FDI could be tempered by shortage of offices and housing

The release of the latest house-building costs by the Society of Chartered Surveyors Ireland shows only very marginal building cost increases in the last year.

This is good news for the economy and reflects the improved competitiveness which has developed in the construction industry in Ireland in the face of six years of recession.

In commercial construction, according to the society’s index, at the end of last year tender prices were some 30 per cent lower than the peak in 2007 and still 12 per cent lower than they were 14 years ago, at the turn of the millennium.

So those who were brave enough to undertake construction over the last five years have been the real beneficiaries of contractors cutting margins and overheads, utilising more efficient ways of working, sourcing alternative material suppliers and reducing – or in some cases eliminating – profit just in the interests of maintaining cash flow and turnover.

Below-cost tendering is an unsustainable way of working over a prolonged period and can lead to poor management of projects and failure of contractors and of building projects.

Construction tender prices are not divorced from costs and building firms cannot offer ever-lower prices, but clients can avail of the efficiencies which the sector has managed to achieve.

It has been a common perception that building costs in Ireland were artificially high compared to other countries. It is extremely difficult to accurately compare like-for-like construction costs across the EU because of differing economic sizes of member states as well as varied prevailing economic circumstances and locational and transport issues.

However, the European Council of Construction Economists, an umbrella group of what we know here as quantity surveyors, has recently completed an exercise to accurately compare construction costs on a pan-European basis.

The initial cost model is based on a standard and consistent specification of a typical three-storey office building (basic shell-and-core only) of cicra 3,500sq m (37,674sq ft ) and has been measured in each of the years from 2010 to 2012.

That study certainly shows that office-construction costs in Ireland compare very favourably with our European neighbours, with only Hungary and the Czech Republic showing lower costs than Ireland.

That is particularly good news for Ireland from a competitive point of view, especially when all of the issues are taken into account, including Ireland’s relatively small economic size, its additional transport costs for imported materials and the limited number of large-scale projects on which significant economies of scale can be achieved.

This study doesn’t include the additional non-construction elements of development cost – such as fees and levies payable to local authorities for planning permissions and for connections to services and the direct and indirect costs of delays before securing planning permissions, etc.

It is surprising that in spite of the clear competitive reduction in construction costs over the last seven years, there has been no reduction in local authority planning fees or development levies – with the commendable exception of the levies charged by the four greater Dublin local authorities, which have been reduced significantly.

The Government’s Construction and Development Strategy 2020 will focus on initiatives that will help fill the deficiencies in new housing and office supply, particularly in the greater Dublin area and which will promote employment in the sector.

The recent Housing Agency study, Housing Supply Requirements in Ireland's Urban Settlements 2014-2018, identifies a requirement for about 16,000 units per annum for the next five years, of which almost half will be needed in greater Dublin. More importantly, that study is based on the premise that "housing requirements in any previous year have been met".

Many would be clearly of the view that the assumption is extremely optimistic. Only 6,500 new residential units were completed in greater Dublin over the last four years.

The results of a further, more detailed study on the housing supply and needs by the ESRI on behalf of Nama and others are awaited but it seems highly unlikely that the Housing Agency estimates will turn out to be excessive. Indeed the opposite seems more likely.

It is clear that our appeal as a location for foreign direct investment is tempered by a current and, more importantly, a future lack of supply of available offices and residential units and our competitiveness is diminished by further rapid increases in residential and offices rents – heavily driven by lack of new supply.

Early resolution of supply issues is limited by time constraints involved in the planning process, not to mention the constraints in securing development finance. However supply is also constrained by lack of investment in infrastructure.

We all recognise the benefits which have accrued to the country and to the economy from the development of the motorway network, but for the last seven years, public funding in our physical infrastructure has been cut with, many projects delayed, shelved or cancelled.

Not only is this a missed opportunity to capitalise on low construction and property prices (if acquisitions were necessary), but also on significant employment-generation possibilities.

Moreover, the lack of adequate infrastructure capacity is starting to emerge as an issue in the development of the anticipated levels of need for new office and housing starts. These trends echo circumstances which prevailed in the early 1990s which were in part a prelude to escalating property prices.

Planning is not just about restricting and controlling development – it is about enabling the delivery of the appropriate development.

Our relevant legislation is entitled the Planning and Development Act, reflecting the importance of the development sector to Ireland. For the last seven years, we have been so focused on what went wrong with our planning, that we have lost sight of what was or would be needed in terms of development.

Other jurisdictions have had to continue growing, even during the recession, so as to maintain their strategic advantage. London is a case in point. There, the deputy lord mayor with responsibility for planning, Sir Edward Lister, is primarily focused, not on controlling the detail of development, but rather on making sure sufficient new development actually takes place to meet London’s immediate and future needs and make the city work.

There may be important lessons for us to learn from our neighbours.

Lister will be a keynote speaker at Property Industry Ireland's upcoming conference on Making Cities Work at the Marker Hotel on June 19th. For further information on the conference, see propertyindustry.ie. Aidan O'Hogan is chairman of Property Industry Ireland, a representative body for the property industry.