Sunday Business Post-Property supplement*Sunday, 29 March
2015Page: 14
Circulation: 34322Area of Clip: 67600mmPage 1 of 2
New thinking is needed to fund development Planning permission
received for just a quarter of the new housing stock needed to meet
demand BY DONAL BUCKLEY
^he2.9percent 1 fall in Dublin house prices
' over the four months since October has added to the debate
on
whether this price trend will have a knock-on effect on prices
for development land. While most agents say that developer interest
remains strong, at least one suggests that falling house prices are
also reducing site values.
Last year, anecdotal reports suggested some Dublin land values
nearly doubled, but as such a pace of recovery could not be
sustainable, agents expect
that land prices this year may track house prices more
closely.
One agent said that if house prices fall by 1 per cent then site
prices could drop 2 or 3 per cent. On the other hand, Evan Lonergan
of Knight Frank said land values are stabilising and if, as
forecasts suggest, house prices rise by 5 to 10 per cent this year,
then development land prices could show similar increases.
Yet another view comes from Pat Davitt, chief execu
tive of the Institute of Professional Auctioneers and
Valuers
who said: In the short-term I believe [house] prices are
falling
faster than the CSO figures are suggesting.
The knock-on was also alluded to by the ESRIs Kieran
McQuinn, when he said the Central Banks restrictions on mortgage
lending will probably
result in house prices being less, fewer houses being
supplied
and lower levels of credit being extended than would otherwise
be the case.
But the credit restrictions on home buyers are not the only ones
affecting supply. Banks apply even lower loan-to-value
ratios of 60 to 65 per cent on the amount of working capital
for developers. Concerns surrounding the remaining 35 per cent
provoked the Department of Finance into supporting the Construction
Industry Federations latest campaign which is advising builders to
secure new sources of development finance in order
to fund new supply. However, such alternative
sources can prove more costly. While the pillar banks charge
single digit interest rates on their working capital, providers
of mezzanine finance charge higher interest rates of 13 to 19
per cent. Another group, equity investors, may demand all of the
profits from the development and leave builders with just the fee
that they charge for building a development.
For those developers who opt for a combination of mezzanine
and pillar funding, their blended interest charge nowadays could
be around 8 to 10 per cent per annum. But the cost of funding is
not the only issue. Mezzanine and equity funders can also prove
demanding in their targets aimed at generating lucrative returns
within a two to three year time frame. For those developers
who are used to being their own bosses, this may
require a complete change of attitude in terms of
accountability
and tight deadlines. Then there are other developers
whose land is worth less than their loans and who have yet to
sort out their debt issues. For some of those, the only way to get
out of negative equity may be to add value to the land by
developing it.
CIF director general Tom Parlon said recently: Whether
we like it or not, the old system of construction finance is
dead. Most projects will need to make use of new [equity and
mezzanine partnership] models if they are to move forward.
Over the last few years access to finance has been one of the
key issues holding up construction activity.
Pat Davitt suggested another approach in order to encourage
developers to improve supply of housing, and he called on the
government to establish a Builders Finance scheme. The government
can access the money markets at a very cheap rate right now, it
should seize the opportunity and pass that good fortune on to
competent builders who will bring supply to the market,
he said. Others point out that the
state, in the form of Nama, is already providing funding as
reflected in building work on developments such as Cosgraves
Honey Park and Gerry Gannons Millers Glen.
But for those that are not Nama clients, CIF housing director
Hubert Fitzpatrick said that the new models are
necessary. Any means that would improve funding for developers
and supply of housing would be welcome. The last thing needed now
is for supply to fall when demand
is increasing, he said. While supply has improved,
it is still low relative to demand. Last Thursday the CSO
revealed that developers got planning permission for 3,530 new
homes in multiunit
projects in 2014. Add in one-off houses and this brings the
total permissions for new homes to6,626. Butthatsonly about a
quarter of the 24,000 homes that are needed to meet demand.
Commentators suggest the markets took a breather during the
first two months of the year and this lull is also reflected in the
development land market.
Agents agree that there is developer appetite for sites but, as
Wesley Rothwell of CBRE explained, the strength
of that appetite varies according to the level of supply
and activity in the local area. There is greater appetite in
those areas which have seen less activity and supply.
Meanwhile, developers wait to see what sites will be offered
for sale later this year by portfolio owners, private owners,
banks and receivers. Its almost like watching the judges on the RTE
television show The Voice Of Ireland, and waiting to see whose
chair will be the first to turn.
