Glenveagh setback this week may open up opportunity for rival Cairn

Glenveagh Properties, one of the worst performing stocks on the Iseq 20 last year as it lost close to a third of its value, had a stab at a rally in the first days of trading in 2023. It didn’t last long.

A trading statement from the home builder on Thursday sent the stock tumbling as much as 10 per cent on the day, as it downgraded its forecast for suburban house completions this year by 20 per cent to about 1,350 units – citing “near-term gridlock” in the planning system at a time when supply is continuing to fall well short of demand in the State and the housing crisis is supposed to be a top Government priority.

Back in September, Glenveagh said it had planning in place for 80 per cent of the 1,700 homes it then aimed to complete this year, and that it expected to receive the go-ahead from An Bord Pleanála (ABP) on the remaining 20 per cent during the fourth quarter. None of the anticipated approvals came through.

Just days before Christmas, ABP issued an apology for ongoing delays in issuing planning decisions, admitting it was not meeting “statutory objective time frames for decisions for a large number” of cases. The embattled planning body also highlighted that its board, which takes decisions on appeals or applications, was operating with half of its standard complement of 10 members.

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Glenveagh, led by chief executive Stephen Garvey, used the trading statement to urge planning system reform be “expedited to solve the longer term structural supply issues the sector faces”.

The outline of draft legislation published last month has the object of, among other things, recasting ABP under a new name and decision-making structure, and tightening the time frames for judicial reviews of planning decisions, in an effort to avoid projects being bogged down in legal proceedings. The Government aims to enact the planned laws “in early 2023”. But it is no quick fix.

While the Government has a target for an average of 33,000 homes to be built every year until 2030, Davy analyst Conall Mac Coille estimates house completions will actually fall this year to 27,000 from 28,400 in 2022.

Glenveagh has long set its sights on becoming the biggest housebuilder in the State, and to be churning out 3,000 homes by 2024. Peer Cairn’s aim is to deliver 5,000-5,500 homes in the three years to 2024, which, when factoring in the 1,500 units factored in for last year, points to a more manageable average of 1,750-2,000 for this year and next.

Some 2,000 of Glenveagh’s 2024 target is forecast to come from building houses, mainly in the Dublin commuter belt, with the rest coming from building urban apartments for investment firms involved in the private rental sector (PRS) and a new line of business developing social and affordable units in partnership with local authorities and State agencies.

Glenveagh has enough to be getting on with, for now, on the urban front – having agreed forward funding deals last year to develop projects in the Citywest, Castleknock, Blackrock and north docklands areas of Dublin, totalling more than €310 million. However, this line of business has become increasingly challenged over the past six months, as overseas money that flooded into the sector in recent years – including German and Dutch pension funds – has all but dried up since the European Central Bank (ECB) started to jack up interest rates.

“There is a real viability issue in PRS at the moment,” said Colin Sheridan, an analyst with Davy. “Buyers that were in the market in recent years were buying at rental yields of as low as 3.6 per cent in prime areas... Even if PRS investors come back to the market, they’ll be demanding higher yields than they previously had accepted.”

Jonathan Coubrough, an analyst with London brokerage Numis, noted to clients that Glenveagh was struggling to scale up its business as quickly as it would have liked. “We see further timing risk here,” he said, reiterating his reduce recommendation – the equivalent of a sell – on the stock.

Barclays analyst Celine Soo-Huynh was more upbeat, saying “fundamentals are expected to remain resilient” this year, with house price inflation expected to amount to 6 per cent, while construction cost inflation, which had hit the construction sector hard last year, should also ease. Irish lenders have largely lagged behind European peers in passing on ECB rate hikes.

“The 30 per cent presale on the units completing in 2023 is lower than the year prior, but management expects the recent announcements by the [Central] Bank of Ireland on less restrictive mortgage requirements, as well as a supportive Irish housing policy, to still fuel demand for new homes,” she said. This time last year, Glenveagh had already signed up buyers for almost 45 per cent of the owner occupier homes it ended up completing last year.

Some believe that Cairn – which had a head start on accumulating its land bank following the crash and floating on the stock market – should break away from its arch-rival in the eyes of investors. Shares in Cairn, trading at 91 cent in Dublin on Friday afternoon, and Glenveagh, changing hands at under 87c, are well below their respective €1 initial public offering prices.

Could a scheduled trading statement from Cairn on Monday morning be a catalyst? “Cairn is in a more advantageous position from a planning perspective – with 90 per cent of its guided unit volumes to 2024 having full planning permission,” said Shane Carberry, an analyst with Goodbody Stockbrokers.

The overriding ambition of both housebuilders is to deliver profit returns by 2024 that are the equivalent of 15 per cent of shareholders’ equity. Glenveagh has more work to do, with its estimated return on equity last year of 7 per cent below Cairn’s 11 per cent target.

Glenveagh has been relying more heavily on share buy-backs and to get there, having repurchased and cancelled close to €254 million of its stock over the past years (helped by money received from the forward sale of apartment schemes). It announced on Thursday that it planned to repurchase a further 10 per cent of its stock – which equates to €55 million based on its current share price. More buy-backs may be in store if it fails to deliver on hitting ambitious building targets.