Business

Monday 26 September 2016

Irish developers have had to face new realities in the post-crash era

Institutional equity has replaced the compliant bank as the source of funding but what else has changed in the cash-fuelled world of the Irish developer? asks James Treacy

James Treacy

Published 28/08/2016 | 02:30

The personal guarantees extended by some individual developers proved relatively worthless in the aftermath of the crash, particularly as they had in some cases been given to numerous providers (Stock picture)
The personal guarantees extended by some individual developers proved relatively worthless in the aftermath of the crash, particularly as they had in some cases been given to numerous providers (Stock picture)

With precious few exceptions, Irish property developers could hardly be considered a shy and retiring group. Rather, they are more usually characterised as a group of metaphorical bulldozers, accustomed to getting their way - qualities that are no doubt useful when negotiating the typical obstacles in the way of development projects in this country.

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The role of property development and its sponsors in the national disaster that befell the country post-2008 is well known and there has been much public odium directed at the more culpable names involved. But as the recovery has taken hold, some of the familiar names have reappeared in the news pages, emerging from bankruptcy or acting as apparently pivotal figures in property deals.

Could it be that it is business as usual for the old guard?

The fact that so many of the old names are still standing is a testimony to the sheer resilience and bloody-mindedness of the group. But while any involvement whatsoever of certain figures in the property sector might well be deemed unacceptable, outraged citizens can take comfort in the fact that this group is presently operating in a very different set of financial circumstances.

Pre-2008, the greatest single attribute of some of Ireland's property magnates was their ability to pursue ambitious schemes while transferring risk almost totally to others - in other words, the equally culpable banks, where risk-management was an aspiration, rather than a policy.

Many developers operating in Ireland used vastly inflated land prices as their equity and as collateral for 100pc debt financing of working capital requirements.

The personal guarantees extended by some individual developers proved relatively worthless in the aftermath of the crash, particularly as they had in some cases been given to numerous providers.

In the new world, with the entire banking sector emasculated by regulation and effectively off limits, the master is institutional equity, where the standards of due diligence are somewhat higher than 10 years ago, to put it mildly.

The first requirement for institutional backing is financial credibility and the technically bankrupt need not apply. All remaining cases are subject to financial scrutiny of the most exacting nature.

The only circumstances where the description "shy and retiring" might be applied to your average property developer might be when it comes to disclosing their beneficial interest in the labyrinthine and secretive structures they typically used to house their business interests.

Such structures are no longer necessary or appropriate for those wishing to do business in the present market.

The new institutional names we have become familiar with over the last few years - the Kennedy Wilsons, Lonestars, Carvals and so on - are nakedly commercial enterprises.

Their involvement with some of the bigger names of yesteryear have a sound logic: they are looking for the undoubted know-how, expertise, contacts - the familiarity and skill-sets that these individuals have in what is a singular and challenging property market.

For the developers, the benefits of getting back on the construction horse are several. It raises their profile for future deals and it also provides them with a valuable revenue stream when it is most needed.

But while familiar names may ostensibly lead some of the more high-profile deals in the media, and while their institutional backers are happy to operate behind these names, this is not to say that they have any equity interest in those deals. Rather, most (if not all of them) are being hired on a fee basis, with, in some instances, a profit-share arrangement.

This is very far from the model in the good old days - but nonetheless remains a valid and potentially rewarding business.

At this point in 2016, the prospects for the construction sector look bright, with massive demand in the residential sector in particular.

This market, however, is being stymied by the lack of public investment in the necessary infrastructure.

Evidence of a buoyant office sector in Irish cities can be seen with the reappearance of cranes on the horizon. And while retail capacity may be at a plateau, much of the space available is in need of substantial improvement.

In these promising circumstances, the challenge for the old guard is for them to demonstrate their ability to work within the confines of an new institutional mindset.

Huge rewards await those who can put aside issues of ego and lack of independence and who can transfer their efforts to what is now a service business, rather than holding out for a role as a principal.

James Treacy is managing director of Stubbs Gazette

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