Beech Park, a development of 164 homes in Cabinteely, Co Dublin, was to be Michael O’Flynn’s return to the house-building game. Earlier this year, while in the middle of a bruising court battle with the US investment giant Blackstone over his property empire, O’Flynn Capital Partners paid €13m for a 5.3-hectare site in the suburb.
With the banking system closed to financing land deals, O’Flynn raised €10.75m from well-heeled clients of Goodbody Stockbrokers and debt from Elkstone Capital, a boutique Dublin corporate finance firm, to complete the deal. Then, on July 31, O’Flynn’s comeback hit a rather big speed bump. Dun Laoghaire-Rathdown county council refused planning permission for Beech Park. It was a shuddering setback for O’Flynn and his investors.
In his 37 years as a house builder, O’Flynn has never had a development of such a scale refused. Company policy is to meet with planners and do extensive preparatory work to avoid having plans shot down. “I’ve never experienced anything like it,” said O’Flynn of his dealings with the council. “It is bizarre.”
The development was refused largely over road access. In an unprecedented move for the developer, O’Flynn went to the High Court to seek a judicial review of the decision, accusing the council of “bias”. He claimed that it had prejudged the planning application.
O’Flynn is not the only developer who has been frustrated by his dealings with Dun Laoghaire-Rathdown. Another large builder with planning in the area said it had been looking for a meeting with the council for years without success.
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A spokesman for Dun Laoghaire- Rathdown said it could not comment on the O’Flynn case. Yet he strongly refuted that there were issues with planning in the area. “The planning department made the third-highest number of decisions in the country in 2014 and has experienced a 160% increase in the number of residential units applied for during 2015, compared with the same period in 2014,” he said.
Dun Laoghaire-Rathdown is not the only authority to face developer ire. One council requires approval from county councillors for the name of a development. If it rejects the name, the property firm has to wait up to six weeks for the authority to meet again to sign off the site’s name.
“I have had 10 weeks on one scheme just to get a site name approved,” said Brian McKeon, head of MKN Property Group.
He said utility companies such as ESB and Ervia (formerly Bord Gais) would not accept plans for a scheme for houses until there was a name that they could add to their billing systems. “Even if you get a planning permission,you can spend a year sorting compliance with planning conditions, ” said another developer who asked not be named.
Little delays add months to the planning process and frustrate developers in delivering houses. Last year, just 3,300 houses were built in Dublin. Population growth and increased economic activity suggests demand for 10,000 new homes a year.
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In his budget speech, the finance minister Michael Noonan said there had been “a market failure” in Dublin house-building, and he had a plan to fix it.
NOONAN announced that Nama would provide €4.5bn to develop homes in the Dublin region, delivering 20,000 new houses to the market by 2020. The agency will work with builders under joint ventures to deliver the properties, 75% of them starter homes for first-time buyers.
Yet scepticism abounds. “There is plenty of land, and now there is also plenty of finance,” said one developer. “This is not the reason why houses are not being built.”
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Within the industry, the view is thatthe real brakes on development are the red tape of building regulations, the dampening effect of mortgage restrictions imposed by the Central Bank of Ireland, and the trials of the planning process.
Development levies and similar costs can add up to €50,000 to the price of a house in some Dublin areas. Houses are not being built because it is not commercially viable to do so. The fear now is that Nama may pump cheap money into the sector and could end up distorting the market. Developers will not be able to compete with Nama-backed estates where no value has been attributed to the site, said one financier, and where the agency is charging 3%-5% on its finance. It is dangerously close to state aid.
Tom Parlon, the director general of the Construction Industry Federation, believes builders might be at a disadvantage going up against Nama. He said the banks would provide only about 65% of the finance for a development project. Builders are now tapping up other sources of capital and private equity funds that seek returns of up to 15% a year.
The higher cost of capital makes some developments already unaffordable to build out. The fear then is that Nama will simply come in and undercut the private sector. “The worry is Nama might have a volume target and it might be under political pressure to build more houses,” said Colin Sheridan, a research analyst at Davy. “You wouldn’t necessarily want to be building next door to them as a private builder looking to make a profit.”
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Property development has changed since the heyday of the boom, when developers could get capital to buy sites and build houses at will. The banks will not lend to buy land without planning permission. Land purchases have been funded through alternative funders, private equity, investment funds or, as in the case of Cairn Homes, through the stock market.
“The banks won’t make funding available unless there is planning in place,” said O’Flynn. “This is the policy of the two pillar banks. If you can’t get planning, you can’t get capital. In the new world of finance, certainty is king — and the planning process is anything but certain.”
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Nama will be well aware of the difficulties within the market. Through various portfolio sales, the agency has sold residential development sites that could deliver 11,000 new units. Just 700 houses have been built on these sites.
New Generation Homes is arguably the most active property developer in the capital. With the backing of M&G, the investment arm of insurer Prudential, it has spent €450m buying up banks of land around the capital since 2011.
“I’m probably dealing with more planning applications than Nama,” said Pat Crean, chief executive of New Generation. “It will get a queer fright when it starts to go through the planning process.”
Sheridan believes Nama’s continued involvement is designed to mitigate any future claims of the land being sold off cheaply, or being delivered to investment funds that could hoard the land and wait for house prices to increase.
O’Flynn argues that few developers buy land to sit on it. He said that 99% of the time when land banks are not developed it is usually because of a planning obstacle.
In Dublin, of course, house prices are falling, with the most recent daft.ie survey showing that asking prices were down 1.4% between June and September.
Housebuilders are in no doubt that prices are being depressed by falling demand, in turn caused by Central Bank mortgage restrictions. The regulations mean most first-time buyers can borrow 90% of a property’s value up to €220,000 and 80% of any amount above this limit.
“The Central Bank thing has completely wobbled the market,” said Crean. It is “constipated”, he said, with people in the middle tier unable to secure mortgages to move to the top tier. Those who are living in starter homes are now not able to progress to the middle tier, which is causing a blockade. “Our building programmes have stopped,” he said. “We have plans that we are sitting on and we are waiting, trying to figure out what is going to happen here.”
MKN has permission for the second phase of a development at Ridgewood in Swords, north Dublin, comprising 179 starter homes. McKeon said sales on the first phase stopped when the last few buyers with mortgage approval signed deals in August. “I’m not building 173 more houses in Swords because I still have 16 houses to sell,” he said. “I’ll start building when I have two or three houses left.”
The Central Bank is in no rush to roll back the restrictions. In a speech to chartered surveyors last week, Stefan Gerlach, its deputy governor, said the rules were “working” and were “not onerous”. It was too early to assess the full impact, he said, yet existing evidence suggests the rules would help prevent another price bubble.
Even if Nama successfully delivers the 5,000 houses a year for the next four years, it will only meet a quarter of the estimated number of houses required to meet demand. There would still be a need for up to 15,000 homes a year from builders who are not working with Nama.
Land continues to come on the market. Ulster Bank is marketing Project Clear, a large loan portfolio secured on development land capable of supporting 13,000 houses. Bidding is expected to be intense.
Competition is also hot on individual sites. The Jurys Ballsbridge site achieved €170m, well above the €120m guide.
It is a strange quirk of the market, said Sheridan, that sites’ prices are continuing to rise even though house prices are falling. It is down to a scarcity of sites arising out of the bust.
McKEON said many builders felt Nama was interfering in a falling market. “If Nama were financing me, I have no doubt we would be building away at this moment because it is writing the cheque.”
For others, last week represented a missed opportunity. The government must commit to reform of the planning system, not go into commercial house-building. O’Flynn believes the country needs a national planning and infrastructure body that would co-ordinate and deliver housing and roads where required.
“Take it away from a situation where everyone, everywhere has a bit of everything,” he said. “This structure got us into difficulty and this structure will not get us out of difficulty.”