Thursday 19 September 2019

Development land supply set to fall short of demand

Pat Crean’s Marlet paid €22m – or more than €25m per acre – for a 0.87 acre site behind the former Zanzibar pub in Dublin
Pat Crean’s Marlet paid €22m – or more than €25m per acre – for a 0.87 acre site behind the former Zanzibar pub in Dublin
Donal Buckley

Donal Buckley

On the face of it 2018 should see a plentiful supply of development land coming to the market for residential development. In practice however, some agents are more cautious, and expect the scale of increase to fall short of demand.

The Government for its part is trying to encourage supply by way of both carrot and stick. But considering the level of demand that exists for housing, hotels, student accommodation, offices, nursing homes and other facilities, neither carrot nor stick should be necessary.

On the stick side, the Government's Site Value Tax will be payable from 2019, and is designed to 'encourage' some landowners who are not developers to fast track sales in order to avoid the tax.

Clive Kavanagh of Jordan Auctioneers this week warned landowners of the effects of the levy: from June of this year owners will start getting notifications that their vacant property may be levied.

He explains the impact. "We recently sold some residentially-zoned lands in a provincial town which is unlikely to be developed in the short term. If you apply the 3pc levy to the current value, the liability will be €13,000 in year one and €30,000 in year two; so this matter is rapidly going to become a serious issue for landowners."

On the other hand where demand is strong, if land values escalate at a rate that is higher than the site tax then the tax may have limited impact.

On the carrot side the Government has allowed those investors who bought sites between 2012 and 2014 to sell without waiting seven years to avail of a capital gains tax exemption. A number of investors have already begun to flip on some of those sites.

Demand is also likely to be boosted by the launch of the Government's Home Building Finance Ireland (HBFI) agency which it is proposed will provide €750m in financing at competitive rates of interest for developers to build about 6,000 homes. This is in addition to the funding supplied to developers from the State-controlled Irish Strategic Investment Fund (ISIF).

The Government has also encouraged state bodies and local authorities to sell land or engage in licensing arrangements whereby organisations such as CIE and Nama would benefit from directly taking a cut from each of the homes sold on these sites.

Donal Kellegher of Cushman & Wakefield expects that Nama, which did license deals on about half a dozen sites last year, may more than double the number of licence deals with developers this year.

Evan Lonergan of Knight Frank also points out that the licensing approach helps developers as they will not need to pay for the sites until such time as houses are completed so this reduces their finance costs.

Licensed sites won't become land banked as developers must commit to time scales for delivering the licensed housing.

Not that Nama has been confining its sights to licensing, as reflected in recent sales such as the former O'Dwyer brothers site behind their former Zanzibar pub on Abbey Street in Dublin 1. The Marlet Property Group, which continues to be one of the major site purchasers, is reported to have paid more than €22m, or the equivalent of more than €25m per acre, for the 0.87 acre site where, it has been suggested, Pat Crean's firm is expected to develop a hotel. Agents Knight Frank had been guiding €14m for the site which is beside a Luas Red line stop and Jervis Shopping Centre.

Yet another factor encouraging sales has been the war chests of the two housing developers Cairn Homes and Glenveagh Properties, that have opted to raise funding on the stock market. The latter has been busy splashing out €178m on site acquisitions, giving it the potential to deliver 5,000 homes. These include a 4.942 acre site at East Road in Dublin's North Docklands where Glenveagh hopes to deliver more than 450 residential units. It paid €40m for the lands it had acquired, suggesting more than €89,000 per unit.

However, its chief executive Justin Bickle says that to date it has paid about an average cost of €61,000 per unit.

That lower figure is partly due to it directing its sights mainly at the commuter belt, and also because it has the resources to purchase larger sites which can be developed at scale.

Its recent purchases include a site at Citywest Road, Dublin 24, close to the Fortunestown Luas stop and to Citywest Shopping Centre which can deliver 195 residential units, subject to planning. Glenveagh has also signed an unconditional legal contract to acquire a 162-acre site in Hollystown, Dublin 15, currently occupied by Hollystown Golf Club, with the scope for 200 family homes between 2019 and 2023, subject to planning. Investec estimates Glenveagh will have paid about €25m to €30m for the sites.

In contrast, the other PLC developer Cairn has gone for some upmarket sites such as the 8.64 acre Donnybrook, Dublin 4 site sold by RTE for €107.5m. That's equivalent to €12.44m per acre. Cairn is expected to develop 500 apartments and 20 houses on the site making for an average of €206,730 per unit.

Marie Hunt of CBRE says the volume of land deals last year was disappointingly low considering the well-documented dearth of supply in the residential sector of the economy in particular. "Unfortunately, 2018 looks likely to be broadly similar in terms of transaction volumes, which is frustrating considering the weight of capital chasing development opportunities," she adds.

Mr Lonergan concurs saying that strong demand will be reflected in pricing.

Ms Hunt foresees new entrants in 2018 and Lonergan says these will include international investors in the build-to-rent sector. In addition to prime Dublin sites, Ms Hunt expects to see continued strong appetite for land in commuter towns and key cities over the next 12 months. However, she advises those buying sites in these locations to be particularly mindful of the viability of proposed schemes before proceeding.

"This is particularly relevant to apartment development where provision will remain relatively low until there is clear visibility on improved viability," she adds.

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