DENMARK: An Introduction to Real Estate: Construction
PRACTICE AREA OVERVIEW: CONSTRUCTION – CHAMBERS 2022
The Danish construction industry at a glance
A snapshot of the Danish construction industry at the beginning of 2022 portrays a thriving industry with remarkably high employment and continued full order books for both large and small stakeholders. Despite the current market situation having been ongoing for several years, the long-term uptrend is not expected to reverse in 2022 as the pipeline for planned projects is tremendous (expected DKK 112.6 billion in 2022), and the overall industry is predicted to continue expanding.
The industry’s momentum is supported by governmental focus on the development of transportation infrastructure and healthcare, but also by the continued focus on expansion of renewable energy. The government aims to make energy generation fossil fuel-free by 2050, generating Denmark’s demand for energy solely from renewable sources. Furthermore, in 2020 the Danish parliament passed the Danish Climate Act, legally binding the government to reduce greenhouse gas emissions by 70% by 2030. This will attract both public and private sector investments in various renewable energy: a process which may be sped up by the current conflict between Russia and Ukraine.
Looking at the drawbacks, the primary clouds in the growth sky are the acute shortage of skilled workers, general instability and potential overheating of the market and the upcoming 1 April 2022 deadline for repayment of COVID-19 VAT loans, which were made available to businesses affected by the lockdowns. The industry’s concern is that the deadline could mark the beginning of a series of bankruptcies throughout the market, as some businesses are still facing liquidity and cash flow issues.
Main trends
Development of transportation infrastructure
In 2021, the Danish government launched a plan to spend DKK 160 billion on infrastructure looking ahead to 2035 called “Denmark Forward”. The aim of the plan is to further improve the national road and railway systems, adding on to previous years’ massive investments in the transport sector. A shortlist of affected projects comprises the Metro M4 (budgeted to DKK 9 billion), expansion of the light rail in various Danish cities, and of course the construction of the Fehmarn Belt fixed link, which is just one of the larger bridges currently under construction in Denmark. These massive national construction projects have contributed to greater attention from international operators who have historically paid Denmark less attention.
Green transition and renewable energy
Green transition permeates the industry, as governmental initiatives reflect climate considerations throughout. This trend is for example showcased in the passing of the Climate Act, the infrastructure plan Denmark Forward’s expressed focus on better roads for electric cars, priority for bikes, massive investments in railways to support public transportation, and ongoing adjustments to Danish legislation to support the transition, e.g., the introduction of a “Sustainable Class” in the Danish Building regulations.
The transition offers opportunities on the construction market for various stakeholders and is naturally reflected in both pipeline and commenced projects. The most notable are the construction of two "energy islands", one located in the North Sea and one in the Baltic Sea, both intended to serve as hubs for offshore wind farms.
Healthcare and other large projects
The industry is still affected by the ongoing modernization of the Danish healthcare sector, which e.g. entails construction of 16 so-called super hospitals. Some hospitals are greenfield projects, while others consist of renovations and extensions of existing facilities. Other noteworthy projects are the development of the northern harbour in Copenhagen (Nordhavn), the port of Aarhus, and Lynetteholmen, a new island to be constructed off the shore of Copenhagen in 2035-2070.
Project developments and residential housing
2022 is expected to be impacted by continued construction and renovation of residential housing and project developments. The residential market is also supported by government initiatives introduced to stimulate consumer spending, e.g., on house renovations and extensions, transition from gas to renewables etc.
Other notable industry markers from a legal perspective
Three years of new agreed document
As no specific Danish legislation applies to construction contracts generally, the industry has widely accepted and used a number of general conditions. They are drafted by representatives from the Danish construction associations, making up a set of rules, which parties can agree to apply. Accordingly, contracts are mainly based on the following general conditions:
• AB18 (general conditions for works and supplies)
• ABT18 (general conditions for turnkey contacts)
• ABR18 (general conditions for building and construction works)
The former general conditions AB92, ABT93 and ABR89 were replaced by AB18, ABT18 and ABR18 from 1 January 2019. However, the former conditions are still used.
International stakeholders make for international contracts
Following increased interest from international stakeholders and operators, the industry is experiencing an increasing demand for contracts subject to international conditions. Contracts for projects which generate international interest, e.g. the Fehmarn Belt and offshore constructions, are increasingly based on international standard conditions such as the International Federation of Consulting Engineers' (FIDIC) Red, Yellow or Silver Book.
Dispute resolution
A large majority of disputes are settled by arbitration, however in the updated agreed documents the dispute clause was thoroughly updated and introduced a resolution ladder. Parties are now required to try to settle disputes by negotiation before initiating any other dispute resolution measures. The updated dispute clause is expected to cause more frequent use of mediation and other means of dispute resolution.
The new dispute clause also introduced the new initiative “speedy resolution”, which the parties may also request before moving on to arbitration.
Current challenges to be faced
The downside to a thriving construction industry is the risk of overheating and uncertainty. Predictability is key in financial management, and the current instability of the market might be the greatest challenge the industry faces going into 2022.
Increasing material costs
The overall increase in material costs and supply shortages highly affect the industry and cause uncertainty. Suppliers are hesitant to lock in prices, which makes submission of tenders difficult and ultimately causes a rise in contracts based on variable prices and with mechanisms to accommodate unstable conditions.
The fluctuation of prices is expected to continue to cause turmoil in 2022 and will be a factor to take into consideration going forward. Between the rise in material costs and lack of labour supply, the industry might be slowly prompted into a standstill period in terms of growth and expansion.
Repayment of VAT loans
To ensure that businesses would not take loans to pay tax bills and ultimately avoid bankruptcy, the Danish parliament allowed businesses affected by the COVID-19 lockdowns not to pay VAT. The unpaid VAT would then take form of a loan on the business’s tax account.
1 April 2022 marks the deadline for repayment, and even though an instalment option will allow businesses to place their loans with the tax authorities and pay in 24-month instalments, the concern is that the repayment deadline will result in bankruptcies and contribute to the general uncertainty and unpredictability of the market.
Acute shortage of labour supply
The non-availability of skilled staff is expected to be one of the major challenges in 2022. Job vacancies have increased and expected to continue increasing throughout 2022, making recruitment of new workers difficult and putting further strains on employers.