Construction Return

It has been a long time since we could detect any positivity in the construction sector following a collapse and decline back in 2007. The Construction Industry Federation has estimated that activity in 2013 will by up by 15.5% on last year, though with home building, a key sub-sector, off by almost 7.5%. Architects are in a position to spot early trends. John Graby of the RIAI, the architects organisation, has stated that building document contract sales are up by 20% in the first nine months of the year. This is the first time in six years we have seen people advertising for architects and technicians on the RIAI website. The large oversupply of units is being mopped up in cities causing rents to surge, along with the price of family homes in the Dublin area, in particular. In large urban areas, demand greatly overshadows supply. Although people still remain cautious. Any form of crisis in the eurozone or beyond could knock confidence. The banks and building societies have kept their wallets tightly sealed. Capacity in the sector is much reduced. Many of the experienced builders are no longer in business, or are operating in a greatly reduced capacity. People have now realised that more building is needed to fill gaps in residential, commercial, and social infrastructure.

Long Term Sustainability

Industry experts suggest that Ireland’s long-term sustainable house building capacity is in the region of 25,000 a year, perhaps close to 30,000. The CSO has predicted a rise of around 400,000 in the population of the greater Dublin area over the next 15 years. Cork, Galway, and Limerick could also see substantial growth. These people will need roofs over their heads. While many economists caution against a return to the bubble years, a failure to ramp up construction in response to demand in the right areas will itself trigger inflationary pressures, which could feed into the labour market. However, a number of obstacles lie in the way of a recovery in building. The CIF says the total number of housing starts in 2013 will end up between 4,000 and 4,500. Dublin needs 10,000 units a year. To date, large-scale developments have yet to get off the ground. Typically, you have 200 unit schemes where 60 have been built in phase one and another 40 are under construction. Until recently, builders were not confident that large numbers of units would sell, but this has begun to change. Curiously, despite a collapse in construction output from a peak of €39bn in 2006 to around €8bn today, building costs have not fallen. DKM Economic Consultants say construction costs fell 1.4% in 2009 following two years of growth in excess of 10%. However, in 2010, costs were up by 1.6%, the key driver being materials — much of which are imported. The world price of steel and other inputs has been high in recent years, boosted by the building boom in Asia. Average construction earnings fell by 15% between late 2010 and 2011, but this decline was not enough to offset rising material prices. The hope is that material prices would fall as construction activity worldwide eases. At the same time, tender prices have tumbled, forcing construction providers to trade unprofitably, in many cases. Any major ramping up in construction can only occur when projects can be seen to pay their way. Until then, the banks will hold back, although there is some evidence that financial institutions are beginning to dip their toes in the development waters, with the commercial side leading the way. Affordability will remain a key issue for hard-pressed consumers. A recent survey by the Irish Housebuilding Federation indicated that the average cost of constructing a typical three-bed house is between €250,000 and €300,000, when land prices and Vat are included. The biggest fear for homebuilders is the ‘Social & Affordable Housing Obligation’, under which developers are required to put aside one fifth of houses for social housing or pay local authorities one fifth of the land value. A measure that might have worked during the boom is now acting to restrain activity altogether. Development levies are another major irritant. This year, Dublin local authorities finally removed a levy of several thousands on developments taking place near the proposed Metro North line, which has been mothballed. The housing minister, Jan O’Sullivan, has pointed to the existence of planning permissions for around 30,000 units in the Dublin area. The CIF counters that 21,000 of the permissions are for apartments, when what people want are family houses. Many of the house permissions, moreover, are ties into apartment permissions on the same site. CIF sources call for a relaxation in planning to save builders the expense and delay from having to resubmit applications for revised planning permission. Mr Graby believes planners should stick to their guns. In many areas, in order to support services and ensure that populations are not scattered, high-density developments, particularly near major transport hubs, will still be required. Annette Hughes of DKM Consultants says real growth after inflation next year in the sector could reach 10%. In particular, she points to a Government stimulus package worth €2.25bn announced in Jul 2012 which should finally begin to kick in. The ability of the public sector to actually deliver on Government commitments will be critical. She also believes Nama is emerging as a key player, with around €2bn in unfinished developments. The CIF estimates it will take between 18 months and two years for the Government capital stimulus package to reach the point of site development. It is optimistic about recovery in 2014 following a lengthy period when the public capital programme was left to contract. The CIF feels Nama already makes a big difference, with €2bn in working capital and €2bn in seed capital provided over four years.

Regulations

On the regulatory front, big changes are under way with a view to ensuring repetitions of the Priory Hall and pyrite fiascoes are kept to a minimum. A voluntary register of construction companies is due to be launched in March. Firms participating will agree to adhere to a code of standards and commit themselves to being tax-compliant. The idea is that the register should become a quality mark. Up to now, anyone could call themselves a builder. The plan is to introduce a register on a statutory basis from 2015. The pity is that it has taken the disasters of recent years to bring about this long overdue change. The RIAI goes further. It is pressing for the introduction of defects insurance. “The State needs to take defects insurance very seriously,” says Mr Graby. In its absence, the taxpayer ends up picking up the tab, as has happened with the pyrite problem, he added. The architects are also pressing the local authorities to overhaul building controls. Online lodgement of information is due to start in March. As a result, local authorities should have access to data informing officials as to what they need to inspect. Certainly, local authorities need to raise their game in this regard. “Some of our members say that they have never seen a building control officer on site,” says Mr Graby. Looking ahead, Mr Graby hopes that by, next December, there will be a reasonable improvement in output and that reform in building control has been delivered while public procurement is working better. Mr Graby sums up the current situation succinctly: “An architect said to me: ‘I am up off the floor, but I’m not running yet.’ ”