construction industry is exceptionally strong. The main factors behind the growth of the German market include a particularly strong demand for housing and a rising number of public projects. The German construction market is expected to grow by over 3% in 2016 according to projections from the German Construction Industry Federation (HDB).
Thanks to a relatively mild winter and construction companies’ order books at their 20-year highs, in Q1 2016, German construction companies (those employing 20 or more staff) booked nominal revenue growth of 4.9% year on year. The residential construction segment’s revenue rose by a whopping 12.6% year on year. The public construction segment registered a 2.7% increase relative to Q1 2015. In turn, the private construction segment expanded by 1.8% compared to the same period last year.
Germany has experienced positive growth in terms of the number of housing completions since 2009. After the weak years of 2008-2011 when the total number of flats completed remained significantly below the 200,000 mark, the following years saw marked improvement in this respect. There were 247,700 housing units completed in Germany in 2015, up 1% compared to 2014, according to data compiled by the Federal Statistical Office of Germany. This is was the highest figure since 2006 when 249,400 flats were delivered for use. Moreover, HDB predicts that the number of housing completions will increase to around 290,000 in 2016, while the segment’s revenue is expected to rise by ca. 5% year on year to €38.4bn. Although it will be an 80% increase from the weakest year of 2010, this will still not be enough to satisfy the current housing demand in Germany, especially in the larger cities where the stock of affordable housing is limited. The estimated number of flats that the German market needs annually to meet its housing needs is 400,000. The substantial demand is underpinned by record-low interest rates, growing employment, the continued internal migration to large cities and a significant influx of immigrants from North Africa and Middle Eastern countries.
Germans, who for the past several dozen years willingly lived in rental flats and put their savings into bank accounts, have been observed to change their habits recently – in view of exceptionally low interest rates on deposits and mortgage loans, as they tend to invest in real estate. Last year, the value of new mortgage loans rose by 22% year on year. Notably, it was the strongest growth in 13 years. The boom seen in the mortgage loan market translates into robust housing price increases in the major cities. Housing prices in Berlin, Hamburg, Stuttgart, Frankfurt or Munich soared by up to 20% over the last year, while the last five years saw increases in the range of several dozen percent in these cities, widely surpassing the growth of people’s incomes. Despite a marked upturn in Germany’s housing market, the monetary policies pursued by the European Central Bank raise concerns of numerous German economists, who argue that the adopted approach can result in overheating the German real estate market and the speculative economic bubble bursting.
The recovery of the German real estate market is also largely affected by immigrants. There were over 1 million immigrants who crossed the German border last year. Such a massive influx of migrants will result in a rapid increase in housing demand by at least 100,000 flats a year.
The number of homes for which building permits were issued in 2015 totalled 313,300 units. This was the highest figure in 15 years. Moreover, the number of permits continued to grow in the first four months of 2016. Permits for over 117,000 flats were issued in January-April 2016, up by 31% over the same period last year. However, as far as the Q1 2016 index of unfilled orders in the residential construction segment is concerned, construction companies operating in Germany reported an increase of nearly 23% compared to Q1 2015.
Taking these factors into account, a positive economic situation in the German housing market is expected to continue both this year and in 2017. Not only German contractors are looking to take advantage of the exceptional situation in the German housing market – also Polish companies are willing to tap the opportunities offered by that market. For instance, Murapol recently acquired a 1-ha plot of land in Berlin in a €1.45bn deal on which it plans to build around 120 flats. GWI Bauunternehmung, an Erbud subsidiary, announced in April that it had completed the sale of the 144-flat West Park residential project in Duesseldorf.
In addition to residential construction, Germany’s public construction segment should also see improvement this year, mostly on the back of increased spending on roads, railways and waterways. On the whole, this year the segment should see an increase in revenues in the range of about 4%, reaching €29bn, according to HDB. The total index of unfilled orders involving road projects in Q1 2016 was almost 24% higher compared to a year ago, according to data compiled by the Federal Statistical Office of Germany. Regarding orders involving other civil engineering works, the backlog rose by over 5% year on year.
The private construction segment, which is the second largest segment of the German construction industry, is expected to stagnate due to the private sector’s capital expenditure that still remains low. HDB predicts that the segment will general revenue of approximately €35.5bn in 2016.