Download Opening Statement Property Ind Ire 23-09-2014

PROPERTY INDUSTRY IRELAND
Opening Statement to the
Oireachtas Joint Committee on the Environment, Culture and the Gaeltacht
Tuesday, 23 September 2014
Commercial and Domestic Property – Supply and Demand
1. Introduction: Property Industry Ireland
Property Industry Ireland (PII) was founded in 2011 as a forum for debate and policy
development amongst businesses operating in the Irish construction and property sectors.
Working as a not-for-profit think-tank, PII is a member-led representative organisation which
works to drive innovation in construction, property and the built environment. In addition to
our policy-formulation work, we provide briefings, discussion forums and conferences to
bring together business leaders, academics, and representatives from charitable and public
sector agencies, to promote cross-sectoral knowledge-sharing.
PII member firms represent the entire spectrum of the property sector, including legal and
accountancy practices, property and asset managers, developers and contractors, as well as
professional practitioners such as planners, architects, surveyors and engineers.
PII is an affiliate of Ibec, the body representing businesses working in Ireland, giving an
unrivalled access to economic and market knowledge. Membership of PII is open to all
businesses with an interest in the Irish property and construction sector.
Commercial and Domestic Property: Supply and Demand
2. The Property and Construction Sector
The Irish property and construction sector grew rapidly during the Celtic Tiger eventually
accounting for around 20% of Irish economic activity. Following the collapse of the banking
sector, construction industry output fell relative to the economy, so that by 2013 it was worth
less than 7% of economic output. House prices and the value of commercial property also
fell rapidly, sending a profound and long-lasting shock across the economy and society.
In mid-2007, direct employment in construction stood at 273,900. By the same period of
2014, employment had fallen to 106,300. Indirect employment in businesses supporting
construction and property development activity has been equally hit.
A number of measures have been put in place by Government in an attempt to stabilise and
grow the sector with the aim of output reaching 12% of economic activity – the European
norm for a sustainable construction sector within a healthy economy. Budgets in 2012 and
2013 have attempted to promote investment in Irish property through reform of Capital Gains
Tax and stamp duty, and there has been a move from transaction-based property taxes to
annual property taxes. Local government funding has been reformed to make local
authorities less reliant on levies on new development. Legislation to support the introduction
of Real Estate Investment Trusts (REITs) has had a notable effect of encouraging new
sources of investment into the sector.
The general recovery in the economy, particularly domestic consumption and the increase in
employment, has assisted in growing transactional activity in the property recovery.
Renewed economic activity and consumer appetites have also revealed supply-side
problems.
In 2014, Government published “Construction 2020” following an earlier Forfás strategic
report into the future of the construction sector. Construction 2020 sets out a number of
actions to reform the governance of the construction industry and to build an evidence-based
property sector. Over the medium-term the strategy seeks to resolve mismatches between
supply and demand for residential and commercial property through targeted infrastructural
investment, reform of planning, and partnership between State agencies and the property
sector.
This briefing note sets out the current state of the commercial and residential property
sectors, from the perspective of supply and demand issues.
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Commercial and Domestic Property: Supply and Demand
3. Commercial Property
3.1 Demand
Following a deep crash in 2007, demand for Irish commercial property sector has rebounded
in recent years, particularly in the Dublin market. The Irish commercial property market was
not unique in Europe in experiencing declines in prices and rents from c. 2007, but it has
been a leader in harnessing increased investor activity, and as a result of domestic and
international investment and economic expansion, the sector has experienced recent strong
demand, especially in the office market.
Investment in the commercial property sector totalled €1.9bn in 2013 (of which 90% was in
Dublin; 60% of total investment was in the office sector. 57% of take-up of office space in the
Dublin CBD was by tech firms). Current forecasts are for total investment in the market in
2014 to exceed the 2006 peak of €3bn.
Compared to other investments, returns on Irish commercial property have been relatively
impressive. According to latest Investment Property Databank (IPD) analysis, the Irish office
market has driven an increase in returns over 2014. IPD forecasts further growth in 2014
onwards. Office rents have increased by 22% over the last year, compared to an overall
increase of 12% overall in the commercial property sector. Office capital values have
increased by 33%.
According to a recent Goodbody report (“Irish Property – from stabilisation to recovery”
September 2014) the increase in demand for commercial property is underpinned by better
than expected macro-economic recovery. The extent of this improved demand should,
however, be seen against a wider backdrop: (1) volatile property cycles, including increases
in investment following deep reductions in prices, are normal, both in Ireland and overseas;
(2) the recent rebound should be kept in the context of the extent of the crash which
preceded it; (3) the mismatch between supply and demand is having a squeezing impact; (4)
the relatively healthy yield compared to government bonds has resulted in an international
search for yield.
Domestic policy issues such as the future of “Upward Only” rent review clauses, as well as
taxation reform in future Budgets and the future investment strategies of the new REIT
sector will continue to have an impact on the value of transactions and the volume of take-up
in the year ahead; the immediate impact of any increase in take-up will be on vacancy rates.
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Commercial and Domestic Property: Supply and Demand
Estimates for vacancy in the Dublin CBD vary between 13% and 17%, with vacancy levels
falling by around 7-10% since 2006, especially in prime areas. The Goodbody report, using
estimates of current vacancy rates from recent Savills and Lisney analyses, expects vacancy
rates in Dublin to fall to c.10% by 2016.
This shortage of prime, quality office space in key areas will have an impact on future rents
and prices. It is also likely to have a serious impact on the investment opportunities for some
businesses, particularly Dublin-based tech firms who have been the most active in taking up
new space.
3.2 Supply
Despite strong growth in demand, investment and take-up, new supply of new commercial
property – especially offices – remains subdued. A lag between increased demand and
increased supply is a normal part of the economic cycle, with new development only coming
on stream when schemes become financial viable following a rise in rents and improvement
in yields.
Latest analysis of supply suggests only modest new development activity in 2014, with only
2 new office projects underway in Dublin. Given the often slow financing and planning
processes, there will be no increase in supply in the commercial sector until 2016. Not until
prices and rents rise across other urban areas will financial viability reoccur, and the growth
in supply will begin to take place.
According to the Goodbody study, there are four issues which will determine the point of
financial viability and therefore the increase in supply. (1) Access to domestic sources of
finance and the extent of reliance on bank lending to support construction activity; (2)
Capacity within the developer, construction, design and contracting supply-chain to build out
large office/commercial property developments; (3) the future direction of NAMA and the
speed and nature of decisions on access to finance and sales by NAMA, and (4) the speed
of charting a new development through the planning and appeals process, especially in
Strategic Development Zones (SDZ) where the bulk of new development will take place in
the short-term.
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Commercial and Domestic Property: Supply and Demand
4. Residential Property
Many of the problems facing the residential property sector in 2014 are legacies of the Celtic
Tiger and the ensuing crash. Issues such as negative equity, homelessness and ghost
estates are, in part, a legacy of a prolonged mismatch between housing supply and
consumer demand. Increasing household formations, the removal of bed-sits and increased
building standards, have all had an impact on the recent increase in house-prices and
shortages of property in some urban areas.
As of July 2014, average house prices in Ireland are 42.3% lower than their highest level in
September 2007. In the past year, national house prices have increased by 13.4% with the
strongest growth seen in the Dublin apartment sector where prices have increased by
26.3%. The speed of price increases has not been uniform, and Ireland currently has a
continuing split between movement in prices in Dublin, other urban areas, and in rural areas.
While the presence of a recovery in prices will be welcomed by some homeowners in
negative equity, the speed at which prices are growing is putting pressure on the private
rental and social housing sectors. Affordability of property, especially in urban areas, has
eroded as house prices have increased faster than take-home pay. Students, in particular,
are facing the consequence of increased rents in Irish cities, and it is widely recognised that
Ireland’s social housing sector has suffered as demand for services has increased as the
exchequer funding of social housing has been cut, and Part V delivery has been undermined
by low private sector development levels.
4.1 Demand
As a result of the decline in supply of new houses, reluctance by many homeowners to put
their house on the market during a period of rising prices, and improving demographics,
demand for available new and second-hand accommodation is increasing. According to the
Housing Agency, 80,000 residential units are required across urban settlements between
2014 and 2018, with an immediate need for over 9,000 units to serve Ireland’s urban areas
alone in 2014.
Demand for residential property is not evenly spread across Ireland. The Housing Agency
estimates that 7,500 units per annum are required in the Dublin region urban settlements
between 2014 and 2018. Demand is also strongest in other urban areas – 4,400 units are
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Commercial and Domestic Property: Supply and Demand
needed per annum in urban Cork, 2,300 are needed in Galway and 2,600 are needed each
year in Limerick. Other commentators and researchers have made estimates for housing
need over the medium-term. The Economic and Social Research Institute (ESRI) estimates
that 10,000 to 12,000 new homes are needed nationwide per year up to 2015. The Society
of Chartered Surveyors Ireland suggests that demand will increase to between 20,000 to
25,000 new units per annum from 2016 onwards.
Irrespective of which figures are used, the gap between supply and demand has already
become visible in the speed of house-price increases. Demographics and population
movement within Ireland will continue, and will determine the location, size, price and type of
housing which is demanded.
Housing waiting list figures and the recent increase in homelessness shows the pressure on
the social housing sector. The homelessness charity Threshold suggests there are 89,892
households needing Social Housing support, and an annual need for 6,000 new social
houses. There is an immediate requirement of 2,700 units to resolve the current
homelessness problem. Reliance by the sector on exchequer financing and Part V
contributions have proven unsustainable during a period of low levels of development and a
weak exchequer position.
4.2 Supply
The growth in house prices and increases in rents has been a direct result of low levels of
housing activity. From a peak of c. 93,000 units in 2006, there were only 8,301 units
completed in 2013. Leading indicators of future housing supply such as planning
permissions and commencement notices forecast continued supply-side weaknesses in the
market. In 2007, 72,661 planning permissions were granted. In 2013, only 21,288 were
granted. While planning permission figures for 2014 to date show a small increase compared
to last year, they too anticipate continued low-levels of new housing development, far below
the levels of demand.
In the first half of 2014, there have been 4,800 new housing completions, and current
estimates for completions for the year as a whole, based on commencement notices
submitted to local authorities, suggest 8,400 new houses will be completed in 2014. Given
continued delays in project financing and planning, it is unlikely there will be any significant
numbers of properties coming onto the market before 2016.
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Commercial and Domestic Property: Supply and Demand
5. Recommendations for Reform
In its 2014 pre-Budget Submission “Delivering Ireland’s Property Needs” Property Industry
Ireland has set out a number of small measures which, cumulatively, could have a positive
impact on closing the supply-demand gap; these reforms would bring some measure of
calmness to the market, and provide stabilisation for the public, private and commercial
property sectors.
5.1 Social Housing

€50m (min.) annual capital injection from sale of surplus state property – potential for
1,100 extra units per annum using existing financing models

Harness private institutional investment: REITs and private investors

Graduated Part V: Early engagement, enhanced role for voluntary sector

Improved Asset Management: Remove voids and invest in refurbishment

Why collect VAT or levies from development of social housing? Why not use existing
sites held by local authorities?
5.2 Private Residential Property

Reduce VAT on construction of residential property (currently 13.5%) to 9%

Enforce reduction of development contributions from peak-era rates

Reduce windfall tax (currently 80%) to 33%

Planning reform to prioritise student/retirement accommodation

Less
doctrinaire
with
regard
to
use
of
vacant
commercial property for
residential/disabled
5.3 Commercial Property

Approve Pre-let agreements for IDA Ireland

Accelerate investment to resolve infrastructure bottlenecks

Promote use of ISIF and EIB to complement exchequer funds

Reform public procurement to facilitate SME employment
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