For ten years, the real estate industry lived in a dream world. Low interest rates and steadily rising prices made it easy to acquire business and generate handsome profits. In the meantime, the market has flipped completely. Instead of 1%, home buyers have to pay 4% interest for a ten-year mortgage. Sales prices have started to slide. This is reflected in the depreciation of values, which has driven many property owners deep into the red. Other fields such as brokers, advisors and financiers are also feeling the effects of the crisis.

Project developers are hit the hardest. They primarily build office buildings and residential quarters. In the past few weeks, various property developers have already collapsed, including big and renowned players. Examples are Gerch from Düsseldorf with a project volume of 4 billion euros, the Nuremberg-based group Project, the luxury real estate developer Euroboden from Grünwald near Munich, the Düsseldorf-based Development Partner and the Hamburg-based Revitalis. In July, the project developer Centrum had already slipped into insolvency. Consus Real Estate, the ailing project subsidiary of the Adler Group, can only continue its business activities thanks to the support of its parent company, which is also in dire straits. Consus has accumulated negative equity of 2 billion euros by the end of 2022 - a depressing figure indeed.

Due to its complexity, project development is considered to be a particularly demanding discipline, which in good years offers rich returns. It ranges from the purchase of suitable land and the establishment of building rights, the planning, financing and implementation of the project to the sale or rental of the realised property. As a rule, projects take several years to complete, which entails the risk of fundamental changes in the general conditions - as is the case now. In addition, there are the usual risks such as rising costs, craftsmen dropping out, potential buyers bailing out and botched construction. The business therefore requires extensive expertise in many areas. Property developers act as a kind of general contractor. They buy materials and tradesmen's services for huge sums and sell them on to customers when the property is sold. The own service provision of the mostly small or medium-sized companies is comparatively small. The big wheel on the production side must be flanked by a big wheel in financing. Many companies operate with a thin equity cover, which is sometimes extended by mixed forms such as mezzanine capital, but for which extremely high interest rates have to be paid. The share of debt is usually high, which increases vulnerability in difficult market phases. Even in earlier construction and real estate crises, property developers were the first to be threatened with exit.

What is special about the current turmoil is that the transition from boom to bust has been extraordinarily rapid. This has a lot to do with Russia's attack on Ukraine, which has driven up inflation rates and interest rates. The effects are not only seen in sharply rising project costs, but also in the collapse of demand. Hardly anyone is willing to invest in real estate on a large scale at the moment. The transaction market is practically at a standstill. Industry representatives feel as if they are racing at high speed towards a wall. It is safe to say that the insolvencies of the past few weeks are only the beginning and that more sellers will start to slide.

The consequences affect suppliers, lenders and customers. Craftsmen are left with invoices, lenders have to cope with credit losses, and buyers have to look for alternative solutions for the continued construction of their property. In the case of the group Project, which finances itself through its own funds, the money of 30,000 investors who have poured in 1.4 billion euros is on the line. In the residential sector, the large group of tenants is indirectly affected. The insolvency of property developers further reduces the supply of housing. This is a huge problem with social implications, especially in metropolitan areas. For many prospective tenants it is already almost impossible to get hold of an affordable flat.