Climate of uncertainty discourages housing developers

The development land market has undergone a period of uncertainty which has led to values stabilising. This has been caused by a drop in demand from developers. While commercial and residential lands have been hit, the effect is more pronounced in the case of housing land. Values of residential sites have slipped over the last four months for three reasons:

The banks have adopted a more cautious approach to lending on development land.

The requirement for 20 per cent social housing in the new Planning Bill.

The uncertainty over future Government policy on residential developments.

For a parcel of land to reach its maximum value there are a number of different factors that have to be met. First, there are the physical issues. Sites must have the following: development zoning; services including foul sewer, surface water and water mains; and access for development.

If any of these conditions cannot be met, developers will discount the price they will pay. Vendors will get value for services only if they can guarantee delivery of them. The lack of services is a major constraint on the supply of new housing and this will not be solved by Public Private Partnership in the short term.

The availability of funding for the purchase of land has a major impact on values.

Another reason for the levelling of prices is the huge increase in the amount of land being offered for sale since March of this year. Many vendors moved to avail of the reduced capital gains tax of 20 per cent.

Any sites sold in the first three months of 2000 attracted the only premium prices so far this year. However, the fundamentals for the economy - and more specifically the commercial and residential markets - are still excellent and the long-term outlook is good. However, due to uncertainty over Government policy for the future, this will lead to a lack of land on the market for residential development.

If you look at the new homes market, prices are still increasing and there is still huge demand. The biggest concern to developers is the 20 per cent social housing requirement for new developments. The Government's new policy of giving 20 per cent of land to the local authority at existing use value (possibly even agricultural value) has led to a reduction of 20 to 30 per cent in site values. However, it is not the cost of land which determines the selling price of houses, it is the reverse as prices of houses are determined by housing demand and supply.

The reason for house price increase is a lack of supply of new homes. This devaluation could be higher because of the perceived effect on new home sales in combined schemes. This should be counteracted by increased densities but planning authorities/Bord Pleanala are not implementing this initiative.

No real framework on how the social housing initiative is going to work has yet emerged and there is concern that the model may be inflexible. This could lead to a fall off in supply of new homes in the medium term. If a developer is forced into an uncompromising situation to build social housing, they may opt to sit on their landbank and do nothing. This will further reduce the supply.

The Government is still attempting to manipulate a market with fragmented measures, such as the most recent Bacon report. Investors are now 15 per cent worse off than an owner-occupier purchasing a new home due to the stamp duty and the income levy. It will take a 15 per cent increase in rental levels to bring this market back to equilibrium.

This means prime apartment sites will be harder to sell in the short term but will come back to full value or greater in the next 24 months - as rents increase the return to investors becomes acceptable again. This will nullify the effect of the Bacon report. Where else do small investors put their money unless into small commercial property funds?

The planning process plays a critical role in the supply of new housing. The delay in getting planning permission means the lead-in time for development can be up to 24 months. With construction usually taking 12 months, it can be three years before the builder can bank the revenue from a development.

With the cost of finance increasing and rumours of future intervention from Government, many developers are questioning the wisdom of purchasing land which will take three years to develop. I believe there will be a fall off in supply of new homes in the next two to three years, contrary to the whole thrust of the Bacon measures. While the Strategic Development Zones are welcomed, the delay in getting these up and running will not alleviate the problem for three years.

The real reasons for the lack of supply to date are poor regional planning policy, a lack of transport infrastructure and planning, a shortage of planners in local authorities to process applications and area action plans, a scarcity of land being serviced by local government (caused by insufficient finance being made available by central Government) and inadequate labour supply in the construction industry.

Even if all the zoned land was available for immediate construction, there is not the manpower to build it.

Developers are frustrated by local authorities refusing planning permission for a scheme due to inadequate services or infrastructure. However, their frustration is justified when the deadlines for delivering such infrastructure are three to four years behind schedule.

There should clearly be a partnership approach to servicing land with developers. For a market to reach equilibrium, demand and supply must be equal. Demand is so great that placing tariffs on different buyers will stunt development. Real money must be put into increasing the supply of serviced land and reducing planning delays.

Demographics show there will be no fall off in demand for housing in the next five to seven years. Land values will continue to increase once the recent readjustment for social housing is accounted for, and house/ apartment values will also increase due to the growing demand.

In conclusion, residential landowners/ vendors must appreciate that the 20 per cent social housing will restrict development profit and impact land values. However, the medium-term outlook is good and land values will increase in the future, albeit more slowly than in recent years. For developers, now is a good time to purchase sites that can be developed in the short term. The supply of new homes will not increase in the short term, ensuring a strong selling market. If a site has full planning permission with no social housing implications, my recommendation to buy is even stronger.

Garvan Walsh is an associate director and head of the development land department at Gunne Commercial.