With more than 70 cranes now visible in the skies above Dublin, to the casual observer, construction is booming, a sign of the recovering Irish economy.
Indeed earlier this year, the ESRI noted the construction sector is set to assume “a growing importance” in the domestic economy over the medium term – while having fallen off a cliff in the years following the crash, the contribution of construction to economic growth has increased substantially in recent years.
However, unlike in the run-up to the boom, these days construction tends to be weighted more towards the commercial side, with residential development considerably lagging behind.
And it’s a lag, that despite recent efforts, doesn’t look like dissipating any time soon.
“The fact is that we have at this point in time a huge shortage of suitable housing stock,” says John Bruder, managing director of Burlington Real Estate, noting that while it’s to be commended that we now have a Minister for Housing in Eoghan Murphy, there is still “an inadequate and underwhelming response” to the development of new housing stock.
“There is little prospect that the situation is going to get any better for the foreseeable future,” he adds.
The problem – at least in part – is that while there is plenty of demand for housing stock, the sheer cost of building outweighs the benefits of doing so.
“If there was money in it there would be people doing it,” says Bruder.
Cost of funds, planning regulations, construction inputs, VAT; last month the Society of Chartered Surveyors Ireland (SCSI) came out with a report which shocked many, as it revealed that building a medium-rise apartment in Dublin’s city centre would cost from €470,000 to €578,000. As a next step, the SCSI hopes to cross-compare the cost of building in Dublin with other cities internationally.
“Even with the value of residential property, it is not economically viable to undertake new development, particularly in the city,” says Bruder, noting the type of development that is most needed, ie apartment blocks in city and town centres close to transport, is the most unviable at present.
For Patrick King, director of the SCSI, what needs to be done now is to see if the sector can cut costs.
“By and large, industry needs to start looking and see what it can do,” he says, adding that issues such as design flexibility and affordability need to be considered.
Initiatives such as Help to Buy, which offers a tax rebate for first-time buyers is helping, says Roland O’Connell, chairman of Savills, but adds the lull is also a factor of what has gone before.
“We went through a hugely traumatic time in the construction business,” he says, “and to start the wheels rolling again takes a lot more time than the general public might appreciate . . . it would be naive to think it wouldn’t take a number of years to ramp up construction again.”
A lack of skills is also an issue.
“Normally, when people leave school a certain proportion go into the construction sector, but we’ve missed out on five to seven years of this normal pool of people,” notes O’Connell.
But he is as certain of the need to get moving as others are.
“We need to see the construction of apartments, particularly in central areas of the city,” he says.
There’s also another more fundamental issue that also needs to be addressed, says King.
“There is also a cultural question there that’s outside the scope of the report,” he says, noting that Dublin has one of the lowest levels of apartment-living in Europe.
“This should opens up a larger discussion about what it is that people want their housing to do,” he adds.
Commercial activity
Commercial activity, on the other hand, is roaring ahead.
“In the commercial sector, offices and industrial and retail, the level of construction is broadly where you’d expect it to be,” says O’Connell.
But here, as elsewhere, it’s not a homogenous vista.
“In general, it’s a very positive picture, but a very patchy picture,” says Bruder.
Indeed, when it comes to offices, “it’s a story of two markets”, Bruder says. In the centre of Dublin, the value of “prime, bright shiny offices” has recovered to what it was at the peak of the market. But outside of that, on the fringes of central business districts, there is “still very good value to be had”, as you can still buy property below the replacement cost.
Brexit of course, and the potential for UK-based business to relocate here to maintain their access to the European single market, is the topic du jour when it comes to offices.
“There has been a huge amount of talk and fascination about Brexit over the last 18 months,” agrees O’Connell. “But I keep reminding people that long before the Brexit vote, the economy was performing really well. We don’t need a big boost from companies relocating from Brexit to keep the market going. We just need to keep doing things the way we were doing them before.”
In any event, O’Connell would not be in favour of an “avalanche” of companies moving here.
“A continuous gradual level of relocations from the UK is what you’d like to see,” he says, drawing on the earlier point about the housing shortage.
While retail has declined, Bruder says “other sectors are growing very dramatically to fill the gap”, pointing to the continued growth of the food and beverage sector, as evidenced by the plethora of coffee shops and bistros on our city streets.
Commercial property and the increase in stamp duty
In October, the Government raised the rate of stamp duty levied on commercial property transactions from 2 to 6 per cent. For the industry, the surprise was not necessarily the increase in duty imposed, but the scale of it.
“It was a real shock. We thought it might double from 2 to 4 per cent but we were really quite shocked that it tripled. It’s seldom that any tax triples overnight,” says O’Connell.
He now expects transactions to dip on the back of the move.
“When transaction fees are low, it’s much easier to buy and sell property. As they start to rise, it becomes more difficult to buy and sell property”.
After all, the greater the costs, the longer investors may have to hold property in order to get a return on their money. As O’Connell notes, an investor will typically need a 10 per cent uptick in the property price just to break even – and a 20 per cent increase in prices to make a capital gain of about 10 per cent.
“This can take a long time,” he says.
But while the move may have shocked, it does put Ireland on a par with many other countries. According to data compiled by Savills, in Brussels the stamp duty rate touches almost 12 per cent, while Hong Kong, Paris, Cologne and Dusseldorf all have rates of more than 6 per cent, with Ireland now joining Berlin, Frankfurt and Australian cities like Sydney and Perth on 6 per cent. However, it is now uncompetitive vis-a-vis other European centres such as London (4 per cent), Milan (4 per cent) and Copenhagen (1 per cent).
