Viability of many housing projects now in question

Viability of many housing projects now in question

The boom is back, or so we keep hearing from many different commentators, in relation to construction activity.

While it is quite true that commercial and industrial construction has taken off over the last number of years, we are still left with a lagging residential construction sector.

Although the output of the residential construction sector is increasing, it is still significantly below the required demand. It is anticipated that approximately 18,000 residential units will be completed in 2018.

However, many of these are one-off housing units, renovations and retro-fits, many of which will not reach the market.

The true level of housing output that will reach the market in 2018 is likely to be between 10,000 and 12,000 residential units.

Figures are still only available up to September but these show that nationally only 9,239 residential units in scheme - housing estates - and apartment developments were completed for market.

The majority were completed in Dublin and the mid-east where the market value is greatest due to demand and purchasers being in a position to secure a mortgage product.

The National Planning Framework calls for 50% of all residential development in Metropolitan Cork and other areas to take place on brown field or existing urban sites.

It is difficult to see how apartments can be constructed with the current cost structures for apartment development.

Constructing and delivering apartments is not financially viable for the “build to rent” sector or for sale to open market in locations outside of the prime Dublin areas.

The rents, the yields and the market value of an apartment product is below what it costs to construct.

While the new guidelines in relation to the design of apartments and the new guidelines in relation to tall buildings are welcome, they still do not adequately address the overall delivery costs with apartment construction.

Charging Vat at 13.5% for those wishing to develop residential units in sustainable locations is counter-productive and tax policies should align with planning policy.

Some of our building regulations in relation to apartment construction are onerous.

We need a Sustainable Development Initiative (SDI) for apartment developments, particularly in the regional urban locations such as Cork, Limerick, Waterford and Galway where we are seeking to grow the population by 50% mainly, in a lot of instances, in brown field locations.

If we are serious about the National Planning Framework, if we are serious about these growth targets for Cork City and elsewhere, then we absolutely need an urgent review of all the delivery costs.

Another complicating factor are the national housing density guidelines. In Metropolitan Cork, these density guidelines are causing confusion in the market place as they seek 35 units to the hectare in locations that are suburban and where there is simply no demand for apartments or duplex units.

A developer cannot build apartments or duplex units where there is simply no demand for that product in that location.

In the centre of Cork City there is obviously demand but there is simply no demand in locations like Midleton or Carrigaline for apartments or duplex units. These national density guidelines are not appropriate in suburban locations and need to be altered to reflect the commercial reality.

In the private sector, the model has always, and continues to be, that a developer will purchase zoned residential land and then go through the planning process to secure the necessary planning permission for residential development on that land.

It seems that every proposal for residential units is subject to objections from local residents and, in some instances, politicians objecting to the housing supply that they themselves are calling for.

If land is zoned for development there should be a presumption that development will proceed.

In some of the larger markets in metropolitan Cork, it is rare that any development will produce 50 sales in a year.

Even in the Cork residential market, the largest outside of Dublin, it can take many years for even the smaller developments to complete and sell out. A developer, therefore, finances the development in phases.

In other words, the sales of the first 20 units justifies the commencement of construction on the next phase of 20 units in a typical scenario in most markets outside of Dublin.

Residential property development for the private sector is a risky business, with large, up-front costs that cannot be recouped until the development completes. Many property developers will tell you that you only make your profit on a development when the final few houses complete. In most instances, this can be many years after the original proposal was made.

Housing policy needs to ensure that the builders involved at the lower end of the scale can continue to be involved in the Irish construction sector and the residential sector. Housing policy cannot always be aligned to those who are mainly only interested in the larger markets, who can build at scale and take a very long-term view.

In many towns in Ireland, it is simply not viable to build a house and sell on the open market.

We have seen, throughout 2018, a cooling off on house price growth throughout most markets and while double-digit increases took place in the earlier part of 2018, in some locations, all the indicators for the latter part of 2018 show that single-digit increases in house prices are going to become the norm.

The Central Bank’s lending rules will ensure that mortgage lending is limited to 3.5 times the income of most applicants.

This policy is working in cooling house prices but it also inhibits the ability of the private residential construction sector to provide units in most of Ireland.

If we are at the stage in the market where house prices cannot increase, land has reached its maximum value and replacement costs are still greater than market costs in most locations, then controlling input and delivery costs should be to the fore in housing policy.

There will need to be a trade-off if we are serious about delivering more private residential construction units throughout Ireland.

The State, semi-state agencies, local authorities and financiers will have to accept that their take from a residential unit will have to reduce in order to boost supply.

Wages and materials, factors largely outside the control of the industry, are increasing. The viability of many private residential projects, right throughout Ireland, is now coming into question.

Can we proceed? Will we make a profit if we proceed? In what phases will we proceed? These will be foremost in the thoughts of all of those involved in the private residential construction sector.

Conor O’Connell is Munster regional director at the Construction Industry Federation

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