DENMARK: An Introduction to Real Estate: Construction

The Danish Construction Industry at a Glance – 2023

Contrary to the state of the Danish construction industry at the beginning of 2022 – which portrayed a thriving industry with remarkably high employment and continuously full order books for both large and small stakeholders – the picture today, in early 2023, shows quite a different market situation with challenges and uncertain times ahead.

Russia’s invasion of Ukraine, inflation pressure, increasing material costs due to previous supply chain difficulties, increasing interest rates and uncertain energy supply have sent the world into financially unstable times. Consequently, the Danish construction industry – like most other industries – faces financial challenges. Accordingly, it is expected that the industry will continue to see a decrease in the number of new construction projects, an increase in bankruptcies, increasing involvement of guarantors as well as a rise in unemployment.

The full impact and development cannot be predicted, and it should be noted that there have been signs that, inter alia, the energy crisis has stabilised, the construction pipeline is still full and that the crisis has fuelled politicians’ ambitions to make Denmark independent from fossil fuels. Consequently, the demand for, and focus on, renewable energy solutions is more prevalent than ever.

Main trends 

The industry has jammed the brakes – but remains optimistic

Even though not necessarily a tangible trend, optimism and crisis atmosphere go hand in hand in 2023. It is evident that the industry held its breath at the end of 2022 to size up the world market crisis but has now slowly started to take in the large pipeline of projects waiting. As such, 2023 seems to be the year of uncertainty, but even though it appears that the world is on the brink of a recession, the Danish industry remains optimistic and strong, as earlier challenges, such as the limited supply of labour and materials limiting production capacity, are diminishing slowly.

Energy, energy, energy – and green transition 

According to the Danish Construction Federation, energy supply will be the biggest topic of 2023. This applies not only to the private housing market, where the increase in energy and utility costs encourages consumers to invest in energy-saving solutions, but also to industrial construction, where investments in large-scale, energy-saving solutions are spiking.

Investments in solar cell installations, biogas plants, offshore wind turbine plants etc, have increased massively in recent years. In addition, Russia’s invasion of Ukraine has boosted politicians’ interest in Denmark becoming independent from fossil fuels.

Also, green transition still permeates the industry, as government initiatives reflect climate considerations throughout. This trend is apparent from the passing of the Climate Act, the infrastructure plan, Denmark Forward’s clear focus on better roads for electric cars, priority for bikes, massive investments in railways to support public transport and ongoing adjustments to Danish legislation to support the transition – eg, the introduction of a “Sustainable Class” and new climate requirements in the Danish Building Regulations.

The situation offers opportunities in the construction market for various stakeholders and is naturally reflected in both pipeline and commenced projects. Examples of this 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. Further, a new Power-to-X (PtX) process transforming green electricity into hydrogen (liquid fuel) is planned to be implemented next year in a PtX plant in Esbjerg.

The demand for new energy solutions is likely to increase market pressure on both prices and capacity, as it is a specialised field with few stakeholders.

Renovation is the new black 

As prices rise and the focus on sustainability becomes continuously more significant, interest is directed more and more towards renovating existing buildings rather than tearing them down. The rise in prices naturally slows down the erection of new buildings, which paves the way for more visionary developers, who see a value in making use of existing buildings and reducing CO2 emission.

Other notable industry markers from a legal perspective

New climate regulation on CO2 emission 

From 1 January 2023, the Danish Building Regulations include a set of climate regulations for all new buildings. The purpose is to decrease CO2 emission from the construction sector, lower the sector’s climate impact overall and prepare the sector for more sustainability. To ensure this, all clients must comply with the regulations to obtain a building permit for a new building. The new regulations also require all new construction projects to document their environmental impact over a lifespan of 50 years through a Life Cycle Assessment (LCA) calculation. Further, buildings over 1,000 square metres must comply with the threshold value of 12 kg CO2 equivalent per square metre per year.

Pragmatic conflict resolution – dialogue and solid co-operation

An increasing focus on dialogue and solid working relationships has been seen in the approach to conflict resolution in the construction industry, which has been supported by the revised agreed documents (the AB general conditions) from 2018.

Advisors of the various stakeholders should focus on carefully drafted contracts, encouraging an ongoing constructive dialogue throughout the building process, making sure that agreements are unambiguous and providing detailed documentation.

Dispute resolution 

A large majority of disputes are settled by arbitration. However, in the updated agreed documents from 2018 (the AB general conditions), the dispute resolution clause was thoroughly updated and introduced a dispute resolution ladder. The parties are now required to try to settle disputes by negotiation before initiating any other dispute resolution measures. The updated dispute resolution clause is expected to result in more frequent use of mediation and other means of dispute resolution.

The new dispute resolution clause also introduced the new initiative “speedy resolution”, which the parties may also request before moving on to arbitration.

Current challenges to be faced 

Postponement of construction projects 

Even though the first months of 2023 have seen a new optimism, and fewer clients are expected to be forced to postpone projects, the coming months are likely to see the postponement of many construction projects, as inflation, high interest rates and ever-high material costs dominate the industry.

In 2022, many planned construction projects were not even commenced. In fact, at the end of 2022, the realisation rate of planned construction projects was lower than during the first COVID-19 lockdown. This trend is expected to continue in 2023, as especially private clients may wait for more certain times before commencing construction projects.

The year of bankruptcies 

Despite the overall belief that the Danish construction industry will defy the biggest challenges and remain strong, it cannot be denied that many contractors are affected by the financial challenges of the market situation. At the end of 2022, the number of bankruptcies increased rapidly. We have yet to see signs that the situation will improve, which is why the industry’s stakeholders must prepare for difficulties such as delays, increasing disputes and added pressure on guarantors.

Inflation pressure and increasing costs 

There is no denying the fact that a key challenge of 2023 will be inflation and rising material costs. Even though supply seems to be less of a challenge now, the price increases are a result of the supply chain difficulties due to COVID and the war in Ukraine. Together with the general market uncertainty, this is expected to ultimately lead to a dip in employment. However, since there has been an acute shortage of skilled workers for a substantial time now, employment in the sector will most likely continue to be high.