DENMARK: An Introduction to Real Estate: Construction
The Danish Construction Industry at a Glance – 2024
Similar to the state of the Danish construction industry in 2023, the picture in early 2024 shows that challenges and uncertainties still affect the industry. Especially financial instability caused by higher interest rates and inflation has slowed down investments in residential construction projects in particular.
Consequently, the construction industry in Denmark has, in these early stages of 2024, experienced major bankruptcies and a decline in turnover for large construction companies creating a snowballing effect and challenges for small and medium-sized contractors and other stakeholders in the industry.
Accordingly, it is expected that the construction industry will continue to experience a decrease in the number of new construction projects and an increase in the number of bankruptcies and requests for payment under payment guarantees.
Nevertheless, the construction industry is expected to be resilient and generate modest growth driven by certain segments of the construction industry, especially in relation to the non-residential construction projects, the green transition projects, energy projects and renovation projects. Further, Denmark has a number of very significant infrastructure and medico projects securing a certain level of activity in the industry. These projects will continue in the years to come and are expected to benefit the industry in general.
Main Trends
ESG, ESG, ESG!
ESG (Environmental, Social, and Governance) considerations have undeniably taken the center stage – and this also applies to the construction industry. The ESG framework covers environmental, social and governance issues, thus addressing climate and environmental concerns, labour rights, human rights and best practice in relation to governance.
As a result of recent years’ development, including the increased amount of sustainability regulation, industry ESG expectations and requirements will rise. Thus, the industry will face an increase in the requirements to act and report on sustainability throughout the supply chains.
Consequently, ESG is becoming an increasingly important competition parameter for stakeholders. The prioritisation of ESG is no longer optional; it is a necessity.
A failure to adapt to the increased demand for ESG compliance may therefore prove to be costly for stakeholders in the industry due to the vast number of statutory ESG requirements and standards. However, companies that embrace the demand for ESG compliance – and succeed in doing so – may turn the requirements into commercial advantages.
Momentum in the green transition
According to the Danish Association of Construction Clients (Bygherreforeningen), the green transition has kept the momentum going and is expected to be one of the drivers of the construction industry in 2024. This applies not only to the private housing market that has witnessed growing interest in investments in energy saving solutions, but also – and particularly – to industrial energy projects. Investments in and the construction of such large-scale energy projects are spiking.
Investments in solar cell installations, biogas plants, wind turbine plants etc. have increased massively in recent years – and the pipeline of energy related construction projects is record high. Thus, the list of the major construction projects planned for execution in 2024 includes the construction of a CO2 capture plant, a biogas plant, a waterwork project and solar parks. According to the Danish Association of Construction Clients, six out of ten of the largest construction projects in 2024 concern green transition and energy.
This situation offers opportunities for various stakeholders in this area of the construction industry and could most likely prove to be a major and long-term trend for years to come.
Renovation rather than demolition?
The environmentally conscious choice is often to utilise and renovate the existing buildings rather than demolishing them or constructing new buildings. Combined with the high interest rates and inflation, this may very well be the reason for the increase in energy optimising and renovation projects. Thus, 2024 may also present opportunities for developers and contractors who recognise the value of energy optimising and renovating existing buildings – rather than demolishing them.
Other notable industry markers seen from a legal perspective
Modular construction and off-site productions
In response to the construction industry’s demand for faster and more efficient construction methods, a trend has emerged towards a higher demand for modular constructions and prefabricated building supplies and materials.
These modular constructions are predominantly produced off-site, then transported and installed on-site. Consequently, the contractors and material suppliers that offer modular constructions and prefabricated modules or building material systems find themselves in situations where they may – in legal terms – take on varied roles (including as contractor, designer or material supplier) and sometimes even as a hybrid of these roles.
Obviously, the focus on liabilities and interfaces regarding such trend - or movement - from more traditional contractors to hybrid “module suppliers” or “system suppliers” should be considered carefully when entering into contracts.
Innovation in construction materials and construction supplies
The shifting climate patterns and the growing demand for more durability and sustainability in construction materials have compelled manufacturers to think differently. Moreover, as natural disasters and climate-related events intensify, there is an increased focus on establishing and constructing more weather-resistant and resilient infrastructure.
These trends have introduced numerous new building materials, new ways of thinking in terms of design, and creative ways of using traditional building materials.
From a legal perspective, the introduction of new building materials, methods and designs – essentially anything new – inevitably raises complex legal questions regarding the liability for their use or the new context in which they are used.
A new memo on practice regarding expert appraisal procedures
Expert appraisal procedures are an important tool in resolving disputes. Often, these procedures are the key to securing evidence concerning potential defects in works or designs. Consequently, it is not uncommon for disputing parties to reach an amicable agreement based on the outcomes of an expert appraisal procedure.
However, expert appraisal procedures can be both costly and time-consuming. During the initial stages of an expert appraisal, the parties must agree upon various procedural matters, including the qualifications of the expert, the questions for the expert, the scope of the expert’s assessments, and the statements of facts and documents that may be submitted to the expert.
These procedural issues often spark off disputes between the parties.
Therefore, the Danish Building and Construction Arbitration Board issued a memo in January 2024 regarding the Board’s practice in expert appraisal procedures. Hopefully, this memo will contribute to streamlining the expert appraisal procedures and reducing the number of disputes, ultimately leading to smoother and more time-efficient procedures.
Another year of bankruptcies?
In 2024, bankruptcies in the construction industry have already made the headlines and impacted the ongoing and planned construction projects and project stakeholders.
The number of bankruptcies increased towards the end of 2023, and the current state of the construction industry does not give reason to believe that the frequency of bankruptcies will cool down any time soon. However, some of the larger contractors are consolidating and generating record breaking turnover. The year 2024 may therefore be a year where the “industry gap” between smaller and larger contractors increases.
Consequently, it is not unlikely that the construction industry in general – and throughout the supply chain - may need to prepare for further challenges related to the bankruptcies, such as delays, extra costs, increasing number of disputes and added pressure on guarantors, etc.