Market Monitor - Construction industry - Germany

Market performance snapshots

Germany

• Lower growth in 2015
• Poor payment behaviour of public remains an issue
• Decrease in insolvencies slowing down

In recent years the performance of the German construction and construction materials sectors has improved, and the outlook for 2015 is positive. As a result, our underwriting view of the industry is quite relaxed.

The performance of the German construction sector was generally positive in 2014. Especially in H1 of 2014 new orders, order backlog and turnover of German construction businesses were clearly above the 2013 level. However a cooling down was noticed in H2 of 2014, mainly in the public construction segment, due to lower investment. It is expected that nominal turnover grew 4% in 2014, and for 2015 a 2% growth rate is forecast by the German Builders Association. Residential construction is forecast to increase 3%, commercial construction 1.5% and public construction 1%.

Although the construction materials subsector is naturally highly dependent on construction performance, its development is varied: construction materials subsectors engaged in reconstruction and modernisation have performed better than those active only in new building. Despite the industry’s overall satisfactory performance, the sawmill/wood machining subsector continues to face problems, despite a global increase in demand for sawn timber products. The reasons are the high price of German round timber, high production and financing costs, overcapacity, and a disconnect between prices for log wood and sawn timber. Therefore, and in contrast to other construction/construction materials subsectors, our underwriting stance remains very restrictive in this segment.

On average, payments in the German construction sector take around 45-50 days. Instances of payment default decreased again in 2014. However, the poor payment behaviour of public buyers remains an issue, as it puts a strain on suppliers’ liquidity.

In general, when assessing buyer risk we take into account operating results, equity, liquidity and financing (e.g. the ratio of work in progress/advanced payments) and orders in hand. Despite our broadly open stance, we still consider construction to be a riskier sector than other industries, although credit insurance claims have decreased over recent years. Many construction companies – especially smaller ones – traditionally have weak equity ratios (the proportion of equity used to finance a company’s assets) and limited financial scope. The average equity ratio in the German construction industry has improved slightly in recent years: reaching around 12-13% in 2014. According to Creditreform, construction insolvencies decreased by more than 5% in 2014,to 3,450 cases. However, the proportion of insolvencies in the sector is still higher than in other industries (95 insolvencies per 10,000 firms compared to 42 per 10,000 in the manufacturing sector). In 2015 we expect construction insolvencies to decrease further, by 3%, which is less than in 2013 and also less than the 5% decrease forecast for business insolvencies overall in Germany.

With less background information to work with, we are naturally very cautious when assessing the creditworthiness of construction/ construction materials businesses that have operated for less than one year, unless they are part of, or a spin off from, a larger group.

While we normally review buyers annually, in more problematic subsectors (e.g. businesses focused solely on public clients) we hold additional reviews. Where we identify poor creditworthiness and negative operational results, our underwriting stance is naturally very restrictive.