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What has happened? Bloomberg news agency has recently highlighted the most pressing problems of the German housing market.
The main problem. The first to be hit by current situation are project developers, who are struggling with the increased construction costs, increased interest rates and the drop in prices.
As interest rates have risen sharply, investors have demanded higher rental yields as compensation, which in turn has driven down the price they will pay for a completed site. Construction costs are also rising, forcing developers to set aside more money for unexpected expenses.
As a result, more and more companies are filing for bankruptcy. For example, in August a large developer from Munich — Euroboden GmbH — has declared bankruptcy.
The reasons. Germany's construction boom was driven in part by mezzanine lenders who were willing to provide large loans to developers with little equity.
That worked when part-built or yet-to-start projects could be forward sold to pension funds happy to pay ahead for a completed site.
However, the market correction has left developers without pre-sales, as well as with expensive debt and uncontrollable expenses.
What else?
• Real estate transactions in Germany are declining due to rising interest rates.
• Developer defaults will hurt the broader property industry, too. Residential builders are already missing out on work, with more than one in five construction companies surveyed by the Ifo Institute reporting canceled projects. That’s the worst since the survey started in 1991.
