Sunday, 12 October 2008

Sunset on the property boom

It is worth re-visiting this article as Frank McDonald and Kathy Sheridan's new book, 'The Builders', was covered on the Late Late Show on Friday night.

THE BUILDERS: In an edited extract from their new book, 'The Builders', based on a series in 'The Irish Times', Frank McDonald and Kathy Sheridan follow the story of a millionaire Ferrari-driving property developer

THERE WAS an end-of-empire feel about Donal Caulfield's party on a Monday night in April 2007 to launch Belmayne, the developer's 2,200-unit scheme on Malahide Road, in north Dublin. Rival developers turned out in numbers at Belmayne's futuristic marketing suite, where TV garden designer Diarmuid Gavin, flouncy interiors consultant Laurence Llewelyn-Bowen and a slew of scantily clad young women rubbed shoulders with property journalists and gossip columnists.

Former Liverpool footballer Jamie Redknapp and his wife Louise provided the minor celebrity glitz, champagne flowed late into the night and many pondered Caulfield's full-colour, full-on, racy marketing strategy in a - whisper it - shaky market. The highly provocative media campaign created by multinational advertising agency McCann Erickson had become a major talking point, involving such steamy antics as a couple lying astride one another on top of a kitchen island unit, and another with two young ones lounging on a bed, minimally clad, with a male hoving into view behind them. Truly, the days of the tastefully drawn artist's impression to sell property were over.

Then again, so were the nights when panicky young couples had to queue in their sleeping bags and throw themselves at the mercy of smug young agents for the privilege of chaining themselves to a property bubble. Now a property developer had to do what a property developer had to do: try harder.

Caulfield, a likeable, UCD-educated civil engineer and former captain of the under-21 Wexford Gaelic football team, was doing just that. In his diamante-studded Roberto Cavalli beanie, Versace jeans, Matrix-style coat and shades - worn indoors and out - he was bling incarnate, light years from the traditional country developer. So, naturally, there would be no Portakabins masquerading as marketing suites at Belmayne.

The "information centre" alone cost €2m to build, the 10 olive trees planted around it contributing €60,000 to the bill. The coffee dock, smart sofas and Star Trek-style computer-generated images were an invitation to linger and sample a "lifestyle" for sale, one graced with the interior designs of Llewelyn-Bowen, gardens by Gavin and a flashy chauffeur-driven Chrysler Voyager to ferry viewers the short distance to the show apartment.

It would be easy to dismiss Caulfield - a former European kick-boxing champion with a former Miss-Universe-entrant-turned-civil-engineer for a fiancee, who drives a red Ferrari and paid many millions for the Belmayne site while still in his thirties - as a flash git. In fact, he is one of the most straight-talking men in the business, his wild oats well and truly sown.

In conversation, he returns repeatedly to the importance of "first principles" - strong design, sustainable developments, schools and parks - and regards more experienced developers such as Joe O'Reilly, Gerry Gannon and Garrett Kelleher very highly.

"But they're in a different league. They have 15 years on our company, the guys who bought the land in 1998-1999 when I was kick-boxing. The older developers have hundreds of millions of liquidity as a result of their developments. Our generation is going to have a harder time. Now we will really have to work first principles to survive."

He has tried to spread his risk, with developments in Poland, the Canaries, London, Madrid and Ibiza.

"In terms of GDV I'm about half here and half abroad. On GDV, you're always aiming to make 10 to 20 per cent margins. Some would have been on 30 to 60 per cent of GDV. We have to be more realistic now. You have to work at it . . .".

So the big glitzy marketing push at Belmayne was not a bit over the top, then?

"To shift 330 units in this market will take two to two-and-a-half years and you'd spend €2m in advertising, marketing and show-off costs. That half-million euro hoarding is our main medium of advertising. The fact is that most people buy in their own area. If you're a northsider, you'll usually stay a northsider and 90 per cent of first-time buyers here actually live within a five-kilometre radius of us. So for two years they won't be able to avoid seeing that hoarding in front of them."

Meanwhile, Caulfield admits, he is sitting on several hundred million euro in loans and didn't see the slump coming.

"Development is not a business for the faint-hearted. When I bought the Belmayne site I thought I'd sell to first-time buyers, that there would be inward investment and continuous growth and the east European immigrants would keep coming. We thought the €330,000 buyers would always be there because it's affordable. What we're looking at now is 10 to 12 per cent less in sale prices and a probable 30-35 per cent drop in projected profits. I would probably have paid less for the site if I'd foreseen this."

In the information centre, the bizarre melange of new and traditional is illustrated by one of his "gorgeous girls" wall posters framed by curtains on either side. The purpose of the curtains becomes evident on alternative Sundays, when they are closed over the steamy poster and it becomes the backdrop to a Mass altar, for the new Belmayne inhabitants.

While the first batch of apartments booked are closing now and helping to alleviate that massive debt, he anticipates a crunch in about 18 months' time, when the absence of first-time buyers in early to mid-2008 will expose the more vulnerable developers.

"That's when the banks will start looking for interest. So we have to keep selling and that means 80 per cent of our sales are to investors now."

So these are worrying times?

"It gets you out of bed in the morning. Definitely. It's not just about having a legacy to show your children," he said, speaking at a time when his fiancee Louise Doheny, was expecting their first child.

"It's your own pride."

Caulfield is a classic developer, never content to pull off a spectacularly lucrative deal and become a lotus-eater. After an undistinguished start as an engineer, and a few years of kick-boxing his way around the world, mainly making money by betting on himself, he went to work with Michael Cotter's Park Developments, where he managed the set-up of the industrial/commercial division. At 28, he was driving a Porsche ("I was getting well paid") and was buying and selling units for himself. He left Park because he didn't want to be an employee any more and went into business with Leo Meenagh, the owner of a construction company, LM Developments Ltd, on a 50-50 profit share basis.

Their first major project together was the development and construction of 900 units and a shopping centre in Cityside in north Finglas. At the height of the boom, the company employed up to 1,200 people. That first foray into development for Caulfield was achieved with the cooperation of a patient landowner, a silent partner who was prepared to wait four years for the development to materialise before he took his gains.

"So a million quid was all I needed to start. Once I had the contracts signed, and with my Cotter background, the banks gave us the go-ahead for finance. We were very lucky. We all made a good return on our money, up to 50 per cent cash return."

Four years after leaving Park, he was able to buy a jet for the business.

"It's not so much about owning the jet. It's about having the money to give you the freedom to do what you want, to say what you want. The more money people have, the more free they are, if they have the right psyche. Having a jet means you're not queuing up for an hour in Dublin or London airports. Money is pure and utter freedom. If you want to wear shades inside, which I often do, I don't care what people say about me. My Da, Joseph, used to say that money was freedom. But he had five kids, he was a great goer, a great small builder, but he couldn't risk it because he had five kids."

In those hedonistic early days, Caulfield's taste for luxury was impressive.

"I'm happy to admit that when I first started seeing returns, I might have got carried away. I was into clothes, holidays, cars. I was a Versace fan, a shopaholic," he said wryly. "Every second weekend, I was in Marbella, Paris, Rome. I lived in the penthouse of the Conrad Hotel for eight months when I was refurbishing my home. I loved it."

Even with a parking place for his Aston Martin thrown in at the Conrad, accommodation alone must have run to a high five-figure bill every month.

"I've always been a car fanatic. I used to have seven or eight cars - Ferrais, Porsches, Lamborghinis. I still have the Ferrari, two Porsches, a Lamborghini and a Range Rover jeep. One of the biggest kicks I got was taking my sisters and girlfriend shopping. You'd get a buzz off that. When Louise and I were going out, we would have been away five weekends out of six. Now I've happily swapped the weekends away for walking the Weimaraner dogs in the park with Louise. I'm saturated with the travel and shopping, although I can say that I never went into the drink or drugs. I was too into health and fitness.

"I'm a country guy and I've managed to keep my friends from 15 to 20 years ago. I don't talk about money and that's why I don't spend a huge amount of time with other developers. I don't go to race meetings or balls - I think that whole scene is not real. What's real to me are my friends and family."

But surely all that spending and extravagance simply confirms suspicions that developers were making obscene profits on the backs of struggling homebuyers?

"They deserve every single euro they make - though the exception I'd make are the ones who were doing poor design, defacing the public landscape. That particular type of 10-year boom will never happen again because, for most of it, the rewards were in no way proportionate to the efforts or brilliance of many developers. You could be the worst builder/developer with no sense of design or landscaping yet everything they built, they sold. So many poor builders made so much money that they didn't deserve.

"But most of them are honourable, good, solid people. And the point is that if you put your balls on the table, you get the reward or you get the kick. It can go one way or the other. Guys are now feeling the squeeze and if it goes on, a lot of them are in trouble. I was lucky. If you'd asked me a year-and-a-half ago, I'd have said the market would still be flying now."

Of course, he would not have been the only one. In the words of Warren Buffett, investors should "be fearful when others are greedy and greedy when others are fearful". The trouble was that those who were fearful - or urging caution - were apt to be accused of "talking" the country into a recession.


In 2005, at the annual Society of Chartered Surveyors' dinner in the Burlington Hotel, 1,200 members and guests from central and local government assembled as usual for the biggest bash on the construction and property calendar.

That year, the prestigious platform of keynote speaker was handed to Colm McCarthy, the mordant, straight-talking founder of DKM Economics Consultants, who now lectures at UCD. McCarthy cast something of a dampener on proceedings by predicting a slowdown in housing output from the extraordinary 2004 levels. This was not what his audience wanted to hear.

So for 2006, the society brought in a more upbeat sort of chap for the keynote speech: the Ballsbridge Baron himself, Seán Dunne, always bullish beyond the call of duty and with a particularly pressing personal interest in keeping the market buoyant. His speech to a record attendance of 1,400 took aim at the old reliables such as stamp duty and the universally loathed M50 toll bridge. It was only when he took a particularly aggressive swipe at stockbrokers and bank economists, likening them to "laughing hyenas . . . harbingers of doom and gloom", that some of the several "hyenas" present began to studiously examine the contents of their wine glasses.

For the previous six years, Dunne asserted, "every economist associated with every stockbroker in Ireland mistakenly forecast the end of the housing and property boom in Ireland". They had been "vociferous and repetitive", in the process encouraging outside commentators, including the Economist, the IMF and the OECD, to issue warnings about Irish house prices being overvalued. Well, "The hyenas have stopped laughing . . . each and every one of them was wrong. Instead, the price and supply of housing units has continued to break records."

When the slowdown began, it was accompanied by faintly reassuring talk from vested interests and estate agents - some of whom were quietly laying off staff already - that the market was heading for a "soft landing".

Economists had been noting for some time that the boom in Irish exports which had fuelled spectacular growth in the 1990s had been supplanted by a boom in construction. Between 2000 and 2006, house prices had doubled relative to income and rents, and some 15 per cent of our GNP (nearly a fifth, if sales of second-hand houses were included) was being generated from the construction of new houses and apartments - three times as much as in other developed countries.

"We have spent the last five years learning to believe that exports and competitiveness do not matter, and that we can get rich by selling houses to each other," wrote Morgan Kelly, Professor of Economics at UCD, in The Irish Times in December 2006, when house prices were still skyrocketing. "We are likely to spend a painful few years as we unlearn that lesson."

In April 2007, a documentary called Future Shock: Property Crash, made by Animo Television for RTÉ, asked whether Ireland's property bubble was about to burst - and suggested, with a soundtrack of ominous music, that it was.

"We have allowed building construction to grow too rapidly and take up too big a share of the economy," the Economic and Social Research Institute's professor John FitzGerald (son of Garret and elder brother of Mark, chairman of estate agents Sherry FitzGerald) told the presenter, business journalist Richard Curran. "We are out on a limb at this stage; getting down off it is going to be delicate without hurting ourselves."

The programme pointed out that the construction industry now accounted for 25 per cent of the economy, employing 280,000 people, 30 per cent of whom were foreign nationals staying in rented accommodation, and asked what would happen to that market as they drifted off to jobs elsewhere. What's more, multinational companies such as Pfizer were laying off staff because they could no longer compete, what with the US dollar weakening month by month against the euro.

We were also building far more new homes - 20 units per 1,000 in population, compared to just five units per 1,000 in Britain - and the government had failed to implement most of the recommendations made by economist Peter Bacon in his four reports on how to deal with house price inflation. Not only that: by continually extending the deadlines for tax incentives such as Section 23, the government itself was fuelling an already overheated market.

Meanwhile, a global financial crisis was brewing. In the spring of 2007, we started hearing about jitters in the US over "subprime" mortgages: loans given to people with low credit ratings who couldn't get money from the mainstream banks. Through the alchemy of "securitisation", these inherently risky loans were bundled together and sold on to investors, including some of the world's largest financial institutions. The make-up of the bundles was often so opaque that even the bankers themselves couldn't tell what they were really worth, especially in a falling market; the credit rating agencies often gave these products implausibly strong ratings.

And who was required to bail out the banks when these phantoms came back to haunt them? Joe and Mary Public, of course.


According to the IMF, there had been a "collective failure" to appreciate the scale of risky borrowing indulged in by the financial institutions. The cancer at the heart of the western world's financial system caused turmoil on the stock markets and accelerated the steep fall in the value of the US dollar, already weakened by the spectacular levels of government debt run up by George W Bush's war in Iraq and huge tax cuts for the rich.

It also triggered a sudden shortage in the credit available to banks, causing the Bank of England to bail out Northern Rock - which had unusually low cash reserves - and to make available tens of billions of pounds in "emergency liquidity" to the banking sector. Similarly, Bear Stearns had to be bailed out by the US Federal Reserve. As banks concentrated on rebuilding their balance sheets by raising additional funds and limiting future lending, homebuyers were finding it more and more difficult to get loans.

The once-plentiful supply of mortgage credit was drying up, with knock-on effects on the construction industry and the property sector in general.

House prices started falling in Ireland several months before the global credit crunch hit in autumn 2007; the end of the days of 110 per cent mortgages accentuated a trend that was already well established, and the writing was on the wall.


In October 2007, some of the developers had begun slashing prices, and there were urgent calls for the government to shore up the faltering market by, for example, cutting the rates of stamp duty on the acquisition of second-hand homes. The following month, the big builders got their annual opportunity to speak to the minister for finance in the run-up to the budget.

During the boom years, this exclusive dinner, organized by Ken MacDonald, chairman and chief executive of estate agents Hooke and MacDonald, was used by the builders to bellyache to the minister about the tortuous nature of the planning process and what objections and refusals were costing the development community in lost time and money.

This time, with Joe Cosgrave playing host in the Radisson SAS (owned by himself and his two brothers), the customary spread was laid on for about 25 big builders and developers.

Building sites were idle, new schemes stood empty, and some builders were growing a trifle mutinous about the incessantly negative publicity about the property market and the inactivity of the government. They wanted to hear some positive stuff about stamp duty cuts and other proactive ways of getting the market moving again. Plus, being flint-eyed businessmen, they knew they would be paying through the nose for dinner, although some may not have been aware of quite how much at that stage.

Brian Cowen, then minister for finance and guest of honour, was unavoidably detained elsewhere and turned up three hours late, by which time several of the builders had grown somewhat "tired and emotional", as Private Eye would say, or "langers", as one of those present reported.

The question-and-answer session that followed was shambolic, the more unruly multimillionaires in attendance making long, rambling speeches about the state of the market and what needed to be done by the minister, who even then was a safe bet to become Taoiseach.

It hardly helped that Cowen was adamant that there would be no change in the stamp duty regime. Nonetheless, a few weeks later, although it went against the grain with the then minister and even more so with senior Department of Finance officials, for whom stamp duty had become a huge cash cow, the Budget did indeed provide a modicum of relief.

Was dinner worth it, then? One bemused guest who could recall paying "only" €500 the year before, later found himself meekly responding to a subsequent demand for €5,000, payable to Fianna Fáil. A splendid result for the party, at least, since a quick calculation suggests that a few hours' discreet dalliance with the minister raked in an amount equal to half the take for the week-long PR fiasco that was the Galway Races tent.


By the summer of 2008, "interest roll-ups", a kind of benefit scheme for distressed developers, had been put in place by the banks. When developers run into cash-flow problems, the banks just let the interest payments ride indefinitely. In the meantime, as one estate agent murmured, "a lot of helicopters are going back".

The Builders by Frank McDonald and Kathy Sheridan is published by Penguin Ireland

In an edited extract from their new book 'The Builders', based on a series in 'The Irish Times', Frank McDonald and Kathy Sheridan follow the story of a millionaire Ferrari-driving property developer

The Irish Times

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