As a highly cyclical sector, construction has faced significant downturns in recent years due to persistent inflation and elevated interest rates, which have reduced housing demand and increased costs for builders. Rapidly rising mortgage rates, combined with high inflation, have significantly reduced housing affordability, leading to a drop in new mortgages and housing investments. As demand falls, costs are rising: material and labor costs have skyrocketed and financing conditions have tightened. Consequently, a growing number of projects are being delayed or abandoned as builders’ margins come under pressure, leading to a surge in business insolvencies in the sector.
Recently, there have been positive signs as the easing cycle begins: demand is picking up, with housing loans increasing for the first time since early 2022 and investment activities starting to rebound. Construction price indices have begun to decline, inflation in building materials has reversed and construction confidence indicators have stabilized. Although construction activities and building permits are still subpar, supply is expected to gradually catch up as housing prices bottom out and construction costs further stabilize.
On a more positive note, the demand for infrastructure construction remains strong and will continue growing. Structural changes, such as decarbonization and digitization, are taking place globally and are expected to persist for decades, requiring substantial capital. As governments ramp up investment and roll out policies to foster the green transition and infrastructure development, the construction sector is poised for long-term growth. Still, there is a USD15trn gap between projected investment and the amount needed to provide adequate global infrastructure by 2040, prompting the private sector to increase its presence in infrastructure investment.
On the public market side, there has been notable expansion over the past ten years. The market capitalization of listed infrastructure globally, as proxied by the Dow Jones Brookfield Global Infrastructure Index, increased by +64.3% over the decade, reaching USD1.5trn by the end of July 2024. This trend is also visible in private investments: As one of the fastest-growing asset classes in the private market, unlisted infrastructure in Europe has expanded from merely USD1.4bn of assets under management in 2000 to USD425.2bn in 2022, a more than 300-fold surge.
