Saturday 13 June 2009

The fall of the mighty developers

ENTIRE landscape of Ireland’s construction industry has changed utterly over the past 18 months. Gone are the days when ministers trumpeted record housing output year-on-year as an outstanding national achievement – even though the rip-roaring trend they repeatedly applauded was clearly unsustainable.

The industry was so white-hot that it glowed in the dark, its tower cranes emblazoned with all the big names (McNamara, Pierce, Sisk) churning out office buildings, hotels, shopping centres and apartment blocks. In 2006 alone, nearly 90,000 new homes were built – more per capita than anywhere else.

Artificially inflated by Government tax incentives for investors, which continued to be dispensed long after there was any justification for dishing them out, the property market became so overheated that it eventually collapsed. And because the boom here was so intense, the bust is much more severe than in other countries.

Architects were the first to feel the bitter chill of recession. Firms that expanded enormously during the boom found the work drying up and began laying off staff in droves. Some practices are a shadow of their former selves, with personnel down from 200 to little more than 20, while others have gone into receivership or liquidation.

Estate agents, solicitors and others who were kept busy during the boom have also been shedding staff. And for those being laid off, there are not as many options to seek work abroad, as there were in the 1980s, due to the global nature of the recession. As a result, many professionals are swelling the dole queues.

Direct employment in the construction industry is down by well over 50 per cent since it peaked at 280,000 in early 2007. During last year, the number of unemployed foreign nationals here trebled, from 8,000 to 25,000. The influx of migrant workers – mostly from Poland – has been reversed, with an estimated 100,000 leaving Ireland in 2008.

Meanwhile, builders and construction industry professionals are scouting for opportunities overseas, in an effort to stay afloat. House builder McInerney Holdings, which operates mainly in Ireland and Britain, has its eye on the Middle East and already has a team in Abu Dhabi, chief executive Barry O’Connor revealed last month. At home, more than 50,000 new homes are vacant, having failed to sell in a market that has yet to “bottom out”. Developers desperate to offload their stock have been offering huge discounts; some have devised ingenious “rent-to-buy” deals to attract customers.

Much-touted PPP (public-private partnership) projects have fallen apart, most notoriously a brace of regeneration schemes for run-down housing estates in Dublin involving Bernard McNamara and Castlethorn Construction.

MANY DEVELOPERS are now in serious trouble. The most high-profile case to come before the commercial division of the High Court so far involves Paddy Kelly, who admitted last March that he was considering bankruptcy after two banks moved to secure court orders for the payment of more than €25 million in loans and interest charges. Most of the €16 million claim by

ACC Bank related to guarantees allegedly given by Kelly and his three grown-up children over loans in late 2007 to purchase the Cablelink/NTL building at Pembroke Place, Ballsbridge. That property was valued at €27 million at the time, but is currently on the market seeking offers of around €9.5 million. Kelly was one of Ireland’s leading evelopers, with schemes such as Clarion Quay and the west side of Smithfield under his belt. He also had extensive hotel interests, notably the Clarion group, and was involved in consortiums with Alanis Investments, John Flynn and Joe Linders as well as an ill-fated golf resort in Sarasota, Florida.

But Paddy Kelly’s problems (at least, those already revealed) pale into insignificance compared to the mountain of debt racked up by other developers. At Anglo Irish Bank alone, 15 of its once-valuable customers each owe more than €500 million; most of them are builders or developers, although their identities have yet to be revealed. On May 29th, Anglo Irish posted a loss of €4.1 billion for the six-month period to March 31st and warned that losses were likely to exceed €7.5

billion by 2011. “Our rate of growth and risk appetite at the top of the economic cycle was imprudent and the stark evidence of this is seen in the figures announced today,” said chairman Donal O’Connor.

Morgan Kelly, professor of economics at UCD, has put all the banks’ bad debts in a nutshell: “If we suppose that most of the €20 billion lent to builders will not reappear this side of Judgment Day, along with 20 per cent of the €90 billion lent to developers, and 10 per cent of the €120 billion in mortgages, then we are already up to €50 billion”.

Writing in The Irish Times last February, he said: “These are only guesses. However, the continuing stream of revelations from Anglo Irish – which bear out the old investment dictum that there is never just one cockroach in a kitchen – suggest that they could be optimistic guesses”. In which case, he concluded, “we are sunk”. The Government’s device to avoid such a catastrophe is the National Asset Management Agency (Nama), although nobody yet knows precisely how it will work.

In theory, it aims to “clean up” the balance sheets of the six banks by taking over their dodgy loan books, thereby allowing them to get on with legitimate lending.

Nama was seen by one developer (who couldn’t be named) as “quite accomplished, quite elegant really, because it keeps those who caused the problem away from messing with the solution”.

However, as Arthur Beesley reported in The Irish Times late last month, “the failure of Minister for Finance Brian Lenihan to set out exactly how Nama will work has led to a sense of paralysis in the property sector and fevered speculation. In a community accustomed to easy profit and the luxury lifestyle, a sense of profound uncertainty pervades.”

The main fear is that Nama will get its hands not just on “nonperforming” loans, but also on sound properties used by developers as collateral to lever funds for projects which have failed due to the collapse in property values. Many of the assets are abroad, principally in Britain but also in far-flung places like Bulgaria and Florida. One of the key issues is what discount will be offered by the banks to get toxic debts off their books.

For example, the Irish Glass Bottle site in Ringsend was bought by a Bernard McNamara-led consortium for €412 million in October 2006, and no interest is being paid on a €288 million debt to Anglo Irish Bank. How much is this site worth now?

Given that Nama will end up as one of the largest landowners in the State, with a mandate to “work out” property debts over 10 to 15 years, it must have a broader role in securing

sustainable development – not merely to get some sort of return to taxpayers, but also to ensure real “planning gain” in the development of its vast landbank.

Irish Times

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