Sunday 1 March 2009

Can the builders survive the hit?

From a life of high-octane property wheeling and dealing to days filled with increasingly frantic attempts to keep the wolf from the door, the nightmare is getting worse on Planet Developer, write FRANK MCDONALD and KATHY SHERIDAN in the first of a six-part series

‘IT WAS LIKE a 10-year dream,” says the disconsolate developer, turning his mobile to silent, in a futile effort to shut out the clamorous world. “Now it’s like a tsunami that just keeps coming.” And meanwhile, as one architect wryly put it, the politicians, bankers and regulators are “still playing volleyball on the beach”.

The once bullish, man-about-town property developer seemed in a state of shock. “It’s the suddenness of it – the high to the low,” he says thoughtfully, as if seeing a catastrophe clearly for the first time. “It’s certainly brought everyone back to earth with a thump.”

In less than a year, the world he bestrode has turned on its axis. His sumptuous suburban home has gone on the market. The aircraft has been returned. The rarely-used villa on the Mediterranean is now the family’s principal residence. “It’s warmer there and it’s 40 per cent cheaper to live,” he says. A text message pings from his wife back at the villa. He swallows hard. “Good luck with the meeting,” she writes. “Whatever happens today I want to say thank you for making such a nice life for us.”

His days are now filled by an endless succession of tortuous meetings. Such encounters once carried the addictive thrill of a high-stakes poker game, with the delusional gambler’s faith that investments would always soar in value to counter any losses and a pet banker would always be on hand to up the ante – no matter how high it went.

That’s what kept the boom going for so long – the almost infantile notion that there was only one way the property market could go, and that was up. Which is why the banks kept throwing money at their developer clients even though these men with the Midas touch were leveraged up to their eyeballs, with multi- million-euro loans “secured” on the asset value of their sites.

The disconsolate developer’s housing estates and landbanks still encircle Dublin, but he is merely a project manager now, on a salary from the bank. “A lot of people will be working for the banks like this for the rest of our lives. The banks would lose their shirts if they tried to sell the sites now. They know that most developers are good at what they do, so they’ll keep them afloat to work the sites as best they can for five to seven years and they’ll pay their overheads and salaries”.

This is what banks mean by “supporting” developers. “It means that developers with credible skills and who are controllable will have a role. Just that – a role,” says a leading property expert. The transition from organ-grinder to monkey will be more bearable for some than others.

For those with mansions and thoroughbreds in the stables, offspring at expensive private schools, wives accustomed to a lavish lifestyle, K Club membership and private boxes in Lansdowne Road, all wrapped in a public image built on machismo, self-aggrandisement and reckless largesse, the process will be more challenging.

Only a year ago, a major concern among some of these men was how to educate the next generation about the value of money, how to steer their young towards sensible management of the family wealth in a champagne-soaked hinterland. Now the heirs of the boom are learning lessons undreamt-of by their buccaneering fathers.

The landbanks they expected to inherit are now worth half of what they had been bought for at the height of the boom. And even if more money could be squeezed out of a bank to develop these sites, what would be the point in today’s market? Who would buy the new houses or apartments or retail units in these depressed times, when almost nobody believes that the market has “bottomed out” yet?

There was a time when tower cranes on the Dublin skyline were so rare that Bertie Ahern, as minister for finance in the early 1990s, used to count them from the top floor of the Central Bank in Dame Street. Then, as the Celtic Tiger got into full roar, there were so many cranes all over the city that few bothered to count them. Now when you see tower cranes, you wonder what on earth they’re doing.

The property expert we spoke to suggested that developers “didn’t have a firm grasp that these things are cyclical. Yes, I’m sure some remember the painful recession of the 1980s but most of them were builders then, not developers, and developers have a different skill set. Most of them came from small farm backgrounds, so they’re first generation businessmen with no culture of putting money away. They spent the money and were generous to a fault. You can argue that it stemmed from insecurity and they needed to be the Big Men – but they did throw it around in every quarter.” And so, indeed, did the banks.

But the tables have been turned with a vengeance. Garrett Kelleher, progenitor of the 150-storey Chicago Spire from which he was set to make a profit of €850 million, admitted this month that this mega-project was at a standstill for lack of finance. The Architectural Record dubbed it the “Lien-ing Tower of Chicago”, because “while construction has stopped, the liens keep coming,” including one for $11.3 million (€88.2 million) from its illustrious designer, Santiago Calatrava. “If I’d known in July of 2006 that the world would be where it is today, I would have done things differently,” said Kelleher. These “things” probably included the €140 million that he himself had lobbed into the pot.

MEANWHILE, BACK HOME in Ireland, unemployment is rising rapidly, the Government’s massive debt grows by the day and consumer confidence has been undermined by fears about the future. The sudden economic downturn from the heady days of the boom has led to a steep drop in the value of commercial/ industrial property and development land – the “assets” that supposedly underwrite a mountain of debt.

Last November, media news desks were bracing themselves for an announcement – expected on a Friday around 6pm – that the banks had foreclosed on one of the major developers. When this didn’t happen, one of us received a text message the following day containing two rumours about the developer in question – that he was either in St John of God’s being treated for depression or “holed up in Spanish villa with phones off waiting for the end”.

According to reliable sources, another developer was visited at his salubrious home by some rough-looking eastern Europeans, who claimed they had bought a large debt he owed to a sub-contractor and demanded that he pay the money – some €7 million. When he declined to do so, he was allegedly beaten up, and he has since had to engage a security firm for personal protection.

At first glance, the developers with well-located assets may seem the most fortunate in weathering the recession. A leading property expert suggested, however, that “good assets are the worst thing they can have – because they’re saleable. What bank is going to lend hundreds of millions to develop such sites now? They’re riddled with risk. If sites are any way saleable, there’s every chance the banks will just sell them on.”

Those developers who survived the 1980s and had the luck to see their long-acquired landbanks blossom into fields of gold may cherish hopes that the same will happen again. “It won’t. Not for those who bought between 2004 and 2007, because the land value is wiped out,” one developer admitted. “The land value is between 30 and 40 per cent of a sale; values are already down by that much so that’s gone. Gone. You think you can sit on a site for three, five, 10 years? Not while you’re clocking up interest of €15 million to €20 million a year and the land value is dropping . . . ”

This month, developer Mick Wallace – known for his left-wing views – popped up on RTÉ’s Prime Time and said he wasn’t paying interest on his bank loans and neither were any of his competitors. Even the Dublin Docklands Development Authority has stopped paying interest on its share of a €288 million loan, advanced by Anglo Irish Bank to enable the Bernard McNamara-led Becbay consortium to acquire the Irish Glass Bottle site in Ringsend.

As property values plummeted to unimaginable depths, the banks began to “re-evaluate” their exposure to big loans that might never be repaid. Bank of Ireland raised its forecast from €3.8 billion to €4.5 billion over the next three years, with a “downside risk” that it might have to write off €6 billion if the economy continues to deteriorate.

AIB followed with a revised forecast that its bad debts, mainly from property investment, would almost double to €1.8 million for this year alone. And as for the rogue bank, Anglo Irish, it emerged through the PricewaterhouseCooopers report that 15 of its once valued clients have outstanding loans of more than €500 million each. Meanwhile, local authorities are facing a financial nightmare because of the costly task of completing roads, lighting and basic amenities in housing estates abandoned by developers. Dublin City Council alone is owed €142 million in unpaid development levies – mainly due to developers mothballing schemes after the first phase failed to sell. Developers desperate to sell housing stock were reduced to coming up with increasingly creative inducements.

These included interest-free mortgages, free cars with houses, and even the offer of a free apartment in Cape Verde to takers of a five-bed in Clonakilty, Co Cork. With anything from 35,000 (the Construction Industry Federation’s low estimate) to 100,000 new homes lying vacant, why build any more? As the crisis deepens, there has been a marked rise in litigation in the High Court. Erstwhile partners are suing each other over who should pick up debts, builders and developers are facing claims for unpaid bills involving piddling sums of money, in some cases, and landowners are taking cases against developers for specific performance of contracts to purchase sites, entered into during the golden days.

Entangled in the mess are countless buy-to-let “landlords” – ordinary people seduced by the buying frenzy and promise of easy money, who were often urged by mortgage lenders to buy two apartments (one to live in and one to rent out) on the delusionary assumption that hundreds of thousands of migrant workers would keep coming and rents would keep going up.

But far from rising, the number of Polish migrants registering to work in Ireland fell by 53 per cent in the second half of 2008, and it was estimated that some 100,000 migrants actually left Ireland during last year. By the end of December, the number of unemployed non-Irish nationals had trebled, from 8,000 to 25,000 in 12 months.

The CIF predicted that building jobs could plummet by almost 150,000 from the 2007 peak of 282,000, nearly halving employment in the sector that sustained the property bubble for so long. Some 750 solicitors joined the dole queues in December; the bog-standard but lucrative conveyancing work involved in shifting thousands of identical new houses on large estates had virtually ceased.

At an overseas property auction at Dublin’s Citywest Hotel last month, offering 60 properties in Antigua, Bulgaria, Cape Verde, Dubai, Spain and Turkey, some at half price, only one was sold – a Marbella house originally bought for €300,000 and sold for €180,000. “A lot just want to get rid of them,” said the auctioneer. “They may have lost their jobs and can’t pay for a second mortgage as well.”

House auctions in Ireland last year fell to just 9 per cent of what they were at the peak in 2006 peak; one quarter of estate agents countrywide had been made redundant by last Christmas with plenty more expected to go in 2009. And a survey commissioned by the Royal Institute of the Architects of Ireland (RIAI) in January projected that 41 per cent of architects would lose their jobs within a couple of months. Most architectural practices have already laid off some of the best and the brightest of their younger staff; in some cases, dozens lost their jobs in a single day. In the past, there was the vent of emigration for both professional and manual workers. But this time, there is almost nowhere to go; even Britain’s most famous architect of recent times, Lord Foster, announced 350 layoffs as his global design empire felt the economic bite.

The “generational loss” of younger architects, as RIAI president Seán O Laoire put it, might be avoided if the Government was maintaining public capital expenditure on much-needed schools, social housing schemes and conservation projects. Instead, the shutters have come down, with all departments reluctant to sign any building contracts now that they are back under the cosh of the Department of Finance.

WHO’S TO BLAME? “Bankers were the most at fault,” one developer insisted. “If they had put a brake on credit, it would have come to a natural end before real damage was done.” When the Irish Mail on Sunday caught up with Michael Lynn, the “missing” solicitor who owes €80 million to Irish banks, he called himself “a product of the system”. It was just so easy to get the money, he said.

“It was the way things were in Ireland . . . The banks were . . . very excited . . . by the amount of money that could be made and we were all – including myself – following the trend. I was the Celtic Cub out of control in hindsight. And I was greedy and over-ambitious. But yes there were other parties involved. They didn’t conspire; we were all part of a mythical illusion . . . ”

And there was no-one to rein them in. The Financial Regulator appears to have been “out to lunch” and the Government that employed him had no wish to puncture the property bubble. Only a small number of courageous economists raised warning flags against a bullying, short-termist establishment. The Economic and Social Research Institute had long been warning that the government’s housing policy was highly dangerous and urged that it raise taxes as a brake on demand.

But it was addressing itself to a government whose revenues had come to depend disastrously on Lynn’s “mythical illusion”, a State where “light-touch” regulation (or what the Guardian called Liechtenstein-on-the-Liffey and others called the Wild West) reigned, proudly headed by Bertie Ahern who – in the words of a major property figure – “sat at the back of the boat, told the lads to put the spinnaker up and said ‘let her off’. Then just before the wind changed, he scrambled off the boat . . . ”

What Ahern left behind was a cast of characters – including the likes of former Anglo Irish Bank chief executive Seán Fitzpatrick – who could credibly populate a remake of The Bonfire of the Vanities . Not to mention leaving the rest of us not only now owning, but facing the daunting task of cleaning out the Augean stables.

The financial event was Dunne’s €379 million purchase of the Jurys and Berkeley Court hotels in Ballsbridge, and his plan to tear them down for a billion euro scheme that would feature, in Thomas’s words, “a soaring Dubai-like office tower cut in the shape of a diamond that anchored a futuristic community of expensive houses and glamorous shops”.

The cultural event was the celebration of Dunne’s second marriage, to gossip columnist Gayle Killilea, with 44 friends – including Irish Nationwide’s Michael Fingleton – on a two-week Mediterranean wedding cruise on the former Onassis yacht, the Christina O, which “came to be seen . . . as a conspicuous and garish expression of the man and his business”.

The idea that an entire city quarter should be bulldozed and rebuilt to on a massive scale because property developers had over-extended themselves – while claiming that what they were planning was “in the national interest” – was not lost on ordinary people; such reasoning, in microcosm, had driven planning in Ireland for years.

Asked where he would find the €600 million he would need to demolish the two hotels, dig a massive hole in the ground and erect his vision of a new Dublin, Dunne told Thomas ruefully: “It is fair to say that there is not a queue of bankers lining up to lend to me right now.”

Following An Bord Pleanála’s comprenensive rejection of his overblown scheme on January 30th, he told Newstalk radio that “Seán Dunne, as an individual, is 100 per cent solvent”, although he couldn’t vouch for his company, Mountbrook. As for the 5,400 jobs that he claimed would be created by his project, he said that if an American multinational was offering them there would be a “a queue of Mercedes” from Ballsbridge “all the way to Government buildings”.

A leading estate agent estimated that Dunne’s seven-acre site is probably worth no more than €100 million now – or just over a quarter of what he paid for it.

Values will climb again, he suggested, but ironically, the hotels (Jurys and the Berkeley Court) – once written off as little more than useless – will be the most valuable part of the asset.

Frank McDonald and Kathy Sheridan are joint authors of the bestselling book, The Builders . A smaller format paperback edition, with a new preface, is due to be published in May by Penguin Ireland.

Irish Times

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