Construction sector output has grown but challenges remain, says CONOR O’DONOVAN.
The Irish construction sector has turned a corner and output is expected to grow in the next two years, mainly driven by new private sector construction in the residential and commercial property sectors, which will help to alleviate the shortage of supply.
Key to the economy
A sustainable construction sector is a key element of any properly functioning economy, and following several years of declines in output, the construction sector finally began to stabilise in 2013. The sector grew by 9.9% in 2014 to €11 billion, according to a new report by the Society of Chartered Surveyors Ireland (SCSI).
Since the industry bottomed out in 2012, the overall volume of output is projected to be almost 42% higher by 2016, as the economic recovery gathers momentum and becomes more widespread. The sector accounted for approximately 6.9% of GNP in 2014 and is expected to reach a value of €12.5 billion or 7.5% of GNP this year.
Other indicators, including employment levels, are also improving following a dramatic decline. A total of 115,800 people were employed in the construction industry in Q4, 2014, representing an increase of 18,500 or 19% from the lowest point reached in Q1 2013. There has also been a 27% increase in the number of people applying for built environment-related courses on the CAO, which is also positive given the shortage of skills and capacity currently in the industry, as many exited the sector and country during the recession.
Challenges and opportunities
The positive growth indicators are a step forward for the construction industry and economy, but many challenges remain. The construction sector is heavily reliant on the performance of the wider economy and growth is coming from a low base, and while many projects are beginning or underway, it is likely to be 12 to 24 months before many materialise. Furthermore, the overall sector output is still below the 12% of GNP that is considered to be a sustainable level according to European standards.
Investment in the commercial property sector has experienced a strong start to 2015, largely driven by increases in rents for prime office space arising from a shortage of availability of modern stock. According to the SCSI report, the level of commercial construction output is projected to be at around €3.5bn over the two-year period 2015-16.
Perhaps the most significant contribution to the private commercial construction market (offices, industrial, retail) is expected to come from NAMA through its support for construction projects and through other initiatives. The overall amount of office space planned on sites is of the order of 316,000 square metres out to 2025, with four operational projects in the North Lotts and Grand Canal Docks SDZ in the Dublin Docklands expected to deliver around 130,000 square metres of commercial space over the next four to five years.
The foreign direct investment (FDI) sector is also generating significant opportunities for the construction industry, as existing and new FDI companies seek to expand in, or relocate to, Ireland. It is important to ensure that we have sufficient modern office accommodation to support their needs and that rents do not become uncompetitive compared to other international locations.
In terms of the housing market, the shortages of supply in key areas remain an issue and analysis in the SCSI report suggests that the number of units actually built within a given year is fewer than the official figure suggests, as it is based on ‘completions’, i.e., units that are connected to the electricity supply. The SCSI forecasts that approximately 10,000 units will actually be built in 2015 and 14,000 in 2016 as the large number of units from unfinished estates washes through the system. That said, the annual average demand is for 26,000 units a year, so we are still some way off reaching a sustainable level of output.
A number of new initiatives by Government, including the implementation of some of the Construction 2020 measures under the Urban Regeneration & Housing Bill 2015, which reduces construction costs including Part V and development contributions, will support more development coming on stream as schemes become more viable.
SCSI launches new quarterly housing development monitor
As part of the SCSI’s commitment to improving research and information, and to support more transparency in the property and construction sector, it has published a new monitor of residential planning activity in the Dublin region across the four local authorities. The report shows that there were 2,363 planning applications of 25+ unit schemes in the first quarter of the year. This was an increase of 6% compared to the final quarter of 2014 (2,234 permissions), but is down 40% on the number of similar applications for Q3 2014 (3,734 permissions). It also shows that there were 1,605 commencements in Dublin in Q1, which at current levels is below the projected minimum requirements by the SCSI of at least 7,000 units per year.
SCSI policy update
SCSI Meets Dr Don Thornhill and Department of Finance
Representatives of the Society were invited to meet with Dr Don Thornhill, who was appointed by the Minister for Finance Michael Noonan to review the operation of the Local Property Tax. The SCSI representatives highlighted a number of recommendations, and made a full submission to the Department of Finance, which is available at www.scsi.ie.
Department of Finance consultation on proposed taxation on zoned and serviced land
The Society, through its valuation and planning and development professional groups, has made a submission to the Department of Finance on the review of proposed taxation measures on zoned and serviced land. The SCSI has highlighted the lack of viability with some sites and made some recommendations including the importance of viability testing as part of any taxation proposals. It also suggested reducing the VAT on new homes for a two-year period.
Urban Regeneration and Housing Bill 2015
This Bill has been published and sets out a range of measures to support housing supply. The SCSI previously made a submission and met with Minister Coffey, and is working on a follow-up submission.
Central Bank Macro Prudential Policy Rules
The Society has made a submission to the Central Bank in relation to the macro prudential policies, which include a new two-month valuation rule. The Society has also met with a number of financial institutions in relation to its implementation.
If you have any questions on the above, please contact Conor O’Donovan, Director of Policy & Communications, at email@example.com.
Conor O’Donovan, MBA
Conor is SCSI Director of Policy & Communications