When Construction Projects Falter: Ensuring Project Success Despite Challenging Financing

The construction sector has faced sustained pressure for years. Mid-sized companies are particularly exposed: unlike large corporations, they rely heavily on debt financing, leaving their viability at risk when interest rates rise. Securing additional funding therefore requires a robust, credible plan. In this interview, real estate expert Jan-Eike Ratjen explains how banks and other lenders assess project viability—and why an independent adviser is particularly valuable during critical phases.

Mr Ratjen, tentative hopes of a recovery in construction and real estate have given way to renewed uncertainty. How do you assess the current situation?

Conditions remain challenging. Market sentiment had indeed improved somewhat since the end of last year, but many of those positive signals reflected optimism rather than a tangible recovery in activity. We need to remember that construction and real estate operate on long cycles. Developments emerging today often take years to feed through to projects and balance sheets. The interest rate increases of 2022 and 2023, for example, are still having an impact. Additional uncertainty arising from wars, rising energy prices or renewed inflationary pressures is more likely to prolong this period than bring it to an end.

Property developers are under particular pressure. Why are they so exposed?

Property development is highly capital-intensive. Many mid-sized developers have traditionally relied on substantial debt financing. That model worked very well when interest rates were low. Today, the economics have changed. Rising financing and construction costs, longer approval processes and tighter lending requirements mean that projects considered viable a few years ago now face fundamentally different conditions.

Long development timelines compound the problem. Companies have limited scope to respond quickly to changing market conditions, putting increasing pressure on liquidity and funding.

Which projects are most at risk?

Large, capital-intensive projects with long lead times are particularly vulnerable. This applies especially to developments that still require planning permission or have been in planning for several years. Their financial projections were often based on very different interest rate and cost assumptions.

We also see projects struggling in weaker or less sought-after locations. In uncertain times, capital tends to favour established locations perceived as secure. This intensifies the pressure on projects already facing sales or leasing risks.

What happens when a project runs into difficulty?

Unfortunately, this is becoming increasingly common. What matters is that stakeholders recognise the situation as early as possible and act decisively. The greatest risk is to wait out the problems in the hope that the market will improve. In most cases, the opposite happens: the longer action is delayed, the fewer options remain.

We therefore recommend a rigorous, candid assessment. What are the remaining costs to complete construction? How is liquidity developing? What are the realistic prospects for sales or leasing? What is the actual funding gap? Only then can stakeholders make well-founded decisions.

How do banks and other lenders assess these projects?

They face a difficult balancing act. On the one hand, lending criteria have tightened considerably. Decisions take longer, requirements are more demanding and internal reviews are more extensive. On the other hand, lenders have a clear interest in seeing viable projects through to completion. No one benefits from an unfinished property or an abandoned construction site. The central question is therefore often no longer, “Is this project ideal?” but, “Can it be completed successfully under realistic assumptions?”

In some cases, lenders go a step further and provide additional funding even when they expect to incur a loss on their overall exposure. The rationale is straightforward: a completed property can be sold to recover funds, whereas an abandoned development or an insolvent project may only increase losses. Additional funding is therefore often a calculated loss-mitigation decision rather than a sign of weakness.

Interestingly, we increasingly see a similar willingness to compromise among purchasers. Buyers awaiting completion are often open to negotiation and may accept a higher purchase price if this secures delivery. They, too, recognise that a completed property at an additional cost is preferable to an unfinished one with no clear path forward.

What do lenders expect when deciding whether to provide additional funding or support a project’s continuation?

Above all, transparency and a reliable basis for decision-making. Banks need a realistic assessment of whether the project can be completed, how much funding is required and what market value the property is likely to achieve on completion. They also need to establish whether the existing management team can deliver the project successfully. Independent expert assessments are best placed to address these questions.

What types of assessment do you mean?

Depending on the situation, these may include property valuations, technical assessments or financial and commercial analyses. In more complex cases, an Independent Business Review (IBR) or a restructuring assessment prepared in accordance with recognised standards can be particularly valuable. These assessments help both lenders and companies gain an independent view of the situation.

What mistakes do you see most frequently when projects come under pressure?

The most common mistake is waiting. Many decision-makers hope that the market will recover quickly or that problems will resolve themselves. Decisions are postponed and valuable time is lost.

Another mistake is engaging with lenders too late or taking an overly defensive approach. Banks tend to respond far more constructively when problems are raised early and presented clearly, with supporting evidence. Transparency builds trust, even in difficult circumstances.

What options remain when a funding gap has emerged?

More than many companies assume. Additional funding from existing lenders is often the first option considered, but alternative sources of capital may also be appropriate. These include mezzanine financing, family offices, private equity investors and, in certain cases, crowdfunding.

It is equally important to consider whether the project structure can be adjusted or parts of the development sold. Sometimes, the right conclusion is that continuing a project is no longer economically viable. That, too, is a valid decision—provided it is made early and supported by robust evidence.

What role can an external adviser play?

A very important one, because they bring an independent perspective. When projects are under pressure, emotions inevitably influence decisions. Owners, developers, banks and investors can therefore reach very different conclusions about the same situation.

External experts help distinguish facts from assumptions, develop alternative scenarios and establish a sound basis for decisions. At enomyc, we deliberately take a multidisciplinary approach to these projects. Depending on the circumstances, we bring together specialists in financing, restructuring, construction, law and operations. This often produces solutions that no single discipline would have identified alone.

What advice would you give developers, investors and lenders?

The most important message is this: acting early preserves options. Those who identify problems promptly, communicate transparently and establish a rigorous basis for decisions have a significantly better chance of completing projects successfully or restructuring them in an orderly way—even in this challenging environment.

Mr Ratjen, thank you for your insights.