Zombie construction sites and their impact across the world

The German housing market is the latest to be plagued by a disturbing phenomenon - abandoned construction sites, or so called "zombie projects" – and the country is not alone. Such unfinished developments, often left in a state of disrepair, are a stark reminder of the many challenges facing not only Germany, but other areas across the world, writes John Ridgeway.

Zombie projects have been observed in dozens of different countries over the last 16 years, often driven by a similar range of economic and market conditions. It was noted as early as 2008 in Spain, which experienced a significant number of abandoned construction projects following the housing market crash. Many unfinished developments were left vacant, creating "ghost towns" in some areas.

In the same year, the Irish housing market also faced challenges, with numerous abandoned construction sites becoming a common sight. The government even established a "bad bank" to deal with these unfinished projects. The Irish housing market, had actually experienced a significant boom in the early 2000s, fuelled by low interest rates and easy access to credit. However, this boom was unsustainable, and the market eventually collapsed in 2008. The collapse led to a wave of abandoned construction projects, as developers were unable to complete projects due to a lack of financing and declining demand.

In response, the Irish government established the National Asset Management Agency (NAMA) to deal with the growing number of abandoned construction projects. NAMA purchased a significant portfolio of distressed assets from banks, including unfinished developments and later worked to complete or sell these projects, helping to stabilise the housing market.

While not as prevalent as in some other countries, abandoned construction projects have occurred in the United States, particularly in areas affected by economic downturns or financial crises.

The Great Recession of 2008 led to a decline in the U.S. housing market and resulted in some abandoned construction projects. Developers who were unable to secure financing or sell their units were forced to abandon building sites. The U.S. government responded by implementing measures to stabilise the housing market and provide relief to distressed developers. These measures included government-backed loan programmes and foreclosure prevention initiatives.

China's abandoned construction sites

More recently, China has faced a surge in abandoned construction projects. It is a phenomenon that has become a pressing concern for the government and the public. These "ghost cities," as they are often referred to, are characterised by unfinished or abandoned buildings, often located in smaller cities and rural areas.

One of the primary causes of abandoned construction projects in China is overbuilding. In the past decade, there has been a surge in construction activity, particularly in smaller cities and rural areas, driven by government policies and economic growth. However, this rapid development has often outpaced demand, leading to an excess of housing supply.

This has happened partly because the Chinese economy has faced its own challenges in recent years, including a slowdown in growth and trade tensions. This economic downturn has negatively impacted the construction industry, leading to a decline in demand for new housing and commercial projects.

Chinese government policies, such as restrictions on property purchases and mortgage lending, have also contributed to the problem of abandoned construction sites. These policies have made it more difficult for individuals and businesses to purchase property, reducing demand for new construction.

These abandoned projects represent a significant waste of resources and have become breeding grounds for pests and pollution, posing environmental risks. Unfinished buildings can also be dangerous, posing risks to public safety. In fairness, the Chinese government has recognised the serious nature of abandoned construction projects and has introduced various measures to address the issue such as additional financial support.

In addition, it has implemented reforms to improve the efficiency and transparency of the construction industry and while the problem of abandoned construction sites in China still remains significant, the government's efforts to address the issue are showing some positive results.

The reasons for abandoned construction projects vary, of course, across different countries, but common factors include recessions and financial crises, which can lead to a decline in demand for construction projects, resulting in abandoned developments. Building too much housing, as has happened in China, without sufficient demand can also lead to market saturation and abandoned projects.

Developers who face financial challenges, such as rising costs, debt, or bankruptcy, forcing them to abandon projects is another factor compounded by inefficient or restrictive government policies, which can hinder construction projects and contribute to the problem of abandoned sites.

Some industry experts are suggesting that we will see more zombie sites, as Germany is discovering, unless governments are prepared to provide more economic support to the construction industry to help projects get back on track. Streamlining regulations and improving transparency can help to reduce the risk of abandoned projects and would be a good start.

Creating incentives for developers to complete projects and avoid abandoning them, would be another factor as well as engaging in advance with local communities to understand their housing needs and ensure that development projects are aligned with their priorities.

It is a situation which needs to be addressed. The impact of zombie construction sites extends beyond individual hardship. Abandoned projects can blight neighbourhoods, reduce property values, and create safety hazards. In addition, they can waste valuable resources and hinder economic growth. If it is still happening now in Germany and China – two of the world’s biggest economies – could the rest of the world be once again at risk? Probably.