Friday 22 March 2019

Paul McNeive: 'Overseas influences are changing Irish property'

The right moves

Paul McNeive
Paul McNeive

Paul McNeive

An extraordinary series of events have combined to transform our property markets, and are changing the supply of residential and commercial units. In particular, the operation of the residential development market has changed completely in five years or so, with implications for Irish society, and for estate agents.

Firstly, the recession and collapse in the property market wiped out a swathe of Irish developers, and/or their capital and ability to operate. Government set out to attract foreign capital, and through Nama, and a zero-tax regime for overseas funds, certainly achieved that. Most of the funds have come from the US.

The property collapse naturally saw demand for residential property plummet, due to a lack of finance and confidence. But the population kept growing and when the economy began to recover sharply, the decimated development sector was unable to restart supply for a variety of reasons, including a penal tax regime. Soaring demand and no supply, led to rapid increases in house prices and rents.

But other influences were taking hold too. Young Irish people have taken to the European model of long-term renting, and remain nervous about the traditional rush to buy a house and 'get on the ladder'. Boosted also by an immigrant population of 12pc, long-term renting has become financially attractive to institutional landlords, and in a few short years we have gone from having no institutional Private Rented Sector (PRS), which was long established in western Europe, to where a quarter of Irish households are now in the PRS.

And that trend is accelerating if one looks at the development market today. Overseas funds are developing directly, or partnering with Irish developers, to deliver a wave of PRS schemes, funded by overseas money and being sold to institutions. There has been half a dozen sales of entire large schemes to institutions/funds in the past 12 months and more are on the market.

Indeed, the pre-sale of blocks of apartments is probably now the preferred method of developing. Housebuilders have three main concerns when evaluating a scheme: house price inflation - what price will I get when the units are finished; construction price inflation - how quickly will construction costs rise during the project; and 'absorption' - i.e., how many units can I build and how long will it take me to sell them.

Residential developers are keen to maintain their margin and they are not as confident when assessing those three areas now, as they were two years ago. Hence, with threats like Brexit in the air, a pre-sale of your entire scheme has become very attractive. A further positive in all this, at a time when we are desperate for new supply, is that projects in secondary locations, which look unviable under the traditional method, where a developer would sell the apartments individually over two years or so, become viable, albeit at less profit, where the entire can be pre-sold in one lot.

Incidentally, this sea change in the market is causing some angst amongst the major estate agencies handling new home sales. Suddenly, schemes which would have provided years of work in selling individual units, are lost as instructions when pre-sold into the PRS, and then rented out. New homes agents will say that the instructions were won in the first place on the back of decades of building relationships with developers, building a new homes brand and slogging in the trenches through tough times. Now, these blocks are being sold in one lot - and usually by the investment and development departments, or newly established PRS specialists.

In the commercial market developers are committing to larger, speculative schemes, particularly for offices. The influence of the dollar is notable when one considers that, for many projects, the site will have been bought with US money, the construction will be financed with US money, an American will sign the lease, and a US tenant will pay the rent. Money from America indeed!

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