Construction costs have increased to unprecedented levels
Tue Dec 27 2022 – 00:12
Sir, – It is with disbelief, disappointment and absolute frustration that I and others involved in facilitating new residential development in Ireland read “Rise in ‘uncommenced’ housing linked to land speculation” and Cantillon’s “Age-old land hoarding problem” (Business, December 22nd), referencing a newly published report by the Department of Public Expenditure and Reform.
Anyone who has carried out a development appraisal (end price versus costs) for an “apartment” development site in Ireland in the last 12 months on a formal or informal basis would know that it is not viable to fund or build apartments in the majority of the State.
Construction costs have increased to unprecedented levels over the last four years. Also, as highlighted by the Society of Chartered Surveyors Ireland in their July 2022 Construction Tender Price Index report, the construction industry is reportedly “near peak capacity”, and as a result increasing new supply further will be a challenge, and so it is not surprising that apartment commencements are not following consents.
Drawing conclusions around the reasons for non-commencement of planning permissions without factoring in the practicalities of development is misleading.
Historically the land price was seen as around 33 per cent of the total development value (GDV).
Owing to numerous factors relating to rising costs over recent years the land price for apartment schemes is probably now down to between 8 per cent and 10 per cent of the development value. As the planning system in Ireland is so dysfunctional there can justifiably be land value increases as a result of securing a planning permission.
However, where land has a planning permission secured there is very little to be gained in just sitting on the land, especially where build costs are continuously increasing. Stakeholders that have capital and the required expertise typically look to develop their land so they can earn the profit from development and return of their site price.
The most recent cycle for apartment construction started in circa 2016 and while many parties with land have sought to improve the develop-ability of the land by securing a planning consent over the last four or five years, unlike in the 1990s and early 2000s where funding and purchasers were freely available and commencements followed planning consents, most of these new planning permissions will not be built as a result of the lack of funding and viability.
The funding model for the development of apartments in Ireland is broken, and has been for a number of years.
Owner-occupiers cannot fund new apartment development, small investors have left the market and developers have had to rely on the Irish taxpayer (through local authorities and approved housing bodies) or large institutional investors to fund and make viable the limited amount of apartments that have been developed over the last five years.
The planning permission is only one element of what is required to commence construction of these projects, which are high in complexity and risk.
You cannot develop a site unless you have the expertise and capital, and it is viable to do so.
It is evident from reviewing the CSO and Eurostat figures on the composition of purchasers of new houses and apartments in Ireland that private institutional funders only make up 11 per cent of the purchasers over the last three years, with the Government and approved housing bodies making up 22 per cent.
It is worrying that a Government department charged with delivering the National Development Plan, which is critical to Ireland’s future, appears to be out of touch with what is happening in reality.
Unless the Government addresses the real issues around funding and viability, and incentivises apartment development in some form, as is done in other jurisdictions that recognise the challenges of high-density development, we will be reading about similar commencement shortages next Christmas, and the next and thereafter. – Yours, etc,
Hooke & MacDonald
Source – Irish Times