Could German infrastructure be the next hot investment?

CNBC

a day ago

Germany's newly minted government is looking to the private sector to help save the country's ailing infrastructure.
Economy minister Katherina Reiche called for a cash injection earlier this month:
"We need speed and investments, and we need private capital," she told CNBC. "Of all the investments we will do, 10% of them could be done with public money, we need 90% of private sector investments."
Germany has become riddled with infrastructure issues after a long period of underinvestment and restraints that have been linked to the country's fiscal rules, leading to crumbling bridges, broken train tracks and limited digitalization.
These issues are a top priority for the new government, according to its coalition agreement. Germany earlier this year also enshrined a 500 billion euro ($564 billion) infrastructure and climate special investment fund in its constitution, alongside an amendment to its fiscal rules that is set to increase defense spending — both of which are widely seen as potential boosts for the country's struggling economy.
"Overall, there are certainly large opportunities coming in defence and infrastructure," Greg Fuzesi, euro area economist at J.P. Morgan, told CNBC.
And enthusiasm for Germany's investment opportunities seems to have gone global, according to Stefan Wintels, CEO of German investment and development bank KfW.
"There is a lot of interest ... This year I was on the road in New York, London and Zurich. I observe and feel a lot of belonging to Germany. People want to invest in Germany," he told CNBC on the sidelines of the Tegernsee summit earlier this month.
Robin Winkler, chief German economist at Deutsche Bank, echoed the sentiment, telling CNBC that the recent political moves could trigger a wave of private sector investment.
"There has been a notable pick-up in investor interest in German infrastructure," he said, noting that the mobilization of private capital would be crucial for the government "to get a bigger bang for its buck out of the new special fund."
On top of Berlin's plans to spend big on infrastructure, its commitment to cut red tape would also likely be attractive for investors, Winkler explained.
"In recent years, infrastructure projects in Germany have been hamstrung by excessive bureaucratic and regulatory hurdles. There is now an ambitious plan to reduce these hurdles... We expect these reforms to incentivize private infrastructure investment, too," Winkler said.
Berlin has also suggested it could take further measures to incentivize private investment, with economy minister Reiche telling CNBC that the government needed "to shape programs and make offers for the private sector to invest in our infrastructure."
Dresden's Carola Bridge has become emblematic of the state of German infrastructure. It partially collapsed in September of 2024, just minutes after the last overground train of the night had crossed it.
According to the organization Transport & Environment, thousands of bridges across Germany are in need of work and require require investments totalling around 100 billion euros.
Elsewhere, Germany's train company, Deutsche Bahn, reportedly said it will need around 150 billion euros by 2034 to modernize, maintain and expand its existing network and boost digitalisation.
More broadly, a report from the Cologne Institute for Economic Research from May 2024 suggests 600 billion would be needed over 10 years to move the country forward on infrastructure.
Questions about infrastructure investment remain despite the political momentum, including concerns about time pressure and capacity, Jens Thiele, head of project finance and corporates at Hamburg Commercial Bank, told CNBC.
"It will be interesting to see how long approval processes will take to get projects to RTB (ready to business) stage and whether there's enough capacity to develop all these projects within such a compressed timeframe," he said in written comments.
J.P. Morgan's Fuzesi also noted timing is a key concern.
"Investors have asked questions about the speed of delivery," he said. "In my view, "infrastructure" is very broadly defined and therefore constraints in one area can be overcome by doing more in another area. Ultimately, this will come down to political will," Fuzesi explained.
He added that it was also unclear when — and how successfully — the government's goals to simplify planning processes would become a reality.
For the German government, pressure is on to soon implement its investor-enticing promises and its investment targets.