Construction in Ireland: A new boom?

The Celtic Tiger economic boom was driven in part by the country's house building industry.  Equally, the financial crisis that followed was a result of the debt that homebuilding and buying engendered.  As the financial crisis unfolded, the construction industry collapsed and pictures of unfinished developments became emblematic of Ireland's economic failure.

Challenges of the Current Market

Whereas at the peak of the boom in the region of 90,000 homes a year were being built, in 2015 the number was less than 13,000.  The consequence, particularly in Dublin, is a chronic housing shortage that poses a problem not only for potential homeowners and renters but is seen by the government as a direct challenge to Ireland's economic future.  While its rapid rebound from the crash has seen the Irish economy become one of the fastest growing in the Eurozone, the country's attraction for foreign investment is threatened by the absence of high-quality housing and associated infrastructure, both economic, such as roads and broadband, and social, such as schools and healthcare (a problem recognised by the government in the 2018-2027 National Development Plan which promises massive infrastructure upgrades over the next decade).

Without housing for their workforce the attraction of Ireland to overseas companies is compromised but in any event concerns exist regarding the adequacy of supply of office space.  While Dublin has already established itself as an attractive outpost of Silicon Valley within Europe, with companies such as Facebook, Google and LinkedIn employing thousands of people, and is an established base for pharmaceutical and service businesses, its ability to meet increasing demand is uncertain.  Projects that were started after the recession are only just reaching completion and a lot of old stock is in the process of being demolished to make way for new buildings.  The consequences are very low vacancy rates and limited options for companies looking to set up a base in Dublin.

A new boom?

Given the shortages in commercial and residential property it is no surprise that Ireland is experiencing a new boom across the construction sector.  According to the latest Construction Purchasing Managers' Index from Ulster Bank, housing and commercial activities both showed strong growth in 2017.  Construction is set to expand again in 2018, with Aecom Ireland estimating 14% growth.

The strong economy, shortage of housing and the rapid rise of house prices have all conspired to bring Ireland back to the attention of global institutions, private equity and real estate investment trusts seeking to invest in real estate.  Brexit has, of course, also fuelled interest.  While Ireland has the largest trade exposure to the UK of any EU country and has the potential to be negatively impacted, there is considerable optimism that Brexit offers a wealth of opportunities for investors who might see London as overpriced and who also want to retain a foothold in the European Union.

PRS

There is also an increasing appetite among investors towards "alternative" sectors such as the Private Rented Sector (PRS) and Purpose-Built Student Accommodation (also known as PBSA). These sectors are seen to have less volatile income characteristics, potential for capital growth and provide diversification.  According to Jones Lang LaSalle, PRS in Ireland was of particular interest to investors in 2017 and they expect continued activity in this sector in 2018.  Property consultants, Savills, estimate that approximately 18.9% of people currently live in private rented accommodation in Ireland (24.5% in Dublin) and that figure is anticipated to rise.  Scarcity of accommodation means that vacancy rates are being driven lower (currently estimated at being in the region of only 1.3%), which, together with strong rents (despite rent controls in certain areas), adds to the attraction of PRS as a stable investment opportunity.  The fact that property prices continue to advance faster than earnings means that the rental sector is unlikely to slow down any time soon.

Build-to-rent

Evidence indicates that it is not just young professionals and students who are renting.  Couples, families, migrant workers and pensioners are all represented in the shift.  To cater for this increasingly diverse market, the concept of "build-to-rent" is gaining traction in Ireland. Build-to-rent typically involves large-scale development, with on-site staff and amenities, and long-term ownership by a single entity engendering a sense of investment and community in the project. Although a well-established model in some markets, including the United States and Canada, and a growing sector in the UK, in Ireland it is still new. Nevertheless, build-to-rent may offer a viable solution to issues of affordability as well as the changing demographic where the greatest need is no longer for the traditional three-bedroomed, semi-detached home, but for smaller housing units.

The Irish government recognises the potential of build-to-rent and has invested in its future by prioritising planning applications for such schemes and exempting them from recent legislation to limit potential rental increases in certain areas.  Experienced international built-to-rent operators, such as Hines and Kennedy Wilson, are also actively engaged in this sector in the Irish market.  Since the crash in 2008, Kennedy Wilson has invested substantially in Ireland and their portfolio includes not only retail, commercial and PBSA, but also multi-unit Build to Rent schemes such as Clancy Quay – the largest apartment project in the country.  Hines is the leading developer at Cherrywood, a 400-acre site in South East Dublin, and has recently agreed a joint venture with Dutch pension investor, APG, to develop 1,300 units. According to Brian Moran, Senior Managing Director of Hines' Dublin office, Hines plans to acquire other sites for volume development in the sector as sites are released.

Student Accommodation

Purpose-Built Student Accommodation (PBSA) is another area of potential growth in Ireland.  Like PRS, it is seen by international investors as a safe home for their money.  PBSA has been a success story in the last decade in the UK as the shift from student houses – often older properties owned by small landlords – to purpose-built housing in large new blocks with facilities such as gyms, bike stores and cinema rooms, has offered investment opportunities.  Data has shown that since 2007 in the UK growth in bed-space in private blocks has vastly outstripped that of university-owned halls of residence.  

Investors are already capitalising on similar opportunities in Ireland. Hines entered the PBSA market in Dublin around 18 months ago and already has over 1,200 units under management with a further 500 in the pipeline. According to UK-headquartered GSA, Dublin has 80,000 full time students and a further 100,000 coming to the city to study English language each year. These numbers could increase if Brexit results in more European students heading for Ireland rather than the UK.

The potential of this sector is evident from a GSA project in Dublin.  In Autumn 2017 GSA launched a 400-room development in Dublin's Liberties area and despite rents rising above €1300 a month, the development is fully booked for the current academic year.  GSA have a number of other schemes in the pipeline and plan on looking beyond Dublin to other parts of the country such as Galway in the future.  However, the success of PBSA schemes is tied to their location and what works in Dublin may be less successful in other parts of Ireland.  Evidence from the UK indicates that the higher the ranking of the university the better the financial outcome of the PBSA scheme.

Technical Innovation

Both PRS and PBSA have the potential to help alleviate the chronic under-supply of housing, particularly in Dublin.  Ireland also has technical capability, for example, in the offsite manufacturing (also known as modular building) sector, which could help solve the housing problem.  Certainly, in the UK, the government sees it as a potential solution to its own housing crisis: in November 2017, UK Chancellor, Philip Hammond, acknowledging the importance of modernisation and innovation to the future of the industry, stated that the government will drive adoption of modern methods of construction, such as offsite manufacturing. Historically, poor durability and structural performance contributed to a perception of prefabricated construction as inferior to more traditional methods, but in recent years an incremental approach has seen an increase in the successful use of modular construction, for example, bathroom pods and façade manufacture.

Innovative strategies can alleviate the challenges Ireland faces in other ways too.  For example, Aecom, in its Annual Review 2018, draws attention to the potential of brownfield sites and cites the successful development of Dublin Docklands.  Agricultural land also offers opportunities.  Facebook is expanding with a new data centre in County Meath.  The centre is considered to be one of the most energy-efficient in the world being 100 per cent powered by wind energy.

The future

It's not only the housing shortage and lack of associated infrastructure that poses a threat to the country's economic model.  Rising interest rates, increasing protectionism and a shortage of skilled construction workers are further challenges. The bottom line is that the Irish construction industry is still playing catch up and will be doing so for a number of years.  But the will is there, not only domestically but also from international investors.  This is seen by many as the key distinction between now and the pre-2008 position.  Whereas then the industry was largely debt-funded by Irish developers, the current boom is heavily weighted in favour of institutional money with more equity and less debt.  Combined with an increased focus on innovation and receptiveness to changing demographics and lifestyle choices, the outlook for a durable, thriving Irish construction industry seems positive.

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