2023: Mitigated year for the Belgian construction sector

2023 is a difficult year for the Belgian construction sector. Market demand is declining, due in part to rising interest rates and the downturn in the economy. The sector is struggling with high material costs, rising labour costs and shrinking margins. Bankruptcies are also on the rise. This in turn helps contribute to the increase in non-payments construction companies are facing.

In the longer term, however, the outlook for the construction sector remains positive, due in part to an anticipated renovation wave to make homes more sustainable. Companies will also be undergoing an energy transition. Europe's aim to be climate neutral by 2050 will increase the demand for renovation and insulation works. New construction will also remain important due to the growing shortage of affordable homes.

It looks like Belgium will be safe from a recession in 2023, but economic growth is minimal. The economic uncertainty makes both companies and individuals more cautious. Home purchases and renovations are being postponed. At the same time, contractors are struggling with persistently high material costs. It is true that prices are going down a bit here and there, but they remain historically high. There is also a great deal of uncertainty about future developments with material costs. This makes it difficult for construction companies to issue quotes. Revision clauses are often included due to this. Especially now that demand is falling, it is becoming even more difficult for contractors to fully pass on higher material costs.

Due to indexation, wage costs continue to rise.  This upward pressure on wages will continue in the coming period, as the sector is struggling with a shortage of construction workers.  New construction personnel who are hired will often have to be retrained due to the application of new materials and techniques. This also requires extra investments from construction companies.

Construction companies are increasingly switching to automated production. That requires specific skills. Unemployment is already low, but on top of that there is a huge shortage of suitably skilled technical and IT employees. The demand is many times greater than the supply. In Belgium, there can also be problems due to linguistic divisions between Dutch and French speakers. The ageing population is also increasing. The shortage of suitable personnel poses a serious threat to achieving the climate goals in 2050. In order to find solutions, construction groups have set up their own 'academies' to train and retrain their own people.

We foresee (limited) negative growth for the construction sector as a whole, with an exception being the production of civil engineering works. It will grow by a few percent this year. This is mainly due to government investments in clean energy and infrastructure projects. The energy renovation sector (heating, ventilation, insulation and renewable energy) also benefits from government support in the form of VAT reduction.

Vast numbers of existing homes will require major modifications in order to meet the 2050 climate goals. This means a hefty investment for homeowners, especially given the historically high costs for building materials and technical installations such as solar panels and heat pumps. This will also result in lower energy bills, however. Many private individuals (particularly with lower incomes) are putting off the necessary energy adjustments. There is also a lot of uncertainty about what the best solutions are for insulation, solar panels and heating.

The number of permits granted for new construction projects has fallen across the board in the past year. Both for single-family homes and apartments, as well as for non-residential real estate. In the latter case, there is a downward trend for both new projects and the renovation of existing commercial real estate. Numerous factors influence the granting of permits, such as stricter environmental standards, rising construction costs and land prices, higher interest rates, stricter regulations and increasing scarcity of land. Moreover, what is particularly striking is the slowness of government in granting permits.

The World Bank has reviewed the granting of permits in 208 countries. Belgium falls far behind other countries, including neighbouring countries like Germany and the Netherlands, as well as other major EU countries. Only France scores worse. The slow permit policy (long processing times and cumbersome appeal procedures) is an obstacle to Belgian construction activities. It undermines developers' drive to invest in and begin new projects.

  • Sustainable construction
    In the coming years there will be a growing demand for energy-efficient and environmentally friendly buildings.
  • Digitisation and building information modelling (BIM)
    Digitally modelling the entire construction process helps improve collaboration, efficiency and communication between construction partners.
  • Prefabrication and modular construction
    Prefabricating building components in the factory offers benefits such as faster construction time, reduced failure costs, less waste and improved quality control.
  • Renovation and repurposing
    Due in part to sustainability concerns, there will be a growing focus in the coming years on the renovation and repurposing of existing buildings instead of new construction.
  • Circularity
    Minimising waste and maximising the reuse of materials.
  • Innovative technologies
    Technological developments such as 3D printing, robotics, drones and smart construction techniques are increasing efficiency, safety and productivity in the construction sector.

Last year, almost 10,000 companies went bankrupt in Belgium. That was an increase of 42 percent compared to 2021. The hospitality and construction sectors accounted for the majority of these bankruptcies. For example, according to Statistics Belgium, a record number of construction companies (574) went bankrupt in the last quarter of 2022. More and more construction companies are struggling to make a profit. Many companies are just breaking even or even operating at a loss in the hope that things will improve soon.

Construction companies can often only partially offset the higher costs by raising their prices. Especially for installers and contractors, this can be a difficult sell to the end customer. The end customer's willingness to pay has its limits. This is about finding the right balance between which costs can be passed on and which ones cannot. We also see a trend towards seeking cheaper product solutions.

Construction is a highly competitive sector. A company can decide to pass on the higher costs to the end customer, but in so doing runs the risk that the assignment may go to someone else. The same goes for public tenders. If the bid is too high, the assignment will pass them by. Construction companies generally struggle with low margins, while many also struggle with mounting debts. Bills are being paid later and later, which means that construction companies are actually getting each other into trouble because their cash flow is under pressure. The logical consequence of this is that defaults and bankruptcies will increase. Even healthy companies can be affected by this. A large unpaid invoice is a nightmare for many businesses.
Taking out a trade credit insurance enables companies to focus on their core business. We offer a solution for every type of company. Whether or not an invoice is paid is no longer a concern. Companies can be sure of their money. This provides security and removes anxiety. With our trade credit insurance, we take over the debtor risk from the company. Is their customer not paying the invoice? Then we will compensate the company for this. In addition, companies that take out a trade credit insurance with us receive information about the creditworthiness of their (prospective) customers. We analyse the financial situation of customers and prospective customers on a daily basis.

Despite the many red flags in 2023, the long-term outlook for construction is favourable. We foresee a strong wave of contracts to make homes more sustainable. The business community will also be undergoing an energy transition. Europe's aim to be climate neutral by 2050 will stimulate demand for renovation and insulation works.

The construction sector has a huge opportunity to capitalise on the energy transition over the long term. There is still a lack of vision and cooperation, however. It is up to the government to provide clarity to individuals and companies through information campaigns. A helping hand is also needed from the financial sector. Many individuals and companies are in the dark about what is and what is not possible. Banks can also help provide clarity around these issues.

Another positive sign is that the order books are still relatively well filled and that the Belgian construction sector performed better last year than the construction sectors in neighbouring countries. The relatively good performance of the Belgian construction sector in 2022 is due to several factors, such as the reduction of the VAT rate for demolition and reconstruction, the strong demand for new construction and renovations during the pandemic that continued into 2022, and various regional energy measures.

After a period of decline, business confidence in the construction sector appears to be stabilising. This can partly be attributed to energy prices, which are normalising somewhat. Inflation (at a higher level) also appears to be under control. The post-2023 recovery will not be a fast one. We expect it will likely take until 2025 for the industry to bounce back to above pre-pandemic levels.

Do you want to know more about how a trade credit insurance can also help support your business? Do you have other questions?

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