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Construction and real estate is one of the most cyclical industries. The sector is currently under pressure due to changes in the labor market, commodity prices and above all due to the interest rate environment and credit availability. This is said in an analysis by Kofas.
According to the credit insurance experts from Cofas, the global situation on the world stage will not improve in 2024.
The housing market faces supply and demand constraints. The rise in interest rates has led to a rapid decline in demand as households cannot afford to buy property, especially as house prices have risen.
This, along with the global labor shortage, are the biggest obstacles to construction.
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Low supply and a rapid rise in interest rates over the past two years have caused construction costs to rise across the board. Material prices have risen, wage pressures have increased and financing costs have skyrocketed.
High interest rates are a challenge for the real estate market
Real estate companies that are primarily active in business segments (industrial, office and retail) are particularly sensitive. This is due to the long-term trend towards hybrid working, the closing of office space and the acceleration of e-commerce.
The office vacancy rate is at a 15-year high of 20.2% in the first quarter of 2023 in the US. In Europe – 7.5% for the period.
High interest rates are challenging real estate companies, with one of the biggest impacts being a slowdown in both the number of property transactions and their overall value.
Deals in Europe have halved over the past year and are at their lowest level since 2010. Interest expenses have grown dynamically in the last two years.
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The situation in CEE
Different dynamics are observed in different CEE countries.
Bulgaria is still below the level registered in 2015, the Czech Republic is slightly above it. Romania is growing.
Cofas expects an improving trend in the region – construction sector orders show that the worst is over for most countries and the industry will gradually improve, although there will still be many challenges.
Among them is the lack of manpower, which still limits business activity.
Access to construction materials is at a better level than it was during the recovery period from the pandemic and the outbreak of the war in Ukraine.
Insolvencies in the construction industry are most concentrated in Romania and the Baltic States. This is due to both the large number of companies operating in the sector and the delays in corporate payments in it, which are above average for the region.
CEE countries benefit greatly from the inflow of funds from the EU. A particularly active user of these funds is Romania, which partly confirms the high dynamics of construction production.
Predictions for 2024
Prices are forecast to fall in the majority of advanced economies (34% in Germany, 31% in Japan) from the perspective of buyers.
Business property prices have already fallen by 25%. There are cases where famous buildings are sold at over 50% discount.
From Cofas this year they expect dynamic conditions for the sector, helped by the welcome drop in interest rates.
