18.01.2022

UniCredit Bank Austria Industry Report
Construction sector growth slows in 2022 following record year

  • High level of orders at the end of 2021 still resulting in high capacity utilisation in the construction industry in early 2022 
  • Production growth cools following material and labour shortages in the autumn, but the industry still ends 2021 with revenue increase of around 14% in nominal terms 
  • Construction sector growth expected to slow in 2022 both in structural and civil engineering
  • Increase in construction costs will not noticeably recede until later in 2022
  • Clear signs that the housebuilding boom of recent years will fade
  • Building renovations becoming key growth driver in construction industry

Austria's construction industry reached record levels in 2021: As an annual average, the industry is likely to have achieved a revenue increase of around 14% and a sales volume of more than EUR 61 billion (data from December is not yet available). Growth in both structural and civil engineering has noticeably cooled since mid-2021. This is primarily a consequence of the sharp increases in material shortages and, in recent months, the return of worsening labour shortages. 

In December, 39% of construction companies in Austria stated that the major obstacle to production was a lack of staff, and 23% stated it was a lack of construction materials. Nevertheless, there are still an adequate number of construction contracts available, as evidenced by the record utilisation at the companies. As recently as the fourth quarter of 2021, the companies reported a production capacity utilisation of 7.6 months, a value well above the ten-year average of 6 months. "2021 could have been even better for the construction industry if production had not been slowed by a lack of materials and, towards the end of the year, by the return of labour shortages. There are still enough construction contracts and this is leading to record utilisation of production capacity", says UniCredit Bank Austria economist Günter Wolf.

Construction sector slowdown in 2022 following record year
The positive order situation, the fact that business confidence at the construction companies remains high—as evidenced most recently by the economic survey in December—and, not least, the development of the construction labour market, all indicate that industry growth could continue beyond the turn of the year. Despite the growing labour shortages, job creation in the construction industry was up 5.1% in 2021 — reaching the highest level since the mid-1990s. At the same time, the number of unemployed construction professionals fell to 24,300 on average, the lowest level since 2008. 

Growth in the construction industry is expected to cool significantly over the course of 2022. The high level of utilisation at the construction companies will be accompanied by a supply bottleneck for construction materials, at least in the first quarter of 2022. As such, new construction contracts will increasingly be reflected in higher construction prices. "The high price level will dampen demand for new construction projects, particularly in parts of the residential real estate market. On the funding side, virtually no impetus for construction sector growth is expected, even though financing costs remain favourable", says Wolf.

In addition, most of the investment gaps have been filled by the intense building activity of recent years, including in residential construction, where new building permits had already fallen in 2020 and most recently fell in the second quarter of 2021 when compared with the previous year. In commercial construction, no more significant impetus for new building projects is expected to be provided by the retail sector or industry. Certain office construction projects that were put on hold in recent years are set to be resumed. However, the changes in business practices brought about by the pandemic are likely to inhibit demand for new offices. Construction demand in 2022 is therefore expected to be increasingly focused on renovations rather than new spaces. Public building construction is also being adversely affected by cost-cutting measures in the budget. According to current budget estimates of the federal government, the capital expenditure of the Bundesimmobiliengesellschaft (BIG) will be reduced by 11% in 2022.

Civil engineering will benefit from growing investment in rail infrastructure, but reduced demand from road construction is expected. According to the latest framework plan of the Austrian Federal Railways (ÖBB), covering the period from 2022 to 2027, an increase in investment of 23% compared with the previous six-year period is anticipated. In road construction, resources are likely to be increasingly invested in maintaining the existing network, rather than in new construction projects.

No long-term easing of the construction cost situation until later in 2022 
Since around the second quarter of 2021, labour shortages have been replaced by a lack of construction materials as the main reason behind the restriction on building activities. At the same time, the prices of many construction materials have increased enormously. For example, in the second half of the year, steel reinforcement mesh from wholesalers in Austria cost around 77% more on average than in the previous year, while prices of particle board were up by 35% and plastic tubing by 25%. 

Overall, construction costs in the third quarter of 2021 increased by 14.1% on average in residential construction, and by 10.4% in road construction. In the fourth quarter of 2021, the price increase had slowed somewhat for certain construction materials. Since September, overall construction costs have fallen slightly, by an average of 0.2% per month—at least in residential construction and housing developments—when compared with the previous months. However, these developments do not point to an easing of the construction cost situation: In December, costs increased by a further 12.5% in residential construction and by 12.1% in road construction when compared with the previous year's level.

The increase in construction costs is not expected to slow noticeably until the second quarter of 2022, once the supply of primary materials has improved and there has been a more significant cooling of demand in the construction industry. However, it is not expected that costs will recede (in the last two decades, a fall in costs in the residential construction industry of 1% was only recorded in the first quarter of 2009). The most recent developments in the prices of lumber and structural steel on the futures exchanges in Chicago and London indicate that the prices in the segments will not be significantly lower until mid-2022. 

Residential construction boom set to fade 
The moderate decline in revenue of 1% in nominal terms in the construction of new housing in 2020 was quickly cancelled out last year. By September 2021 (the most recent data), the sector had grown by around 18% in nominal terms. Revenue has increased to the same extent in the construction-related sectors, which provide many of their services in housebuilding and residential renovations. 

In the fourth quarter of 2021, evaluations of the order situation at the structural engineering companies fell below the 2019 results (economic surveys are only available at a sector level). The weaker demand for new buildings in both commercial and residential construction is likely to be primarily responsible for the higher proportion of pessimistic assessments. Companies in the construction-related sectors were still reporting high order levels in December, probably because of demand for residential renovations, which continues to be buoyant. This assumption is confirmed at a sector level by the economic surveys in the commerce and trade sectors (according to the Austrian Institute for SME Research). The results show that joiners and installers had a predominantly positive assessment of their order situation in the entire second half of the year, while there were already primarily pessimistic assessments in commercial timber construction, which is more heavily reliant on new residential constructions. 

In the coming years, significantly fewer new homes are expected to be built in Austria than in the years before the crisis. On the one hand, demand for new homes is falling — assuming that the forecasts do not change significantly. The number of single-person households has increased by an average of 1.5% a year since 2013, but this number is expected to grow by less than 1% a year in future. On the other hand, the major growth in property prices is losing its role as a driving force in new residential constructions since the positive impact of increasing property values is being eclipsed by falling rental returns.

Building renovations becoming key growth driver in construction industry 
If the goal of climate neutrality by 2040 is to be achieved in Austria, the renovation of the construction sector must be significantly intensified. Around 8 million tonnes—or 10%—of all the greenhouse gas emissions in the country are released from the heating, cooling and hot water systems in buildings. Between 2005 and 2012, building emissions were cut by a third, but since then, have only fallen by 7% due to the increase in new build activity. In any case, the emissions target for 2020 set by the Austrian Climate Protection Act was exceeded. 

The climate protection measures in the construction sector are primarily aimed at the thermal-energy renovation of the housing stock. The current government programme provides for an increase in the annual renovation rate over the next ten years from the current level of 1.6% to 3% of all primary and secondary residences. This target will require a significant increase in funding; based on the funding provided for residential renovations in 2019 in Austria, it will need to be increased from around EUR 600 million to at least EUR 1 billion a year. The planned increase in renovation work would bring about corresponding growth in the construction sector production value for building renovations. Environment Agency Austria estimates the investment potential of thermal improvements to all buildings in the country by 2030 to be at least EUR 29 to 48 billion. 

Enquiries:    
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0) 5 05 05-41954;
Email: guenter.wolf@unicreditgroup.at