Numbers still don't add up for new building outside Dublin
Over recent months, in the midst of a property market that is lacking heavily in supply, the merits of apartment living in Ireland have been widely debated. Unlike other Europeans, we don't appear to have embraced the concept of living in an apartment over the long-term and in particular, the notion of raising a family in an apartment. While the standards of apartments (and houses) in Ireland are at an all-time high, most Irish people regard apartments as the poor relation to houses - something to live in on a temporary basis until a comparable house becomes affordable and/or available. But, in reality, unless we learn to love "the apartment", our urban sprawl tendencies will continue unabated.
Behind the debate there are two core assumptions: first, apartments take up a smaller land footprint so we can live more densely in our cities, thus reducing commuting times and releasing additional free time for Ireland's workforce. Secondly, apartments are more cost effective.
The first assumption makes sense and is difficult to argue against, but I feel that there is a need to bring greater clarity to the issue of cost.
Currently, it costs more to deliver an 80 sq m apartment than a 115 sq m house. That will surprise most people not working in this sector. The cost to build a standard specification apartment without basement is approximately €1,600 per sq m net floor area. The net floor area is the proportion that the purchaser occupies. The common areas also have to be built, but these can't effectively be sold on. When other design, infrastructure, development, sales and finance costs are added to this, it increases to €2,200 per sq m. For the purpose of this exercise financial contributions or levies to local authorities are excluded. For the average two bed apartment of 80 sq m this equates to €176,000 all told. Once you add in 13.5pc VAT this brings the break-even sales price to €200,000. If you include a basement parking cost of €25,000 which is, more often than not, a requirement due to density and open space requirements, and add a 12pc contingency and profit margin, which is industry standard, this brings the sale price to €262,000. All based on the assumption of a €nil cost of land.
Currently, average apartment values in all but the wealthiest areas of Dublin city and suburbs are trading at or below this value. According to myhome.ie, the average asking price for a two bedroom apartment in Dublin in the last three months of 2015 was €220,000. Prices around the country vary between €35,000 and €200,000.
Unfortunately, this means that there is little business rationale for developing apartment schemes for sale or put another way land zoned high density, in all but the very affluent areas, is currently worth little more than farmland unless future value is attributed to it based on significant increases on apartment values.
By way of comparison a three-bedroom semi-detached unit of 115 sq m inclusive of infrastructure, development, finance and 12pc contingency and profit margin, is approximately €190,000. Add VAT and this gives a sales price of €215,000. According to myhome.ie the average sales price for a three bedroom semi-detached house in Dublin is €275,000 - which allows ample room for a value to be attributed to land.
It should also be noted that the example above assumes a cost of financing of 7.5pc which is roughly the current bank finance rates for a fully planned housing development. However, in the case of apartments it is hard to get any bank to finance construction, let alone land, as it is perceived as high risk due to considerable upfront costs and, aside from high end locations, the market for apartments is still weak. Therefore, the cost of funding can increase to mezzanine or indeed equity hurdle rates of 15pc to 20pc.
The recent amendments to standards introduced by the department of the environment to reduce apartment sizes have not had much impact as planning standards still require minimum living, bedroom and storage areas - all of which make it difficult to build a two bed much smaller than 80 sq m. However, the reduction in dual aspect requirements from 85pc to 50pc will assist in lowering costs somewhat, as the number of units per lift core can be increased, thereby reducing the number of lift cores required in a scheme. The quantum of this reduction has yet to be fully understood but is expected to be in the region of €15,000 to €20,000, potentially taking the cost of an apartment back to about €245,000 which is still comfortably above the average price being paid.
There are very few areas where cost can be reduced and dumbing down standards is probably not the right answer. Removing the financial contribution cost is a boost, approximately €10,000 per unit, but again the Councils will have to replace this source of funding by increasing charges elsewhere so it won't work on a long term basis.
The only other significant cost area remaining is VAT. On a new apartment worth €260,000 this amounts to approx. €30,000.
As an active developer, we're often asked why the bulk of development is in housing schemes in the outer suburbs or commuter belt region. Unfortunately, this is being driven by economics - it's only financially feasible to build this type of product in these areas. We need to build apartments in our city centres to alleviate the demand side pressures in the sector, but this will not occur in the current environment. The solutions appear simple, we need to either reduce the cost of building high density developments or somehow increase the price that consumers are prepared to pay for them. The reductions in cost from the change in dual aspect standards and the rebate of council levies will help but to flip the economics from loss to profit so that developers build out apartment schemes will require something more dramatic. Assuming people cannot, or will not, pay more for apartments than current prices and allowing for single digit inflation over time, that leaves the build cost as the only variable that can solve the conundrum. Logic points to a measured and controlled reduction in VAT, and in the short term it probably requires a zero rate. It will be interesting to see how the next Government tackle this particular issue.
Aodan Bourke is director of property developer Regency