German Construction Industry Crisis 'Worst in Generation'

A European Union spring economic forecast showing stagnating Economic activity is borne out by a slow down in construction across the region, and one of the worse construction slumps that Germany has seen in a generation.

EU figures showed that consumption across the region in 2023 grew by just 0.4%, with incomes being hit by inflation. This has been accompanied by a fall in real estate prices, a weakness in investment, and a marked shrinkage of the interest-rate-sensitive construction sector.

Although non-residential EU construction remains resilient, this is due to government infrastructure spending as part of the Recovery and Resilience Facility, an EU flagship initiative to mitigate the economic and social impact of the COVID-19 pandemic. 

But investment in residential construction is projected to continue contracting, as house prices continue to fall and a build-up of inventories weighs on supply. 

The EU expects residential construction to continue to shrink throughout 2025, but says there will be “significant variation across countries”.

Nowhere is the residential construction sector struggling more than in Germany. Reuters reports that Europe's biggest economy is seeing its worst property crisis in a generation.

Foreign buyers accounted for just 35% of purchases of commercial real estate in the first quarter, data from BNP Paribas Real Estate shows – less than in any year since 2013.

This has led to a stagnation in construction, and is a major construbuting factor to Germany being dubbed ‘the sick man of Europe’, a label it first acquired in late 1990s, as it struggled with economic stagnation and high unemployment. 

Kurt Zech, one of Germany's biggest developers, warns the market will keep struggling until foreign investors return.

"The Americans have to come back,” he told Reuters. “When the Blackstones, the Blackrocks and the Morgan Stanleys of this world buy in the German market that will be noticed and then we will all know that we have now reached the bottom.”

German construction giant Zech urges property investment

Zech – a property tycoon whose name is on construction sites across Germany – is urging banks to finance the industry to allow projects to be completed, and is hopeful the market will turn around this year.

“There are currently some good projects in Germany," he insists.

For years, low interest rates, cheap energy and a strong economy sustained a boom across the German property sector, which contributes €730bn (US$794bn) a year to the nation's economy (roughly a fifth of Germany's output.)

That boom was ended by rampant inflation, which forced the European Central Bank to raise borrowing costs, causing real-estate financing to dry up. This put the brakes on new projects, causing major developers to go bust. The German Construction Industry called on Berlin to intervene.

Commercial property prices fell by 9.6% in the first three months of 2024 compared with the year-ago figure, and this followed a 10.2% drop in 2023.

"Germany was a beacon of stability in Europe and people flocked to buy property there," Carsten Brzeski, Chief Economist of Dutch bank ING in Germany,” told Reuters. "Now, the economic engine is stuttering and needs maintenance. It's no longer the shiny new thing investors want."