Business Irish

Saturday 22 October 2016

'No company will build houses unless there's a margin there for them'

The construction industry's image has been dented, and the sector's spokesman says there's no place in it for those who don't want to meet high standards. Paul Melia meets a man who wants to get us building again

Published 05/11/2015 | 02:30

Construction Industry Federation President, Michael Stone. Photo: Damien Eagers
Construction Industry Federation President, Michael Stone. Photo: Damien Eagers

IT's not that Michael Stone doesn't want to talk about the past, but he's certainly more enthusiastic discussing the construction industry's future prospects rather than dwelling on the nightmarish levels of development lending which ultimately forced the State into a bailout.

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The focus for the President of the Construction Industry Federation (CIF) is improving the perception of the sector, and about tackling issues before they become insurmountable. That includes learning the lessons of the recent past, and letting the public know that construction is about more than house building.

"The vast majority of our members are small, family-run companies, working around the country doing a hard day's work and doing so for generations, providing a very good standard," he says.

"There are very few big developers who are members of our organisation, but it's a bigger picture we're grabbed into. I get quite frustrated in that we (in the industry) employ between 125,000 and 130,000, but no more than 25,000 of those are employed in housing. There's a lot of work that goes on that has nothing to do with housing - it's civil, mechanical and electrical engineering projects.

"One of the biggest projects taking place in Europe at the moment is the €900m Bristol-Myers Squibb facility in Blanchardstown. We have data centres too, which require really high standards of work. They came here because we can do the quality.

"We have companies here which are world leaders and which go around the world doing work. We're delivering these projects with Irish managers and tradespeople. That's a message we don't get out there enough."

Elected as CIF president last November, Stone (47) is ceo of the Designer Group, a Dublin-based mechanical and electrical contractor he established in 1992 following a career in the ESB.

Originally an electrical contracting business, it branched into the mechanical sector in 2001 and now works primarily across Ireland and the UK.

The construction industry has undergone a turbulent time since 2008, and only now is employment beginning to return and infrastructure investment resuming. While output is up 7.2pc year on year, house-building remains at stubbornly low levels, driving up prices.

But he says it's a mistake to believe this is driven by companies refusing to build because of low margins and profits.

What's stalling supply is the cost of finance, coupled with levies, VAT rates and Central Bank lending rules which limit mortgage borrowings to 3.5 times income, he insists.

"If I go back to the 100,000 members (working outside housing), typically a specialist contract has a margin of about 2pc-3pc in a good year. In the last eight years, it has been zero or minus. That's typically the margins operating in the construction industry. In the UK, the business is booming and you're only seeing margins of 1.5pc.

"We have spoken to third and fourth-generation builders who know their areas and know what will sell. They're telling us that at the moment, even with starter houses, people cannot afford to get the finance.

"If we look at professionals earning €50,000 they cannot afford to buy a €300,000 house. In the UK, it's (mortgage ratios) 4.5 times and that would make a difference. What happened in the past was not right and resulted in catastrophic decisions being taken. Changing to 4.5 times would make a big difference, but there's no one fixed solution."

The high cost of development finance is a concern, he says, with the Ireland Strategic Investment Fund lending at a rate of around 14pc. He also warns about relying on Nama to solve the housing crisis.

"We welcome the Nama initiative to go and build, but that's only going to account for 20pc of the recognised need of 20,000 to 25,000 units a year.

"Nama can lend money and finance at 4pc. The 14pc just isn't an option. The figures just don't add up. There are private providers providing mezzanine finance at 16pc. That needs to be halved before it's realistic for builders to take up that option.

"No company will build unless there's a margin there for them. When you look at house prices, and the cost of the site, the building costs and the tax take from Government, it doesn't add up. Our budget proposal was to take the VAT down to 9pc. We need to adjust costs including VAT and levies, but I wouldn't be an advocate for reducing standards."

He says that local infrastructure projects, such as the schools building programme, Irish Water's capital investment plan and flood prevention works are keeping many companies afloat.

But the turnover required to bid for public jobs can exclude perfectly capable firms with the experience to deliver. This is something which needs to be addressed, he insists. "They are key jobs for us because they're in the regions. There has been a lack of investment, particularly for infrastructure like broadband. We can't wait for that, it needs to be pushed forward now.

"Irish Water is very positive because it spreads the workload. The schools programme during the recession kept many companies afloat. Certain projects suit public private partnerships, but they rule out a lot of the smaller companies as well.

"There is a case for the threshold for certain types of projects to be brought down. But we don't do enough collaboration and forming joint ventures. The industry needs to join forces and companies should form partnerships. We need to look outside how we have done things. We need to do it differently."

Among the biggest challenges ahead is that of a looming skills shortage, he warns. As companies struggled to keep their heads above water in recent years, training fell by the wayside. It's already an issue in some areas, and as development resumes it's likely to be exacerbated.

"Unless we take action, there is going to be an issue. There is already an issue with architects, consulting engineers and quantity surveyors. In my company, we would see a shortage of engineers. We need to attract bright young people, doing interesting and innovative work.

"The industry needs to step up to the plate. We need to be more adaptive in how we get them trained, and quicker. Part time, on the job and off the job, is the way.

"There's a constant need for upskilling. Since the recession came in 2008, companies have been decimated and investment hasn't gone into training. The way forward is the establishment of Construction Industry Register Ireland. We have very strict rules for membership, including the area around training, qualifications and continuous personal development.

"We're pushing that very strongly in CIF. The industry is constantly changing, there's a lot of new technologies and people need to be at the leading edge of that." Around 800 members have already signed up to the register, with 1,000 firms in the process of joining. The register is expected to be placed on a statutory footing next year, which will not only encourage best-practice, but will also prevent shoddy builders from remaining in the industry.

This is because companies will have to prove they comply with best practice when re-registering with CIRI on an annual basis. If problems crop up with the quality of workmanship, the firm won't be allowed register.

"We need to improve regulation. I don't believe self-regulation has served us well. We support the building control amendments. We believe the CERI is a form of regulation for our industry," he adds. "I can only try to take the CIF forward. We want high standards and there's no place for people who don't comply with higher standards. I'm very conscious of the image of the industry. We want to be part of the solution. We need a new way of looking at things."

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