German new building starts plummet, indicating property stress

German new building starts plummet, indicating property stress

The Dramatic Downturn in Germany’s Property Market

The property market in Germany, the largest economy in Europe, is experiencing significant turmoil and stress. New construction starts have plummeted by 47% in the first half of the year compared to the average of the past two years. Home building has been hit even harder with a staggering 54% decline. These figures, revealed by property consultant and analysis firm Bulwiengesa, reflect the worst crisis the country’s real estate sector has faced in decades.

One major contributor to this downturn is the caution among property developers. “There’s strong caution in project development,” says Sven Carstensen, CEO of Bulwiengesa. The era of cheap money that fueled a decade-long property boom has come to an end, not only in Germany but also in markets worldwide. This change of fortune has led to insolvencies, dwindling transactions, and falling prices. The industry is now seeking government support, with property industry representatives scheduled to meet with Chancellor Olaf Scholz in September to request multi-billion euro aid.

Jan-Marco Luczak, a parliamentarian advocating for a property tax cut, stresses the severity of the situation. “The situation is dramatic,” he exclaims. “I hear from more and more property developers that they are already laying off staff.” The consequences of this downturn can be felt even in cities like Frankfurt, known for its iconic skyline and as the home of the European Central Bank.

Marcus Gwechenberger, a member of Frankfurt’s city council in charge of urban planning, reveals that some building projects have been delayed as developers hope for a decrease in costs. He notes the significant change in the developers’ behavior: “Developers used to call here every two days and ask when we could finally get building approval,” he says. “Now they’re not pushing like that anymore.”

Bulwiengesa’s analysis also shows a decline in the volume of property under development, down 1.6% during the first half of the year compared to the previous year, with larger German cities experiencing even steeper declines. Specifically, residential development in these cities has decreased by 6.7%, while hotel development has fallen by 12.1%.

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In addition to the caution among developers, financing has become particularly challenging. Florian Schwalm, a consultant with EY, discloses that one of his clients was informed by their bank that it would only finance half of their project. This has forced developers to either find a co-investor or sell half of their project. The real estate investment market in Germany has essentially ground to a halt, as Karim Rochdi, managing partner at real estate financial firm Aventos, states.

The decline in Germany’s property market represents a major challenge for the economy and the industry as a whole. The government’s support, along with potential measures such as a property tax cut, may offer some relief. However, developers and industry professionals will need to adapt to the changing landscape and explore innovative solutions to overcome this crisis.

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