Thursday 26 April 2018

Housing shortage goes on

NAMA's headquarters in Dublin city centre
NAMA's headquarters in Dublin city centre

There's a strange dynamic to the economy and property market at the moment and property issues, particularly the housing crisis, have moved centre stage in the attempts to form a government.

The prolonged era of insolvency has disrupted how markets operate and developers, investors and the State have to contend with new conflicting factors, which are producing some undesirable consequences. One such issue is the non-availability of land and development finance.

It's frustrating to hear that initiatives like the creation of a special minister for housing and a reduction in Vat on new homes are likely to form part of the next government's policies, when these measures were clearly needed three years ago. Instead, the government panicked into charging Nama with solving the housing crisis by becoming the provider of the development finance that the market wasn't producing. At the time I pointed out that this created a clear conflict of interest between developers with cheap Nama finance and other developers, who couldn't access any funds or had to pay high interest rates.

It was no surprise when a group of developers challenged Nama's financing role at the European Commission. As part of a defence to that challenge, Nama has reportedly been raising the interest rates it charges borrowers and one source told me this week that he knows of five developers who have had their rates significantly increased. Nama is is financing schemes all over Ireland but the lack of money remains the biggest logjam in the system.

That said, another contrary dynamic is that whilst many developers are building away in partnership with Nama, I'm quite sure that others are delaying. They would see little point in "adding value for Nama" and would prefer to get a better deal by partnering with a venture capitalist that refinances their loans.

Whilst the banks say they are lending for development, builders will tell you they aren't, and many schemes under construction are funded by venture capitalists at rates of up to 15pc.

This underlines another quandary in the market: with a shortage of supply and a fast growing economy, population and employment, why aren't financiers competing harder to lend money at lower rates? Factors like confidence, the State's tax take and the Central Bank's lending rules are restricting viability but it is the very high financing costs which are preventing normal business.

Another factor is the lack of planning permissions on land as a result of the era of inactivity. One agent told me this week that he has over €300m worth of land to sell over the next six months but that only 5pc of it has planning. If it takes two years to secure planning permission, one can see how a 30pc interest cost on your land purchase is stopping developers in their tracks.

It is the viability of residential development which is the problem and the State will have to address that. The number of office buildings now under construction proves how the market can respond once construction looks profitable.

I don't agree that developers are hoarding land to make capital gains. They need to keep building to stay in business and a flaw with investing in land is that it produces no income. There's been a big recovery in suburban land values and prime Dublin apartment sites are making €200,000 to €300,000 per unit. But land prices haven't risen much over the last year and, with the exception of Cork and Galway, have probably "topped out" alongside stabilising house prices. So it doesn't make much sense to hoard land, and throwing taxes at unviable, undeveloped land isn't going to help.

The lack of political direction is not helping either. A solution to the housing crisis and to getting more commercial projects underway requires national scale planning and action. Given the effect of more independent TD's leveraging power, what is the future for national spatial planning, which for years has been diluted by more "hubs, gateways and spokes" than a Tour de France?

This market is notable for an array of conflicting factors. How can a strongly growing economy and low interest rates not equal lots of cheap development finance? Commercial yields are unlikely to go lower and can the market endlessly absorb "portfolios" and "projects" on a massive scale? Oil is cheap but there's a nervousness internationally. Perhaps Nama was right to make as much hay as it did.

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