Building cost inflation still a challenge but some hope on the horizon

Supply still moving at a slow pace that isn’t catching up with demand but the hope is that this pace will gather significantly over the next year or so
Building cost inflation still a challenge but some hope on the horizon

Uncertainty around build cost inflation is the primary concern across all property market sectors.

As if one needed further reminding of it, the latest bi-monthly property report from CBRE underlines once again the challenges of rising costs being faced by builders. These are most particularly being felt in the area of residential apartment blocks.

There is some significant Government action finally on the way to remedy this impasse in the form of the proposed grant to builders of €120,000 per unit.

This should make residential apartment building a profitable business once again but the proof will be in the pudding and not everyone is convinced that this particular pudding will cut the mustard.

According to Binesh Tholath, managing director of Absolute Property (one of Cork’s largest specialists in block management), the financial stipend destined to allow builders to provide apartments profitably for the first time in many years will, most likely, simply result in apartment prices rising and apply upward pressure to house prices generally.

What is clear is that building cost inflation is not going to reduce any time soon. According to the CBRE report, the continuing tangible elements of this trend include rising inflation rates generally, disruption to the supply chains and an increase in the cost of capital source – the latter linked to the real potential for interest rates to rise in the near future.

According to Marie Hunt, head of research and consultancy at CBRE Ireland, the various elements at play with regard to building cost inflation are awash with uncertainty in a world thrown into post-pandemic insecurity against a worrying geopolitical backdrop.

“Uncertainty around build cost inflation, which in Ireland’s case is compounded by lengthy planning delays in some cases, is the primary concern across all property market sectors,” says Marie. “This is likely to impact negatively on delivery timeframes and ultimately, on supply in certain sectors of the market. This will accentuate already severe supply demand imbalances in some sectors – not least the housing sector.

“It must be remembered that property has historically proven to be good hedge against inflation and that even though there has been an upward movement in bond yields in the Irish market over recent months, there is still a very attractive spread between ten-year bond yields and real estate yields, which augurs well for the sector.” 

The report also makes reference to the continuing lack of supply of development land. The scarcity of sites coming onto the market, it says, means that any well-located sites that are due to come to the market over the coming months “are likely to be keenly bid”.

The building inflation costs are something of a rising, moving target and the more delays in involved in the supply of sites, the more the rising costs of building will be felt in the final provision of new homes.

A number of developers who have sites with the intention of selling them for development have been holding off bringing them to the market until such time as they have more clarity with regard to new local authority development plans. These are currently being finalised in many cases.

It isn’t all negative news, however, and while some of the tinkering with the market that the Government has been engaging in will have a limited impact, the fact is that the underlining issue of supply of homes is improving, according to the latest market report from Goodbody. It is moving at a slow pace that isn’t catching up with demand but the hope is that this pace will gather significantly over the next year or so.

Looking at Quarter 1 home completions in 2022 compared to the same period in 2020, there has been a 15% increase (45% up on home completions from Q1 in 2021, but that was a full Lockdown period).

More significantly, the share of apartment building has grown to a record high – even before the Government begins its €120k-per-flat incentive scheme for builders.

There were 5,669 homes completed in the first quarter of this year, which is still running at a rate that is well below the projected demand requirement of 35,000 units per annum.

The main driver of this relative surge was in apartment completions in Dublin, while the building of housing schemes remained more-or-less unchanged.

Continuing an upward trend that has been in evidence since the first quarter of 2019, apartments completed in Dublin in the first three months of 2022 accounted for 67% of all homes built.

Seen nationally, the phenomenon isn’t having much of an impact just yet. And, when it does spread to the likes of Cork, Limerick and Galway in the short term, it will be dominated by flats being built for rent, rather than flats being built for sale on the general market (as it is the case currently in the Dublin market).

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