Germany: Dire Warnings from Industry and Real Estate

Just recently, there have been almost daily warnings about the substantial contraction of the German real estate to be expected. The dominant aspect is that project developers are facing a dual threat: on the one hand, projects and expected profits never materialize due to bureaucratic delays and a never-ending list of environment-related regulations; on the other hand, pre-investments are, in many if not most cases, based on banking loans that mature faster than the projects generate revenue. On top of that, there are millions of square meters of unrented office room dating from the period of the pandemic.

Insiders have warned that up to 30% of project developers may have to declare insolvency over the next 12 months, for those reasons. The residential construction sector will be heavily impacted, because budget cutters in the various administrations, rather than launching public sector constructions, have outsourced them to private sector investors and developers. At the same time, the “green” anti-emission regulations have added to the chronic problems of the home construction sector, along with rising energy and materials costs. One immediate consequence is that the government cannot deliver on its promise to build 400,000 flats annually, of which 100,000 are supposed to be for low-income tenants. Even reaching 200,000 will be a challenge, according to experts. Given the housing backlog of the past 20-25 years, amounting to approximately 4 million flats, this will certainly lead to increase in social tensions, which, in turn, will likely translate in upcoming elections into an increased protest vote against the three government coalition partners (SPD, Greens, FDP).

Meanwhile, substantial cuts of 12 to 20% (year on year) in industrial output have triggered warnings about the de-industrialization of the country. The most recent comes from the Chemical Industry Association (VCI), in an urgent open letter addressed to Chancellor Olaf Scholz, ahead of the special crisis meeting with the chancellor and several cabinet ministers on Sept. 27. The VCI letter, titled “Stop Deindustrialization” states:

“That the far too high energy costs for industry urgently need to be reduced is now a consensus – not only within industry, but also, with few exceptions, in politics and science. To give even more weight to the demand for an industrial electricity price and hopefully to dispel the remaining skepticism. the powerful and unique ‘Alliance for a Bridge Electricity Price’ [a lower price cap industry] has been formed. Associations of energy-intensive industries are fighting side by side with the trade unions for the preservation of industrial site. Together they represent more than 1.1 million employees in over 8,000 companies. In total, up to 2.4 million jobs and a good 240 billion euros in value added are at stake.”