Valeriy Shevchenko was getting ready to move into a new three-room apartment in Berlin’s upscale Prenzlauer Berg district before the disaster. More than a year later, it is still open as part of the unrest at home in Germany.
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(Bloomberg) — Valeriy Shevchenko was getting ready to move into a new three-room apartment in Berlin’s upscale Prenzlauer Berg district before disaster struck. More than a year later, it is still open as part of the unrest at home in Germany.
Project Immobilien-Gruppe, the developer of multi-family residential buildings where Shevchenko has bought units, went bankrupt, leading to a stop in construction just a few months before the three families were supposed to move.
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The site is still abandoned a year later, leaving the Shevchenkos in limbo. Not only is it stuck in an indefinite lease, but the initial payment of €250,000 ($278,340) – about half of the total cost of the apartment – ​​is tied up in insolvency proceedings. Now, on top of the rent, they cover the interest on the loan they took out to pay the money.
“It’s been a sad few days after getting the news,” said Shevchenko, a 34-year-old software engineer who moved to Berlin from Russia in 2017. She feels let down not only by developers, but also by politicians, who she thinks should do more to protect homebuyers. . “I don’t think something like this can be done in Germany,” he said.
The half-finished shell of a house-to-be has become a common sight across the country. More than 1,000 companies involved in real estate activity have collapsed since 2022 as part of the fall in construction costs and the rapid increase in interest rates imposed by the central bank.
As the dynamics spread, the impact in Germany was heavy as the amount of capital invested in a market that had long been considered one of the safest in Europe. Hungry pension funds and major landlords piled in to fund developments and buy housing portfolios, driving up house prices.
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Ambitious acquisitions at high prices were supported by abundant cheap debt from the bond market and banks. Unlike other European countries, German development is possible with “little or (almost) no equity,” according to a presentation from PwC. This high leverage means they are particularly vulnerable when construction costs rise and funding dries up.
“We’ve seen a lot of situations where people have borrowed land from banks to plan but they haven’t done anything about it,” said Zach Vaughan, head of real estate investment at Arrow Global, an investor in distressed assets. “The banks have a big loan and you can’t sell the apartment because the development company is gone.”
The lack of affordable living space has fueled frustration, which has fed into anti-immigrant sentiment as migrants are blamed by many voters for destroying homes. On Sunday, the far-right Alternative for Germany is expected to win a state election in Brandenburg, the state that surrounds Berlin, while the ruling parties are likely to collapse. It will be the party’s second victory in regional elections after Thuringia earlier this month.
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The gridlocked building sites are a totem of the difficulties the German government faces in promoting new construction in a market that is not keeping pace with demand. Chancellor Olaf Scholz’s coalition has failed to promise to build at least 400,000 homes a year. Deutsche Bank economists estimate that only 260,000 units will be completed in 2024 and 265,000 in 2025.
“The crisis in housing construction will last longer,” said Klaus Wohlrabe, senior economist at Germany’s Ifo Institute, whose monthly survey showed sentiment in the sector near record levels. “Companies are still looking for signs of hope.”
Construction saw the biggest drop of any sector in terms of gross value added to the economy last quarter, and the slump added to Germany’s already beleaguered economy. The ripple effect is also seen in related industries, from furniture manufacturers to chemical manufacturers.
Smaller construction companies will be hit particularly hard by the drop in new orders, according to René Hagemann, deputy director of the German construction association HDB, stating that the interest rate cut alone is not enough to revive the sector. “Above all, investors need long-term stability and that is not the case now,” he said.
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“Germany will continue to be one of the laggards across European real estate,” said Christian Fladeland, co-chief executive officer of Heimstaden Bostad, a Swedish-based landlord who owns buildings from England to Poland, including nearly 30,000 homes in Germany. “It is becoming more expensive to build new construction and a significant imbalance in the housing market is accelerating.”
The pain is especially acute for people like the Shevchenkos, who signed the purchase contract in good faith but had no other choice but to wait and hope. Insolvency proceedings are set to pay creditors quickly and are not suitable for restructuring building projects, which require large investments before getting money.
“Families who buy an apartment to live there – they may have to move from their old apartment – become personally stressed if they cannot complete the project,” said Volker Böhm at the law firm Schultze & Braun, which acted as insolvency administrator for Project Immobilien.
While many administrators like Böhm aim to complete the project, getting it done is a challenge. Securing fresh funds to pay contractors and buy materials can be expensive and existing lenders are often reluctant to put good money after bad. Sometimes these burdens may be borne by prospective homebuyers to raise additional funds.
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For some investors, these half-built sites can offer a good opportunity to pick up a project relatively cheaply and benefit from a tight market in the future. Arrow Global, for example, bought property developer Interboden out of insolvency in June with the aim of not only completing its pipeline of projects but also taking on other sites in need of fresh cash.
“We have seen a lot of stranded projects – basically good projects in various stages – with some partially or almost complete where the builder has just run out of financing,” said Arrow’s Vaughan.
It is not only development that requires new investment. Much of Germany’s existing housing stock was built in the 1970s or earlier and is in need of upgrading. Many landlords have reduced capital costs to save cash, but improvements are increasingly inevitable, especially with regulations for energy efficiency.
“Much of Germany’s housing stock is quite dated and requires significant investment to get its energy rating from abysmal to acceptable,” said Ben Bianchi, head of Europe for real estate group Oaktree Capital Management, which wants to buy housing portfolios from cash-strapped landlords for renovations. .
In the meantime, the market continues to tighten. With few incentives to start building new homes, the gap between the prices of new and existing homes is widening, one indication of a growing shortage of new builds.
That means little prospect for relief for home buyers like the Shevchenkos. The project was taken over by a new contractor in the spring, but construction did not resume this summer as expected.
“I’m really worried that he will stop very soon if he realizes that completing this is not as profitable as he wants,” Shevchenko said.
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