The construction sector in Belgium is struggling with high material costs, rising labour costs and shrinking margins

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.

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.

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.

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.