Pages

A 2002 article I wrote for Business Ireland: Perhaps the canny Irish investor knows that she can’t put all her eggs in the one small basket.

A review of the construction industry for 2002


David Donnelly’s working day involves everything from carpets to curtains, from ovens to dishwashers, and from uplighters to frying pans. He is in charge of Apartment Outfitting at Clerys, and he has never been busier. His customers are the hundreds of Irish property investors who are ‘buying to let’ up to 50% of new apartments built in the country and who don’t want the hassles and delays associated with doing the furnishing themselves. For about €5000 for a one-bed apartment, David’s team can, in a matter of days, have a just-decorated shell turned into a home ready for a tenant to move in.

The department was set up about six years ago to meet the sudden burgeoning demand for apartment furnishings as part of the relentless Irish property boom. Having sourced a range of “quality, robust products” and set up a warehouse system so that most things could be in stock, Clerys could offer customers the benefits of economies of scale and time, thanks to their faith in the prospects for the market.

According to PJ Timmons, recently appointed Chief Executive of Clerys, the apartment outfitting business has been growing significantly every year since, and in 2002 doubled in size “a very strong year”, which he puts mostly down to the return of the investor with the repeal of Bacon. He doesn’t see any need in the immediate future to review the scale of the business.

Ronan O’Driscoll, head of new homes at CB Hamilton Osborne King, would share Clerks' confidence. CB Hamilton Osborne King recently handled the sale of Hardwicke’s 77-unit development, Grand Canal Wharf, and recorded €20 million in sales from plans in just over two weeks. The apartments, about half of which would have been investor-bought, will not be ready for occupying until late 2004, suggesting that no matter what happens in the property market the Clerys’ Apartment Outfitting team will be busy for a few years to come.

O’Driscoll confirms that the apartment sector was very strong this year, accounting for 70% of the company’s sales (which would be symptomatic of the market generally) as opposed to only 30% three years ago. It follows that apartment building has come to account for the vast majority of house construction activity in Dublin city. In the suburbs too there’s a move away from semi-detached housing with large gardens front and rear to townhouses and duplexes and even apartments, thanks to the higher building density provisions. In the past eighteen months to two years the duplex has become particularly prevalent in County Dublin, according to O’Driscoll.

The new homes sector overall was very strong, and the company had their most successful year to date in terms of sales. O’Driscoll puts this down to the return of the investor, but also to the turbulence in the stock market, to continued population increase, and, more surprisingly, to marriage break-ups, which “has become an important market sector of late”.

He thinks we’re still in a major construction phase and bends to saying that the Dublin skyline remains the surreal, crane-filled scene that it has been for the past ten years. “They’ve been there so long, they’ve had children,” he jokes, “and even the small baby cranes are growing up now. Yes, there’s a very significant degree of development still taking place in the city.”

The boom has been going on for ten years, but can it continue? “Yes, till 2011,” suggests O’Driscoll, “if you look at the demographics. Each year from now to 2006 there will be more and more people of a house-buying age coming to the market. Then, between 2006 and 2011 it will plateau at that high level. At least up to then, the fundamental demand from first-time buyers will be there, and combined with that there’s net immigration into the country, the marriage breakup phenomenon and so on.”

But the economy may be working against that demand. In the office and retail sectors the take-up is down and vacancy rate up dramatically. Likewise, in the industrial market there was little or no speculative development in 2002 due to the excess supply that reached the market in 2001 still requiring take up. There is no denying the fall in occupancy levels at IDA’s industrial estates in Dublin, in particular the For Sale status “on the Saronix and Solectron and Gateway facilities and three other buildings for which data centres had been proposed at Clonshaugh Industrial Estate”. Ronan O’Driscoll accepts these economic trends make it difficult to forecast price increases over the next couple of years right across the industry.

Eunan King, Senior Economist at NCB Stockbrokers, looking at the supply side, has been more audacious in his comments about the likely direction of prices. Back in August he wrote a report called ‘The Last Gasp of the Great Irish House Price Boom’ in which he argued that the shortage of supply that has been fundamental to the inflation may be coming to an end with figures for house completions and home bond applications increasing steadily over the past three years. He admits that “so far I am wrong, but my timescale is in to next spring and summer when I think a lot of the ‘bought off plans’ by investors will materialise as actual supply in a rental market which has already softened.”

King believes that the required supply of new housing “will need to be similar to that of the last six years, about 48,000 pa. The current pace of new house building, about 56,000 p.a., appears to be too high to be sustainable over the next four years. Therefore prices should not rise much if at all from here.” He adds that it is not a warning of doom just a note caution. Of course, we’ve had notes of caution sounded about the property boom almost since before it began.

In contrast, the Irish Home Builder’s Association (IHBA) suggests, based on its analysis of the processing and level of planning applications, that there will be a dramatic fall in housing supply and, by extension, instability in the housing market. Kevin Gilna of IHBA points to certain trends in 2002: the anecdotal downturn in activity on the ground, the reported falling demand for building materials from suppliers, the Central Statistics Office (CSO) estimate of a 27% fall in the level of residential planning permissions, and their own figure of a fall in the number of new house planning applications in the Dublin area of 65%.

The SCS Housing Study 2002, produced by the Faculty of the Built Environment in Dublin Institute of Technology, in association with the Society of Chartered Surveyors (SCS), finds that between 15,000 and 20,000 housing units are needed per annum in the Dublin region but that there are only 10,000 completions coming on stream. The conclusion: “there will be no decrease in house prices generally in Dublin for the foreseeable future.”

The DIT research shows that present housing policies are causing continued constraints on housing supply, with a negative impact on general affordability of homes and on the development of proper urban settlement.

“The Dublin housing demand will continue to relocate into the Mid-East and outer Leinster areas,” says SCS president, John Daly, “and we’ll continue to see an outpouring of the Dublin workforce into counties Wicklow, Kildare, Meath and Louth, with added road congestion, transport difficulties, adverse environmental affects and all the inherent commuter problems.”

The authors warn that the lack of affordable housing will damage the future economic competitiveness of the Greater Dublin Area. “Ireland has already slipped in world competitiveness ranking, partly due to inflation in which high house prices have played a significant part, and this government's current poor housing policies look like continuing to contribute to the downturn,” said the SCS president.

“However, there is some good news,” says John Daly, “with the study showing that in the short-term the potential is there to increase housing supply significantly if government were to take a few steps, such as the release of under-utilized land holdings with ‘ready-to-go’ planning permission.”

Dr. Williams states that it is evident that the planning and development system requires “a significant renewal” involving a major “shift away from what is currently an adversarial legal and statutory regulatory control system.” He states that the traditional blueprint 'predict, zone and provide' planning process is outdated.

The IHBA would, with a different agenda, agree with such a conclusion, and argue that we badly need increased investment in the planning process, in training, recruitment and management so that the planning process can be speeded up – a major factor in the high cost of housing according to them. They also blame the two-year Withering Rule and suggest it be extended to five years. Otherwise, planning permissions for 44,000 housing units of which 21,000 are in the Greater Dublin Area will expire on December 31st 2002, with resulting huge costs to the exchequer.

Furthermore, while the IHBA supports the principle behind the Planning and Development Act with reference to social and affordable housing, they suggest that the Act as introduced was ill considered and evidently counter productive. IHBA believes that a partnership approach between local authorities and the private sector has the capacity to deliver sufficient social and affordable housing units.

Meanwhile, back in Clerys, while the apartments still go up and the investors continue to have faith in the market, David Donnelly is off on another job. He’s even being asked by his Irish clients to do outfittings in England. Perhaps the canny Irish investor knows that she can’t put all her eggs in the one small basket.

No comments: