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German real estate crisis, a worrisome sign for the global economy

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German real estate crisis, a worrisome sign for the global economy

The real estate crisis in Germany is at risk of worsening, a concerning situation given that other economically strong nations are facing similar challenges

In July of this year, the mayor of Nuremberg celebrated the completion of the Quelle building, a symbol of Germany’s post-war economic recovery from the 1950s. The majority of this vast complex, refurbished with offices, shops, and residences, was set to be inaugurated in 2024.

However, in recent weeks, the project’s developer, Gerch Group, responsible for construction projects worth 4 billion euros (4.2 billion dollars), has requested the initiation of insolvency proceedings, along with one of its affiliated companies responsible for the project’s development. The exact date of this procedure is now uncertain, according to information provided by Bloomberg.

The end of the era of cheap money marked the beginning of the German real estate crisis

This represents another blow to the real estate market, which has been facing difficulties since the era of cheap money. It also underscores who is most vulnerable in this crisis. While investors’ concerns during this real estate crisis have primarily focused on property owners, Gerch’s situation demonstrates that developers—companies that own construction projects—are currently in a precarious situation.

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Marlies Raschke, co-director of the restructuring and insolvency department at the law firm Noerr, observes: Project developers are grappling with rising construction costs, increased interest rates, and falling prices. We’ve noticed that a greater number of them have filed for insolvency in recent weeks, and we expect more cases in the future.

Alongside Gerch, Euroboden from Munich, which collaborates with renowned architects like David Chipperfield, is in a preliminary phase of insolvency proceedings. Additionally, Project Immobilien Group filed for insolvency in August, along with many of its affiliated companies, and some of the work has been tendered to new contractors. So far, the three companies have not responded to requests for comments.

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The situation in the German real estate sector is by no means isolated

Developers around the world are facing similar issues. In Australia, Porter Davis is among the homebuilders that have gone insolvent this year due to rising costs and declining demand. In Sweden, an increase in bankruptcies was driven by a construction crisis, while in Finland, housing construction could decrease to unprecedented levels since the 1940s.

We are witnessing a rapid shift in the situation after years of extremely low interest rates, and investors made significant real estate investments in search of returns. Developers, like Gerch, could easily finance their projects through cheap loans and sell in a market where prices were steadily rising.

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Developers are particularly vulnerable due to the decrease in land value, making projects riskier. Additionally, construction costs are escalating uncontrollably, and developers are forced to allocate more funds for unforeseen expenses.

Construction companies are facing an unprecedented situation in the past three decades

The bankruptcy of major developers will have a significant impact on the real estate industry as a whole. Residential builders are already losing projects, and over one in five construction companies surveyed by the Ifo Institute report project cancellations. This is the weakest result in the past 30 years.

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