A moribund building industry at home means that those who still can are looking abroad, writes BARRY O'HALLORAN

MANY PEOPLE in the Irish building industry would happily wave goodbye to 2010, if they weren’t so worried that 2011 could be even worse.

The sector’s decline entered its fourth year over the last couple of months, but there is no sign of any real let-up in the recession, while there is a fear that it could intensify as the State cuts back on capital spending.

At the peak of the property boom in 2006, close to 90,000 new homes were built in the Republic. In June, DKM Economic Consultants, an independent firm that regularly produces reports on the sector for the State, among other clients, predicted that this year’s total could be 7,500 and 2011 could struggle to match even that.

“The industry is in a really bad place at the moment,” Annette Hughes, a DKM director acknowledged at the time. She noted that employment had fallen by two-thirds over three years to under 100,000 people, while the industry’s value to the economy had slumped from €40 billion to €17 billion. In 2011, this is likely to shrink to €11 billion.

Against the background of this decline, the State’s toxic assets agency, Nama, finally began the job of taking over €80 billion or so of commercial property loans from the five Irish banks guaranteed by the State: AIB, Anglo Irish, Bank of Ireland, EBS and Irish Nationwide.

This had immediate ramifications for the developers who owe that money, some of whose businesses, such as Liam Carroll’s Danninger-Zoe Developments empire and John Fleming’s Fleming Construction, were already going through insolvency.

Nama’s job is to take over property-related loans and, as such, it should be removed from nuts-and-bolts construction. However, some building companies had become so tied into development that it was impossible to separate them.

The consequences were terminal for two, Michael McNamara Company and Pierse Contracting, which went into receivership in November. Developer Bernard McNamara controlled Michael McNamara Company, but stepped back from any role other than shareholder early in the year in an effort to protect the business from the storm that was swirling around him personally.

Among other things, he was an investor in the Irish Glass Bottle site in Dublin’s Ringsend. That site has shed 90 per cent of its value since he and a partnership that included the State-owned Dublin Docklands Development Authority paid €412 million for it in 2006, however. He also put money into the Shelbourne Hotel in Dublin, which looks unlikely to return the investment made in it since McNamara, John Sweeney, Bernard Doyle and Simon Courtney bought it in 2004.

His efforts to keep the company away from his personal problems turned out to be no help. The company is liable for property loans that Nama has taken over. The agency was not convinced by a business plan submitted by Michael McNamara and placed it in receivership.

As it is an unlimited entity, there is little information about it publicly available, and Nama is not going to comment on its financial state for the moment. However, it is understood that inter-company loans and liabilities contributed to Michael McNamara problems. On that basis, it looks as if the company was funding the property development activities of other group entities or subsidiaries and that the weight of these pulled it under.

What happened to the Pierse group was more public and it painted a clear picture of how enormous credit burdens, taken on to fund speculation in the property bubble, can close businesses that could otherwise have a chance of surviving the recession.

The High Court put Pierse Contracting and Pierse Building Services in liquidation with a deficit of €212 million. It was owed €70 million by a related company, Remayne, which it acknowledged was worthless, and had guaranteed €77.5 million worth of loans given to a range of subsidiaries and associated companies.

Most of it was related to property development, while some was related to partnerships with property player Paddy Kelly and other developers. Pierse was in the construction business and was not a property developer, but it had to get into bed with property developers and take on some of their risk in order to get work. This meant that the core building operation was underwriting some of risk involved.

That seemed fine in a rising market but when the market turned – and it did very dramatically – it spelt disaster.

Alongside this, as the industry slowed, companies competed more intensely for jobs, which meant that the core business was being squeezed as well. At the end, the company simply could not keep the show on the road.

As a result, about 1,600 subcontractors, owed a total of €50 million, are unlikely to get paid. This could have serious consequences for at least some of these operations and could mean further attrition in the industry.

In the immediate aftermath, a number of sources predicted that more contractors would follow. It is unlikely that 2011 will pass without other similar failures and property-related debt is likely to take centre stage in any that occur.

Debt was a big issue for housebuilder McInerney, whose Irish business is under the High Court’s protection from its creditors. It is also awaiting that court’s approval for a rescue plan put forward by the company’s examiner, Bill O’Riordan of PricewaterhouseCoopers, which is backed by a new investor, US-based private equity fund, Oaktree Capital.

The plan involves paying three banks – Anglo Irish, Bank of Ireland and KBC – €25 million cash in full and final settlement of a secured €113 million debt. The fact that an investor such as Oaktree is involved means that the fund believes that McInerney has a viable business, if the debt problem can be resolved.

Some observers believe that if McInerney gets its rescue plan across the line, it could pave the way for others. The examinership works means that companies can get a legally-endorsed and formal debt restructuring.

That is easy in cases where creditors are willing to take haircuts, but the problem in the McInerney case is that the banks say that they will fare better in receivership. In this case, it would take 11 years and effectively it would mean that the banks will build homes on McInerney’s sites and sell them. Judgment is expected on January 10th; it would be foolish to predict which way the High Court will go.

For much of the building industry, the State remains the only show in town, but the Republic’s finances are in such a mess, thanks to the banking crisis, brought on by the property boom, that it is cutting its budgets in this area drastically.

While the Government is committed to spending money on such areas as schools and water-treatment plants, few projects are going into the planning process, while those that are under way are coming to an end.

A moribund industry at home means that those with the wherewithal are looking abroad. Sisk has been active in Britain and, along with a partner, Dragados, recently won a contract for construction of a series of tunnels associated with London’s new commuter line. It has also won contracts in the middle east.

The Middle East and Asia have become important markets for others, including Project Management and the Sammon Group. Others will likely follow suit over the coming year.