To be fair, there’s some merit in what they say. Below market funding to “select” developers is a form of state aid.
There is merit but these are also the same guys who are saying they wouldn’t get out of bed for less than €450 a square foot!
So fek them
Developers slow to build so they can boost profits – Nama
Developers can earn €20,000 on newly built home that sells for €300,000 – McDonagh
From the IT article
Assuming that the reference is to a 3 bed semi, built to the current specifications, then I’d dispute the profitability figure.
Based on the Irish Home Builders Association’s own figures from 2012 (here), which contain a very healthy contingency allowance, and taking recent reported Dublin land prices then factoring average densities the profit margin should be closer to 3 times the stated figure above and potentially more if either a lower price is paid for the land or the building contingencies contained in the costings are not used/need.
Start to finish a development will take upwards of 3 years to complete.
Over that timeframe even a 20% margin (rather than the 7% margin quoted by Nama) does not look particularly attractive given the risks involved.
Now let’s talk about the governments piece of the pie
or even Labour promising if elected to increase the minimum hourly wage of unskilled labourers along with everyone else by two euro an hour.
Politicians are now quite restricted in spending government money, due to all the new stability rules etc. The new game in town is therefore to send other peoples money, in this case mostly small employers in marginal business’s.
instead of providing and funding decent social housing, freeze landlord rents for 2 years
Another example of this is the proposal to fund higher education by increasing the training levy(which only applies to large companies I think) , and student loans, repayable from the graduates income.
DCC to build 1,300 homes in Dublin, gets the IT editorial treatment
Which risks exactly do you perceive in the undertaking? The returns on each unit do not arrive at the end of the development, rather as each is sold, often that’s before the ground is broken on its construction. Based on recent history, some of each development will be cash first, build later.
IMHO, the biggest risk any modern developer faces is getting carried away and paying too much for the land, followed by getting their project pricing wrong (all of which are standard business sense risk management issues that any manager would deal with).
There’s no good reason I can see, based on the industry numbers I’ve seen to date, why a “savy” developer can’t make a tidy sum on a development of well build, good sized, modern spec 3-bed semi’s in a well designed and serviced project in most parts of the Dublin area and sell them for not far off €250,000 per unit. However, IMHO the allegation from NAMA in the IT piece (along with some of the agency’s own actions) explains why we’re not seeing that.
For a start, prices can fall or costs can increase for any number of reasons outside the developers control
Still, with the currently constrained supply, buying off plans could well become sufficiently fashionable again to go a long way towards negating the risk of price falls.
Buying off the plans only requires a small deposit. They aren’t paying full cost for the house up front. Financing is still required.
Aha, I had assumed that it implied a firmer commitment than that, along with credit approval, but that the contract could still be sold on. My mistake.
Yes, that is true, but they are similar to the risks any business in any sector or market faces. Nothing special there and certainly not a reason to shirk a better than 7% and potentially double digit % EBIT return.
On the point of deposits, they are generally non-refundable. If a potential buyer places a deposit and fails to get funding or pulls out of the deal for some other reason, the developer and EA retain the deposit. Similarly, during the bubble madness, it was not uncommon for potential buyers to put down deposits on multiple units with the intention of only closing the deal on one (I never understood the logic behind that), again the cash from the uncompleted transactions went straight to the developer profit margin.
To return to the theme of the thread. 20,000 to 30,000 new units a year is well within the capacity of even a diminished Irish construction industry. 2015 is projected to show 12,500 or so new units.
I am not sure your information source is correct. The deposits paid were non-refunderable as a contract was in force binding both parties. Many an investor (post Celtic tiger days) was sued by the developer (or more specifically the bank involved) for specific performance of contracts signed at the height of the market.
House prices in Ireland historically display MASSIVE variation over a 3-year horizon. Sometimes in developers’ favour, sometimes not. Add in to the that uncertainty of the planning process.
It is a risky undertaking hence the need for high return.
The real issue is the cost of land and planning, services, etc. Remember in Ireland local authorities do not make money from houses, they make money from commercial rates.
Of course it’s much easier to blame developers.
A 7% EBIT margin wouldn’t butter many parsnips. Off that they’ve to service their senior debt, any mezz returns and taxes before they see any profits.
Much to Lorcan Sirr’s (DIT lecturer) chagrin, a targeted return of 20%+ is not “greedy” or “excessive”.
The great bastians of Irish utilities Ervia (Board Gais) = EBIT margin of 40%+, ESB’s = EBIT margin is 17%+, Bord Na Mona’s = 14%.
Most major UK housebuilders are generating EBIT margins of between 15% and 25% and they’ve significantly lower costs of funds.
But I doubt Sirr meant EBIT when he talked about “returns” did he?
God knows what metric he meant given how vague all his “proof” was - which essentially boiled down to being “people in the industry mentioned it to him in passing”.
A 20% return on equity doesn’t mean a 20% net income margin though.