Developers need affordable finance to deliver housing
The time has come for Taoiseach Leo Varadkar and Housing Minister Eoghan Murphy to stop the 'spin' and to get to grips with the 'F' word.
Call it funding. Call it finance. Call it what you like, but the ongoing absence of affordable senior debt for developers is possibly the single greatest impediment (outside of this Government's disastrous combination of inertia and ineptitude) to the delivery of the new housing this country desperately needs.
Right now, Ireland's 'pillar banks' of AIB and Bank of Ireland are largely absent when it comes to providing funding for what is still considered as speculative housing development, although I do understand from speaking with a number of developers that AIB is the more amenable and receptive of the two institutions.
With that source of senior debt, which typically falls within a range between 4pc and 5pc closed off, developers are being forced to rely on international capital and mezzanine finance at interest rates which, in certain cases, exceed 15pc.
It doesn't take a genius to understand that these 'credit card' rates of borrowing will serve either to discourage developers from seeking finance in the first place, or end up being accounted for in the increased price of the houses or apartments that they might build.
The cost of funding is an input that has to be paid for along with the site on which a new home sits, the materials and labour used in its construction, the levies paid to local authorities, and the direct and indirect taxes collected by the State.
At a fundamental level, many developers find the prospect of using international capital and mezzanine finance to be unattractive, particularly when the lending agreement with the lender involves a 'Development Management Agreement' (DMA).
Such arrangements often result in the developer's role being reduced to that of a project consultant working for a fee, notwithstanding the fact that they will bear the reputational risk associated with the delivery of the housing scheme.
But of course, not every developer is subject to the same challenges when it comes to affordable finance.
There are numerous Nama-supported builders whose cost of funding remains the subject of a State-aid complaint to the European Commission's competition directorate by a group of five developers -Michael O'Flynn, Paddy McKillen, David Daly, Marlet ceo Patrick Crean and MKN Group director Brian McKeown.
In their submission, lodged in December 2015, they asserted Nama had not only gone beyond the original remit for which it had been given the Commission's approval, but was now giving Nama-supported developers a significant financial advantage over non-Nama developers through the provision of loans at preferential rates as low as 6pc on their loans.
That's opposed to the 14pc to 15pc that "non-Nama-supported developers" could expect to avail of.
Responding to a parliamentary question from Fianna Fail finance spokesman Michael McGrath in July 2016, the then finance minister Michael Noonan insisted that the interest rates offered to Nama debtors and receivers were "unrelated to Nama's own cost of funding" and were provided at "appropriate market rates of interest".
With all the talk coming from the Taoiseach now on all the measures the Government is apparently considering to address the housing crisis, it is quite incredible that the existence of this unresolved State aid complaint has largely been ignored and unremarked upon. Indeed, the closest our newly-minted leader came to acknowledging the issue was in his latest interview with The Irish Times last Monday. Referring to the Government's "quite well-developed" proposal to repurpose Nama, Varadkar said the "emerging idea" was that the agency could "partner" with those developers who are finding bank finance hard to come by. He acknowledged that Nama was "currently financing developers, but only those who are its own clients".
The Taoiseach's comments were unsurprisingly accompanied by a caveat from The Irish Times stating that: "The plan will probably require new legislation and the approval of the European Commission. Neither is a speedy process."
But even if the Government's 'plan' to reinvent Nama as a lender for all developers ever comes to fruition, one would have to ask how the agency's personnel would engage with the numerous individuals the original agency litigated against in the past.
While there might never be a basis for a claim that certain developers were being favoured over others in terms of securing finance or a licence to develop land, the perception that such favouritism exists would almost certainly be sufficient to undermine the work of what industry sources are already referring to as the new 'National Development Agency' (NDA).