The real estate industry is facing a toxic mix of rising interest rates, lower real estate prices, and higher construction costs, which may lead to further upheavals and bankruptcies. Gerhard Weinhofer, managing director of the creditor protection association Creditreform Austria, believes that the economic environment is not solely responsible for the industry’s difficulties. He stated that the long-standing zero-interest policy, which enabled cheap financing of real estate projects and subsequently triggered a boom in the market and high profits, has raised questions about whether companies have built up enough reserves from their profits for the turn around.

Weinhofer believes that the cheap money for two decades acted like a drug and cannot be left abruptly. The long-term upswing in the sector is over and rising interest rates have made loans expensive, thus making project financing noticeably more difficult. This situation has also put consumers under increasing pressure and many can no longer afford to own their own home.

These developments have impacts on rents and the construction sector, and demand for property has increased while the supply remains more or less the same. The majority of consumers are being pushed into the rental market, which is likely to further increase rental prices, especially for apartments that are not subsidized. Weinhofer does not expect an acute housing shortage but believes that the situation will get worse in eastern Austria where there is population growth.

According to a current analysis by credit insurer Acredia, 667 domestic construction companies filed for bankruptcy between January to September 2013 compared to 589 in the same period last year – this represents a 12% increase in bankruptcies among domestic construction companies alone.

The turbulence in the real estate sector is already attributing to a visible increase in bankruptcies among domestic construction companies. This trend is expected to continue as rising interest rates make it increasingly difficult for businesses operating within this space to secure funding necessary for their operations.

By Editor

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