Cairn’s ability to deliver on promises will be put to test

Early yesterday morning some 157.6 million new ordinary shares were admitted to trading on the London Stock Exchange in connection with Irish housebuilder Cairn Homes. This was the final piece of the jigsaw in a capital raising move that has netted the cash-hungry business some €169 million in funding for acquisitions, site development and working capital.

Cairn has raised a hefty €661 million since its flotation on the London stock market last June. Separately, in March, the company announced an extension of its senior debt facility to €200 million, with Ulster Bank joining AIB as a banker to the group. By the end of February, some €554 million of that firepower had been deployed on the Irish property market. In December, its biggest deal to date was announced with the part-acquisition of Project Clear from Ulster Bank.

Cairn paid €378 million to acquire 120 loans secured against 1,200 acres of land, across 28 residential development sites, and 21 borrower connections.

Right sites

It is also in the process of buying the development assets of Argentum for €111 million, which includes some prime sites in Dublin.

Michael Stanley

, Cairn’s chief executive and co-founder, told me yesterday it was still in the market for the “right sites at the right locations”. It currently has net cash of €170 million and possibly up to €90 million of assets from Project Clear to sell off.

With first-time buyers crying out for new homes, it could be argued that Cairn is perfectly positioned to cash in on this pent-up demand over the next decade or so, especially as it owns some 20 per cent of the available residentially-zoned land in the greater Dublin area.

Or it could be said that the company has left itself heavily overexposed to a dysfunctional market where credit is being choked, planning red tape is rife, and there is a lack of scale and skills among contractors.

Execution risk is arguably the biggest issue facing the business. Last year, Cairn completed the sale of 11 homes and had revenue of €3.7 million.

Yet it is now proposing to build and sell some 400 units next year, rising to 800 the following year before breaking through the 1,000 barrier in 2019.

Hitting 1,000 units a year won’t be easy, as any builder/developer would testify. It will require careful management of multiple sites, an availability of sub contractors, and a fair wind at its back in terms of securing the necessary planning permission, which is never straightforward in Ireland.

Then there’s the issue of demand. We know it exists but we also know there are significant issues with credit, especially for first-time buyers. The Central Bank’s rules on deposits and income limits have made it more difficult for first-time buyers to secure a mortgage, particularly in Dublin, Cairn’s core market.

They are being reviewed by the regulator but nobody is expecting wholesale changes when the announcement comes in November.

With capacity to build about 12,000 units on its various sites, it would probably take the company 10 to 15 years to build out its current landbanks. In the UK, housebuilders typically like to have six to seven years of work on their books at any one time.

On the plus side, its cost of funds is low, at about 3 per cent. It has an experienced management team, led by co-founder Stanley, which has impressed the market and the company is chaired by former KBC Bank Ireland chief John Reynolds, who knows his way around the mortgage market.

Blue-chip investors

It has secured some serious blue-chip investors, including Fidelity and Blackrock, who don’t seem to be put off by the fact that they won’t receive a dividend until 2019 or beyond.

Stanley and his team have avoided getting caught up in the debate around the Central Bank’s mortgage rules and has not joined some of its rivals in making a State aid complaint to Brussels in relation to Nama’s plan to build 20,000 houses out to 2020. “We just want to get on with our own business,” he told me.

After a bruising general election campaign, there also now appears to be a clear political imperative to get the Irish housing market moving. For example, Fine Gael has signalled its intention to reduce the Vat rate on construction to 9 per cent to help reduce the costs of building a new home.

House building is not an exact science and the coming years will put Cairn’s ability to deliver on its promises to investors fully to the test. @CiaranHancock1