Executive Summary
Despite major headwinds, the residential construction segment has remained resilient and lower interest rates could revive prices and activity in 2025. Housing starts and residential building permits have been going down in most countries over 2024. However, real estate prices have probably bottomed-out after the significant correction in most markets. We expect prices to increase by +1% in France, Italy and Spain in 2025, while they should grow by +2% in Germany and the Netherlands. In line with this trend, affordability has improved in most countries as wages have increased. In Europe, Germany remains the weakest market, with building permits down by -22% y/y as of Q2 2024 and the sharpest correction in prices. In the US, new house builds declined by -8% y/y in the first half of the year but prices were slightly up. The renovation market managed to grow as energy-efficiency improvements demand was solid. However, going forward, the segment should slow down as it was supported by subsidies and government schemes that will be downsized in 2025. Decreasing interest rates could provide a tailwind in 2025: We estimate that a 1pp drop in mortgage rates increases residential building permits by +3pps over the next quarter in Italy, +5pps in France, +6pps in Spain, +8pps in Germany and as much as +19pps in the US. Furthermore, the transmission of lower policy rates to mortgages is rather fast – a matter of months in most countries. But some have even seen rates start to decrease even before the central bank rate cuts as banks attempt to attract and lock in clients early. Over the full loosening cycle which would leave rates 2pps lower by fall 2025, this would mean a significant boost to residential construction.
But the non-residential segment is navigating structural changes. In the first half of 2024, office construction saw double-digit decreases in the US, France and Germany while transportation, logistics and data centers experienced sharp increases and hotels recovered, especially in Southern Europe. Overall, non-residential construction was sluggish. These developments reflected the continued preference for hybrid work models, the restructuring of supply chains amid geopolitical tensions and the boom in travel. In this context, Commercial Real Estate (CRE) investments are still decelerating but we see sign of stabilizations going forward, especially as demand for CRE loans is picking up and should continue to do so as rates decrease. Overall, the non-residential segment has been following trends such as the rise of remote work, e-commerce and artificial intelligence but there are signs of reversals that could prove costly over the longer term.
Infrastructure should recover but is facing fiscal squeezes. The US has been leading the way in terms of infrastructure projects and investments, with the Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act (IRA) boosting the segment massively. In Europe, the civil engineering and infrastructure output has been resilient mostly thanks to Next Generation EU funds. However, recent figures show a dip in output and the incoming fiscal austerity in many countries will only reinforce this trend, though a more favorable rate environment should help the sector recover. Fundraising in Q3 2024 was 28% higher than in 2023 and (non-renewable) energy projects represented over a third of fundraising up to Q3 2024, highlighting the rush-for-power narrative. Returns of infrastructure assets are also improving progressively, which should bolster demand and support the sector further.
China’s construction sector is still facing a significant slowdown due to the persistent real estate crisis, with no strong rebound in sight. Construction project initiations and total investments declined by around -40% y/y so far in 2024. The real estate downturn that started in 2021, provoked by fast debt accumulation, excessive investments and regulatory tightening, has caused sharp declines in housing starts, sales and prices. We estimate that government support in 2024 adds up to nearly 4% of GDP as authorities aim to break the doom loop between the real estate sector and local government finances. Even if they are successful, we doubt that the real estate sector will return to its former glory in the long run, given deteriorating demographics, smaller room for further urbanization and debt deleveraging. In contrast, infrastructure investment, particularly in renewable energy and electricity, provided some stability to construction overall, growing by +7.9% in August 2024. Electricity investment reached a record RMB1.6trn in 2023 as part of China’s strategy to shift toward sustainable, high-quality development.
Ultimately, lower interest rates are a relief but not a booster for companies in the global construction sector. The slowdown in input prices, from cement to lumber, is benefiting companies that had been squeezed by inflation in the last couple of years. Nevertheless, ongoing labor shortages are pressuring profitability and increasing opportunity costs. In the US, construction wages increased by +3% y/y in Q2 2024; in Germany and Italy, which report the most labor shortages in Europe, wages grew by +5% and +3% respectively. Lower interest rates will improve interest coverage and access to credit but are unlikely to offset the trend of higher insolvencies in the sector that accounts for 20-25% of corporate failures. Insolvencies have risen by +20% y/y in Germany, +31% y/y in France, +35% in Italy and Sweden and +21% in Belgium – with a prolonged high number of major cases globally, particularly in Western Europe and Asia.