Boom in German Construction Sector but Regulation of Rents a Risk to Growth
- Growth forecast for German construction sector: +3.5 percent in 2014; +5.3 percent in 2015
- Bankruptcy forecast: -3 percent in 2014; -5 percent in 2015
- Profit margins for construction companies expected to remain low at around 6 percent for 2014/2015, mainly due to high material and energy costs
- Risk of non-payment still high; 4,131 bankruptcies reported in construction sector, the second highest rate in Germany
The German construction sector is steadily improving. The industry recorded the second highest number of bankruptcies in Germany over the last year, after wholesale and retail trade, including maintenance and repair of motor vehicles, which saw around 4,800 bankruptcies. However, the trend is on the decline and growth prospects are good.
This is the conclusion of the latest study by leading credit insurer Euler Hermes. The German construction sector is expected to grow by 3.5 percent in 2014 to reach total sales of € 285 billion, and by 5.3 percent in 2015.
‘Concrete gold’ instead of capital market: Germans see real estate as an attractive investment
“The construction sector in Germany is booming – bucking the general trend in Europe,” said Ludovic Subran, Chief Economist at Euler Hermes. “This growth stems almost exclusively from the private house-building segment. Public investment meanwhile is lagging far behind.
“Besides the generally positive economic trend, the reasons for the strong demand are record low interest rates, low equity financing requirements, low unemployment, higher German purchasing power on the back of rising wages and stronger immigration. These factors make property an attractive investment – Germans are showing a preference for investment in ‘concrete gold’ over equities, which are seen as risky.”
Default risk still high despite improved payment morale and fewer insolvencies
Construction companies are still contending with rising material and energy prices, leading to relatively low profit margins of around six percent. The days sales outstanding period (DSO) in the construction sector may be decreasing, but in 2012 it was still 16 days above Germany‘s cross-sector average of 20 days.
“Payment morale in the construction industry is improving, but the risk of non-payment remains high,” said Thomas Krings, Chief Risk Officer at Euler Hermes Germany. “We are anticipating 3threepercent fewer bankruptcies in 2014 and a further 5 percent reduction next year. But with over 4,000 cases, the absolute figure in the construction sector is still the second highest in Germany. Nevertheless, the sector is gradually improving, with the number of bankruptcies falling by 23 percent since the 2009 crisis. Only agriculture has reported a stronger recovery, with a 24 percent drop in bankruptcies.”
Growth risks: housing bubble, rent control and low public investment
The biggest risks to future growth in the German construction industry are a housing bubble and the rent regulation (“Mietpreisbremse”) debated by the German government. In France the latter led to a sharp slump in the building industry: in Q2 2014 the number of new construction projects was down 19 percent vs. Q2013. There was also a substantial fall in the number of building permits in France, down 13 percent.
“In major German cities like Berlin, Frankfurt, Hamburg and Munich, property prices have risen by more than six percent in the last three years – disposable income on the other hand is up by only around two percent,” said Krings.
“We are not seeing a housing bubble at the moment, but this gap represents a risk to growth. The rent regulation could also weaken the boom. Lower rents automatically reduce profits for investors, thereby making property investment a less attractive proposition. It is precisely in the metropolitan areas, however, that we need new private constructions, in order to prevent the housing crisis from worsening. We have recently seen in France how this can impact negatively on growth as a whole.”
The construction industry: Facing a mental health crisis
Data collected by the Office for National Statistics has shown that more than 2,000 construction workers took their own lives in 2017. Other findings from a study conducted by the Glasgow Caledonian University show that the problem is getting worse. From 2017 to 2019, the number of suicides per 100,000 rose from 26 to 29, with people in the construction industry three times more likely to take their own lives in 2019 compared to other industries.
Why is the construction industry experiencing a rise in mental health conditions?
Bill Hill, Chief Executive of the mental health charity Lighthouse Club, says that one reason for the rise in mental health conditions is due to financial pressure. He said that it is a “huge factor” in construction, “causing stress, depression, and anxiety”. He added that several self-employed workers are “brilliant tradespeople but don’t have the education”, which may be helpful in running their business.
“They win a project, someone pays them a big invoice but they don’t put money aside for VAT [and then] the taxman asks for payment so they get finance. It tumbles from there. Sole trader-style business management should be taught at apprenticeship level”, Hill said.
According to Lighthouse Club, the industry is “hugely fragmented” and “difficult to reach over half of the 2.8mn self-employed construction workers. “Some larger companies have done a fantastic job on mental health”, Hill says. “But only apply their programmes and workshops to their own staff. Until you get to the huge mass of very capable tradespeople who are getting no input, one of the biggest problems is awareness”.
How can awareness of mental health be improved in the construction industry?
Chief Executive of the Construction Industry Council, Graham Watts, says that the industry has made positive steps forward on mental wellbeing but that “it is still not doing nearly enough” to support staff in this area.
Looking at how awareness of mental health can be improved in the industry today, Watts said: “Today, I would hope it is easier to be more open about mental health. I’m impressed by the leadership that is being shown by some companies – for example, Tideway, where Chief Executive Andy Mitchell has ‘mental health first aider’ immediately after his email sign-off – but it is still only being exhibited by the best of the best”.
Lighthouse club has also launched a campaign for construction workers to raise more awareness of mental health in the industry. Named “Help Inside the Hard Hat”, the campaign makes all workers aware of the services that Lighthouse Club offers, “regardless of employment status”, the charity says. Lighthouse Club is taking particular care to encourage contractors to put up posters on sites and ensure that they reach all workers, including the self-employed.
The charity also has a free app that allows workers to access mental health information and resources. Lighthouse Club is also improving the availability of information by working with partners such as the Safer Highways charity and Glasgow Caledonian University. But the charity is working on improving the understanding and destigmatisation of mental health in the industry one step at a time. Hill said: “The first thing is suicides,” says Hill. “That is the number one benchmark of all the work we are doing – are we reducing suicides in the industry?”.
If you are a construction worker - or someone you know is and you need support, you can call the Lighthouse Club helpline on 0345 605 1956.