John McManus: How Nama and Gerry Gannon unlocked Belcamp

Just before Christmas Eve, Gerry Gannon, the high-profile developer and member of the so-called Maple 10, lodged a planning application for a large development at Belcamp on the Malahide Road.

His company, Gannon Properties, wants to develop more than 260 houses and apartments on the site of Belcamp House, an 18th-century Georgian country pile that saw out its later days as a boarding school and seminary. Among other things it boasts an Oval Room modelled on the eponymous US presidential office.

No doubt there will be objections and no doubt Gannon Properties will do its best to preserve what is worth preserving. But given the shortage of housing in Dublin you would expect that the development will proceed apace.

The full details of Gannon Properties' planning permission have not yet been published on the Fingal County Council website but we can glean quite a lot of information from the summary on the site and from information already in the public domain.

What is interesting about this is that, on the face of it, Gannon Properties is going to be lucky if it breaks even on the project.

A back-of-the-envelope calculation, based on the size of the development (31,000sq m) and the prices being sought for comparable houses, indicates Gannon will realise about €55 million in sales at current prices.

This assumes the company is going to build the sort of housing that they have developed nearby.

Crude calculations

Construction costs will be somewhere in the region of €35 million based on published industry rates. Gannon Properties will obviously be able to avail of various economies of scale but the €35 million figure does not include site works, development levies and various other costs.

This leaves Gannon Properties with a margin of €20 million which is almost completely wiped out by the cost of acquiring the site at approximately €19 million. This figure is arrived at by taking the €105 million that Gannon paid for the 81-hectare site in 2004 and assigning a pro-rata value of €19.5 million to the 15 hectares he will be building on.

You could spend a long time arguing about these figures but, whatever way you look at it, it is very hard to see how Gannon Properties will make any significant amount of money out of the development, if they apportion a share of the original site cost to the project.

This in a nutshell is the problem that confronts developers. If you are trying to recoup the cost of land you bought prior to the crash, then developing it is marginally profitable at best, given house prices at the moment.

The corollary also holds. If the price of your site bears some sort of relationship to what people are prepared to pay for a house on it then you are in business.

Based on the figures above and factoring in the 10-15 per cent profit that is the norm for a high-risk activity such as house building, the true value of Gannon’s site is near €10 million or roughly half what he paid for it.

Assuming Gannon has not quietly converted Gannon Properties into a not-for-profit housing association, we must presume he has found some way of closing this gap. How it was done is between Gannon Properties and Nama and will no doubt remain covered by the cloak of secrecy thrown over many aspects of its activities.

It would appear, however, that many other developers are either unwilling or unable to to write down the value of their sites to a level which is appropriate to the market value of the houses they want to build on them.

They seem to be hanging on in the hope that prices can be forced up to a level where they can cover the original cost of their sites and make a profit.

For this they need two things: people prepared to take on mortgages that are too big for their incomes, and banks willing to lend to them. As we know to our cost, there is no shortage of either.

Sensible footing

Hence the decision of the

Central Bank

to step in and put prudent limits on what people can borrow as a proportion of their salary. It has stopped reckless lending and also put house-price inflation on a sensible footing. Both of these traits are desirable in any well-run economy so some other way must be found to unlock sites for development.

Nama and Gannon Properties would appear to have found one, and no doubt there is more to follow if Nama is to make good on its commitment to help its borrowers build 20,000 homes.

But one suspects it involves a write-down of the value of the site – which either directly or indirectly falls on the taxpayer’s shoulders.