Why can’t we build apartments like the rest of Europe?

We're repeatedly told the answer to Ireland's housing problem is to build up, not out – in other words more apartments in urban areas. But developers say high-density housing, the standard across so much of Europe, is not cost-effective here.

High-rise development, they claim, is more expensive because of the increased structural requirements – think of lifts, car parking spaces, fire safety regulations – and can’t deliver homes at affordable rates, at least not for the sales market.

But do these claims stack up? And if so why are we such an outlier in cost terms? The Society of Chartered Surveyors Ireland (SCSI), the professional body for the industry, puts the cost of delivering a two-bedroom, medium-rise (in a block of five to eight storeys) apartment in suburban Dublin at €400,000-€481,000 and €470,000- €578,000 in the city centre.

A first-time buyer availing of a 90 per cent loan-to-mortgage would need an income in excess of €120,000 to buy at these prices.

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We're tied into a dysfunctional system that's all about extracting the maximum value out of land

The SCSI’s numbers are based on an assessment of 28 apartment schemes under development in Dublin in 2017 and include site costs, professional fees and development margins or profits.

The report concludes that the cost of delivering apartments in urban Dublin exceeded the sales prices a developer could expect, underscoring why most schemes are now aimed at the rental market.

On foot of this the Government tasked the Housing Agency with benchmarking Irish construction costs, and specifically apartment construction costs, internationally. The agency's report found Ireland had "comparable" construction costs with the UK, Germany and France and was "not out of step" with countries that have comparable climatic conditions – for example, heating and ventilation requirements – and similar economic characteristics and construction labour costs. A sub-index of the report specifically on labour costs found they were on average €27.10 per hour in Ireland, which was above the EU average, but on a par with Germany, and below the Netherlands, France and the UK.

But here’s the rub. The report compared countries on the basis of hard construction costs only, namely those related to the physical construction of buildings – in other words bricks and mortar.

It did not consider development costs, those expenses indirectly related to construction such as the cost of land, professional fees and developers’ profit margins. In these areas, Ireland and the UK appear to be out of whack with continental Europe.

"Where land is available, actual construction, de-risked from speculative markets and high-cost finance, is affordable," University College Dublin academic and housing expert Orla Hegarty says.

This is confirmed by the Department of Housing’s own figures for competitively tendered local authority housing, she says. They show that in 2019 the “all in” cost of a two-bed apartment in Dún Laoghaire-Rathdown and in South Dublin was €294,700, while in Fingal it was €281,800.

The figure for Dublin City Council was more elevated at €370,500, though Hegarty thinks this was for atypical schemes and related to certain schemes that year. These figures are also not inconsistent with those of affordable housing co-op Ó Cualann, whose construction costs for two-bed apartments are €285,000.

The disparity between these prices and the SCSI’s prices appear to be explained by the speculative model of development, which is responsible for most residential construction here.

“We’re tied into a dysfunctional system that’s all about extracting the maximum value out of land,” Hegarty says.

It incentivises people to hold on to land and drip feed it into the market on a cyclical basis, delivering windfall profits for landowners while making housing unaffordable for the rest.

She says changes to apartment design standards and the lifting of height caps, ostensibly aimed at making building apartments cheaper, have only fanned land values without making this sort of housing more affordable.

Hegarty says various industry reports, attesting to the high-cost of construction, all seem plausible because they’re based on a traditional business model, which is no longer fit for purpose.

"It's a bit like when Aer Lingus was charging £200 to fly to London in 1980s. If you went in and audited Aer Lingus's cost base, it all stacked up," she says.

"Aer Lingus was saying we can't do it any cheaper and anyone who looked at the books as an accountant would say, yes that looks about right, I can't see where you could make any savings." But then Ryanair came in and threw out the traditional business model, she says.

Hegarty is sceptical about reports comparing construction costs across jurisdictions, noting that costs vary so much from scheme to scheme that cross-country comparisons with different regulatory environments are almost meaningless.

“You could argue either way about whether we’re out of line with other places but the type of information that’s published is very broad brush,” she says.

She takes issue with the SCSI report on the grounds that it is opaque on development costs and averages land values even though they vary widely. The report adopts a notional range of €70,000 -€125,000 for per unit site costs based on advice from SCSI agents. But Hegarty says some developers got sites off the National Assets Management Agency (Nama) for €25,000 a unit.

She also queries the assumed profit or development margin included in the report, noting that the sales prices are set by what the market will bear and not the cost of construction.

Without PRS investors we would see very little product coming to market

“The industry will always say construction costs are too high or off the scale,” but it’s not always the site that’s not viable, it’s regularly the business model, she says.

Paul Mitchell from construction consultants Mitchell McDermott, one of the authors of the SCSI's report, insists the 15 per cent development margin or profit is not excessive. "Banks won't lend to developers unless they're making 15 per cent gross profit," he says. He also sketches out the length of time involved in bringing these schemes to market – a year to design, a year to get planning, two years to build – as well as the cost of finance and the inherent risk involved given fluctuating market conditions.

The current trend for developers to sell their schemes as a single job lot to private rented sector (PRS) investors has unlocked the apartment market, Mitchell says, noting developers can’t build at affordable rates for the sales market as the SCSI’s report confirms.

In an era of zero interest rates, corporate investors have flocked to Ireland to avail of comparatively strong returns from the rental sector. Some €1.1 billion was invested in almost 3,000 units in 2018. Canadian-owned Ires Reit and US firm Kennedy Wilson, developer of Capital Dock in Dublin, are the two largest PRS investors players.

While the arrival of these funds has generated negative headlines, Mitchell insists the apartments they’ve bought wouldn’t otherwise have been built.

It is estimated that up to 70 per cent of this PRS activity is being funded by foreign money.

“Without PRS investors we would see very little product coming to market,” he says. In 2019, just over 3,600 apartments were completed but planning has been granted for 19,000 additional units, which, if delivered, will drive down rents, Mitchell says.

On why development costs appear to be higher in Ireland than in continental Europe, he says: “European countries have been building apartments since the rebuilding programme after the second World War and have established developers and structures for funding these schemes.”

He also claims higher standards for delivery in terms of size and specification drive up costs here.

Mitchell says some people advised him to only look at hard construction costs in the SCSI report and avoid “the thorny issue” of development costs, which he refers to as “viability”.

“But this would have been pointless, particularly when in one part of the city you can pay €20,000 per unit site costs and in another part, €120,000,” he says.

Mitchell appears to pinpoint land as the most significant variable in the equation, echoing Hegarty’s conclusion that the speculative market for land here goes further than anything else to explaining the affordability problem.

In a recent report, the National Economic and Social Council (Nesc) identifies the critical role of land supply and land cost in housing and infrastructure in Ireland.

It notes that public decisions on zoning “often confer disproportionately large benefits on the owners of land”.

“Planning, of the kind found in Ireland and Britain, can prevent undesired development, but lacks the ability to ensure that development takes place,” it says.

“Land can be zoned for housing, and even serviced, but there is no guarantee that it will be used within a reasonable period,” the report says, while noting there has been limited housing development on land sold by Nama.

“Indeed, the supply conditions of land help to create the speculative development land and housing market. The focal point for competition is land acquisition and land hoarding, rather than quality or value for consumers,” the report concludes.

The Government's answer is the Land Development Agency. Set up in 2018 with €1.25 billion in capital funding, its remit is to identify and release State landbanks where up 150,000 homes over 20 years can be constructed.

Its chairman John Moran is wedded to the idea of high-density development while Taoiseach Leo Varadkar says the agency is a model of best practice abroad and a step change in the Government's involvement in the housing market.

It was given a remit to assemble public and private sector land “to smooth out peaks and troughs of land supply, stabilising land values and delivering increased affordability”. However this latter objective wasn’t contained in the draft legislation establishing the body, leading some to fear it may just morph into another development body, surfing the market cycle it is designed to offset.

Rob Kitchin of Maynooth University told the Oireachtas housing committee recently there was "an underlying ethos of marketisation and privatisation of public assets" running through the agency. He also raised concerns about the government of the day being able to sell shares in the agency "thus privatising it".

Trinity College Dublin economist and author of the Daft.ie property report Ronan Lyons claims the lack of apartments, not houses, lies at the heart of the housing crisis here, and thinks we have a surplus of three- to five-person dwellings, both in Dublin and in the rest of the country.

In other European countries, apartments typically account for 30-50 per cent of the housing stock, but in Ireland they account for just 10 per cent, he says.

“So we’re a complete outlier. The only comparable economy is the Shetland Islands, and even there they have about 50 per cent more apartments, on a per-capita basis, than we do.”

Lyons estimates that Ireland has about 500,000 fewer apartments than it should have for the size of its population, and that the apartment shortfall is the single biggest factor driving the current crisis.

The issue of why we can’t build apartments like our European neighbours is tied up in the wider housing problem, which appears to be underpinned by a deeply divisive land speculation market.

In 2011 the then Fine Gael-Labour government offered prospective investors a capital gains tax (CGT) exemption if they held on to land here for seven years in a bid to whip up activity in a moribund property market.

The measure was later linked to land hoarding, particularly in Dublin, at a time of chronic undersupply. Now the Government has pulled the other lever, penalising landowners for not developing with a vacant site levy.

These reactive measures are seemingly the stock-in-trade of successive Irish governments and have delivered next to nothing in terms of affordability.