Refugee influx gives extra push to German construction boom

NEUKIRCH - Reuters

Controversial newly-built luxury building looms called "Living Levels" by property developer Living Bauhaus is seen behind a graffiti-covered mural painting by French artist Thierry Noir at the East Side Gallery, a stretch of the Berlin wall, in Berlin on November 6, 2015. AFP Photo

Demand for entry-level homes for the refugees, many of whom have been sleeping in gymnasiums, local halls and tents, is adding to a cocktail of factors fuelling a revival of the German construction industry.

Near Germany’s southern border, a small family-run construction company is being flooded with orders for its pre-fabricated homes. They are destined to house some of the one million asylum seekers flooding into the country this year.

The family factory in Neukirch, a small town close to Austria and Switzerland, cannot keep up so company chief Joerg Bauer is expanding near the shores of Lake Constance.

“We are about to introduce a double-shift at our plant in Neukirch, open a bigger factory building in nearby Lindau and increase our staff from 40 currently to 60,” he said.

The sector is also being buoyed by population growth in major cities plus an increasing interest in real estate. Record-low borrowing costs and rising real wages are encouraging many Germans to overcome their traditional aversion to buying their own flats and houses, with some also regarding property as an attractive investment.

This demand, coupled with a 13-billion euro ($14 billion) push by the government in 2016 to modernize roads and bridges, is expected to boost construction sales by 2.5 percent to 235 billion euros next year, the highest level since 2000, according to the industry’s BvB association.

The revival adds impetus to a recovery in the domestic economy, which is compensating for sluggish foreign trade as exporters struggle with a slowdown in emerging markets.

Construction accounts for 4 percent of German gross domestic product (GDP) and, with 2.5 million people working in more than 300,000 companies, it is a major employer.

“More and more Germans are putting their money into property,” said Hans-Werner Sinn, head of the Ifo economic institute. Ifo’s construction sector index rose in November to its highest level since German reunification in 1990.

The index, which measures sentiment in the sector, dipped slightly this month but remains high as the European Central Bank’s low interest rates turn more Germans away from regular saving funds and towards property investments.

This increased private sector demand is helping the property market further up the scale from the entry level homes built by companies such as Bauer Holzsysteme in Neukirch.

For instance, shares in real estate group Patrizia Immobilien, which is building 4,000 new flats in cities including Munich, Hamburg and Berlin, have jumped around 120 percent this year.

Still, the construction industry has a way to go to match the boom it enjoyed when much had to be rebuilt in the former communist east Germany following reunification. Turnover in core construction business has increased in the last few years but in 2014 remained about 15 percent below levels of the mid-1990s.

Bubble risk

Housing remains in short supply due to a lack of construction in 2001-2009, when the public sector scaled back tax incentives for residential investors and abolished a home subsidy for owner-occupiers, who also faced much higher borrowing costs then.

From January to September this year, building approvals were granted for about 223,000 flats, the main dwellings in German cities, statistics office data shows.

This marked a 5 percent rise compared with the first nine months of 2014. For the full year, the figure is expected to be nearly 300,000 flats, but that is still insufficient to cope with the urban growth.

“This is a strong development, but it’s still far below the levels we saw in the 1990s after reunification, with more than 600,000 flats,” said Tobias Just, a real estate expert at the University of Regensburg.

To avoid housing shortages - especially in big cities such as Berlin, Hamburg and Munich where populations are growing fastest - more than 400,000 flats now need to be built every year, industry experts estimate.

With demand outstripping supply, some economists say the market could overheat.

“We don’t have a bubble in Germany yet,” said Commerzbank chief economist Joerg Kraemer. “But there is a real risk that this might develop into a bubble in a couple of years.”

Trying to head off an urban housing crisis, Finance Minister Wolfgang Schaeuble and Construction Minister Barbara Hendricks are planning hefty tax incentives for investors who build new apartments in certain city areas in the next three years.

In the public sector, investment in housing for the asylum seekers and the infrastructure overhaul are supporting demand.

Stock in Hochtief, which focuses mainly on public projects such as motorway modernization, has risen about 50 percent this year.

A Hochtief spokesman said the higher state spending on infrastructure and refugee housing was positive for the whole sector, adding: “A company like Hochtief can benefit from stronger growth in residential construction.”

The public sector is doubling its funds for social housing to more than 4 billion euros up to 2019 to cope with the asylum seekers, many of them refugees fleeing war in the Middle East.

The small- and medium-sized firms that dominate Germany’s residential building sector are scrambling to meet this demand.

At Bauer Holzsysteme, orders have been placed for more than 100 pre-fabricated buildings in 2016, up from 20 delivered this year.

Max Boegl, which is also making modular buildings for refugees, is experiencing the same upswing. “We’re noting sharply increased demand since October and we expect this trend to continue next year,” Max Boegl spokesman Juergen Kotzbauer said.