Residential construction remains the main driver of growth
The industry remained relatively unaffected by the worst impacts of the pandemic, and output increased by 2.8% in 2020. The order backlog is still positive, but output is expected to contract slightly in 2021. Turnover decreased in Q1 (also triggered by a VAT re-increase), while a shortage of building materials (reinforced steel, insulation materials, lumber) hampers additional growth. Some larger construction projects could even be postponed.
In 2022, a rebound of about 2.5% is expected, with residential construction activity remaining the main driver of growth, given a shortage in housing facilities and ongoing demand for residential renovation works. While civil engineering depends heavily on the state of public finances, there is a big necessity for infrastructure investment. However, the performance of the non-residential segment remains muted, due to lower business investment in commercial, retail and office buildings.
The majority of German construction businesses have recorded stable or slightly improved results over the past twelve months. The profit margin outlook remains stable for the time being, with price wars being avoided due to the benign demand situation. However, ongoing material shortages and volatile input pricing remain an issue. Builders find it difficult to pass on price increases to customers unless escalation clauses are part of the contracts. This could have an adverse impact on margins in the future.
Payments in the industry take less than 60 days on average, and the number of non-payments has remained stable over the past two years. However, in the coming months an increase is in the cards for businesses that cannot pass on higher prices to end-customers. Construction insolvencies decreased over the past couple of years. However, it seems that this trend has bottomed out, and a 5%-10% increase in business failures can be expected in the coming months. Due to ongoing demand and the rather stable credit risk situation, our underwriting stance remains open to neutral for the industry.