Whatever might be said about the planning system and property developers, someone has been doing something right
This summer my holidays included a commitment to visit parts of Ireland I had missed in my youth. Apart from filling in gaps of my knowledge of the country, what struck me most forcefully was the growth, prosperity and quality of the towns and villages I passed through. True, it was summer, with trimmed grass and flowers, but our provincial towns and villages have moved from being the poor relation of western Europe to being up there with the best.
There are some awful cases of design and ribbon development (east Galway) and there is the occasional ghost estate but, whatever might be said about the planning system and about developers, somebody has been doing something mostly right; indeed an awful lot of right things have been done. My wife commented on how vibrant and busy rural Ireland was and contrasted it to rural France. We toured the Cognac region some years ago and saw many boarded-up villages and derelict houses.
Back in the office I decided to look at the statistics to see if the growth I saw on my travels was real or imaginary. It was real: the non-Dublin population grew by 16%, or 357,000 people, from 1996 to 2006.
I shudder to think what that growth might have looked like if planning had been based on a laissez-faire arrangement, as in parts of the USA. It would have been ribbon development everywhere, garish advertising hoardings, few of the new bypasses that speed up journey time and, of course huge amounts of pollution, not to mention the visual impact of self-designed houses. Bad and all as planning might be, non-planning would be much worse.
So we have been doing something nearly right, but not perfectly. The 2010 Planning Act will make some improvement by bolting on an "evidence-based system" dimension to the present system, but it will not eliminate the oversupply/ undersupply issue. This is because the planning system was designed fundamentally to control and direct development, not manage its execution. Under our system, initiating development is left to the market, with some small exceptions. Building and selling is left to developers who seek to make a profit by buying land and constructing buildings – and getting their timing right and taking associated risks.
The planning system is not a land management system. The planning authorities could acquire land, zone it, plan it, service it and then pass it on to builders. Such systems exist in other countries such as Holland and Finland. The planning authorities have the power to do this but they don't, for a variety of reasons not least funding. It would also require a new mindset among the planning authorities (and their political masters) whereby they would identify demand five to 10 years before it arose.
In theory it could work. Each planning authority would become the equivalent of the Dublin Docklands Development Authority or Ballymun Regeneration. In addition to its development plan, each would prepare its land acquisition plan. This would be linked to an infrastructure plan which would be linked to a funding plan which in turn would be linked to an environmental plan. Of course all would be driven by the national spatial strategy and transportation plan – green, of course. It could work like oiled clockwork.
Would it be doable? The answer is 'yes but' and the 'but' is that this is Ireland, with a public administration system designed to manage each council area in accordance with the will of the people via their elected councillors, and a funding system run by the department of finance. This system has lots of political agendas with a scarcity of money and of professionals who understand the property market and can think like developers, not civil servants.
But stand back and imagine what would have happened if we had had such a system between 1996 and 2007? Would such a system have reacted to the sudden property needs of the economy to meet a 10% annual growth in economic activity and more or less satisfied that need? Or would the economic tiger have been stillborn because the plans for new offices, factories and houses were stuck in the department of finance or local government awaiting clearance from a minister, like the Poolbeg incinerator and all the new schools that the department of education was supposed to have built this year?
In reality, if we had such a system, the Celtic Tiger would never have happened. The economic growth of that time needed new buildings fast. Foreign direct investment went mainly into speculative buildings. The Googles and Microsofts and the international banks are nearly all in speculative buildings, along with the supply of housing stock for their workers. Without those new buildings that investment would have gone to another country, one that did not tie its property industry up in red tape and prevent it reacting quickly to market demand. Had we had a land management system focused on supply management by local authorities – the only way to stop the over-building that produced the ghost estates – then we would probably not have had a Celtic Tiger. Take your choice: Celtic Tiger or occasional conspicuous oversupply?
So we have a planning system that fundamentally works but has made mistakes and can only indirectly control supply of new buildings. The primary tool available to planners for managing demand is zoning in the development plan, which is a political function. The second tool is the granting or refusal of planning permission. But if a planning authority refuses permission on land that is zoned and serviced on the grounds that the building may not be needed, they risk a big claim for compensation.
The key tool of land zoning as a means of controlling supply continues to be debased by local political interests. To them, the next local election is more important than the risk of a ghost estate. The new act seeks to rebalance the influence of politicians but not remove it.
So we have a choice: accept and try to improve a human and democratic system that more or less works, or move to a land management system which will almost certainly not work in this country.
Could we please escalate the debate about overbuilding to look at the fundamentals of our system (most of which are good) and stop blaming planners for mistakes made by their political masters by overzoning in the wrong places?
Tuesday, September 14, 2010
When will market go back to normal?
Nama has probably already put a floor to the market prices for commercial property
THE ARRIVAL of autumn and the approaching first anniversary of Nama has forced me to change my focus from thinking about the present state of the Irish property market to try and picture what the property market will look like when “normality” returns. What will be the route from here to there?
Normality will be a marketplace where houses, offices and shops let and sell in volume and at prices which no one gets excited about and everyone takes for granted. It will be like the mid-1990s, where deals were being done, but took a little time and effort, and rents and prices were stable, only rising gently with inflation (low). Credit was available, but limited.
It will take time to get there but when this new normality arrives, estate agents will be doing their thing, valuers will be confident of their pricing and bankers will again rely on property as good security for their loans.
Development projects will have started again but only on schemes that are clearly viable and based on current prices and letting levels – no more blue-sky schemes supported by blue-sky prices and bankers.
This normal property market will be a dull place – a dull place that true property professionals feel comfortable to operate in, collecting rents, arranging viewings, organising contracts. No Get-Rich-Quick-Harrys relying on yield compression and ever-rising prices to justify their existence and scoffing at the old hands. Property will not be the subject of chat in the pub or the taxi.
Three things are stopping us getting to this new marketplace. Firstly, we have a semi-dead economy with little new demand for our big stock of vacant buildings. Secondly, there is little or no credit available to enable transactions to happen. No bridging loans, no mortgage loans for housing. Thirdly, confidence is missing. Everyone is afraid of paying too much, of grabbing a falling knife.
All of these contributed to the downward spiral which was acute during 2009 but eased off in the early part of this year. The graph will flatten out and reach a bottom – that bottom will be in different places in different markets and locations.
But the bottom will arrive and it will arrive quietly – it may have arrived in some places.
We will know the bottom has arrived firstly when vendors refuse to sell (or let) at prices that are patently silly and secondly when buyers with funding have the confidence to sign contracts.
What is a silly price? It is hard to define what a silly price is but measures of prices will include replacement cost and recent lettings or sales (however limited), the availability of some credit and/or equity buyers, and also the gut feeling of grey-haired property professionals. But vendors need really to be able to say no to silly offers and not have bankers or other creditors forcing them to accept that price.
There must be some sort of realisation across the board by bankers and receivers/creditors that it is better to hold on to the asset and wait than sell at that “silly” price.
The most important participant in the Irish market is Nama. It has acquired or is acquiring all its assets based on property valuation levels set as of last November. In recognition of the fact that valuation levels at that date were significantly depressed (being about half what they were at the top of the boom),
Nama are paying a small mark-up, averaging about 10 per cent, known as long term economic value.
It is highly unlikely that Nama will sell assets at below its buy-in price and this, in my view, gives us a major yardstick as to what is a possible floor to the market and an indication of what is or is not a silly price. This is not public knowledge but it is not hard to make an educated guess.
Nama is now working through the business plans for its clients and these will provide for sales of the underlying property asset over a period of years. It is highly unlikely that Nama will approve any disposals in these business plans at prices below its buy-in price plus long-term economic value margin.
So Nama in practical terms has probably already put a floor to the market prices for commercial assets. We may be at the floor for Nama-type properties. The same cannot be said for the residential market where prices continue to sag as it is a totally fragmented market with no key player. I will come back to the residential market later.
Two things could upset the floor set by Nama in its marketplace, which is mainly the commercial market: first, disposals by non-Nama banks and their receivers could force down values below those of last November; second, if Nama does not have the patience or the capacity to delay disposals by its clients until the market can absorb those sales at their buy-in prices.
This will be a hard one to call for the Nama board who will want to start getting money back asap. On the other hand, its annual cost of funds is low and the ECB is patient.
With this unofficial floor to the market set by Nama, is now a good time to buy?
With a yield spectrum of 7 per cent-plus on quality Dublin city buildings and reflecting rents that are below replacement cost, I think there is now good value out there for long-term commercial investors.
Putting my money where my mouth is I have personally transferred a chunk of my (depleted) pension fund into quality Irish property both directly by participating in the purchasing of an individual office building and indirectly by acquiring units in unit- linked property funds.
I am advising my risk-tolerant clients to follow suit and some of them are acting on that advice. There is a risk that we may not be quite at the bottom but history shows it is impossible to get timing perfect and one has to take a view. If there is a fall ahead it will not be a big fall and I am quite happy to take that chance with quality Dublin property as time will undoubtedly cure any premature acquisitions.
Turning to the residential market the big issue is that no one is setting any kind of floor – there is no Nama effect. The determination of what is a “silly” price is left to the individual. If he or she wants to sell simply for personal convenience then they may choose to postpone that sale.
But in some cases they may not have any choice but to sell so as to meet other liabilities. Again, if it is a family home there may be some protection but if it is a second home or a holiday home it is likely to be a forced sale with a ripple effect on the rest of the local market.
I would personally be a slow buyer in the residential market unless I was very focused on a particular market segment and could identify value there. The Government should do something to assist confidence in the residential sector such as putting a temporary moratorium on stamp duty to reduce the huge transactional costs associated and encourage individuals to trade up or down. The revenue lost would be small in relation to the positive impact of getting the market moving and the flow through to the overall economy
THE ARRIVAL of autumn and the approaching first anniversary of Nama has forced me to change my focus from thinking about the present state of the Irish property market to try and picture what the property market will look like when “normality” returns. What will be the route from here to there?
Normality will be a marketplace where houses, offices and shops let and sell in volume and at prices which no one gets excited about and everyone takes for granted. It will be like the mid-1990s, where deals were being done, but took a little time and effort, and rents and prices were stable, only rising gently with inflation (low). Credit was available, but limited.
It will take time to get there but when this new normality arrives, estate agents will be doing their thing, valuers will be confident of their pricing and bankers will again rely on property as good security for their loans.
Development projects will have started again but only on schemes that are clearly viable and based on current prices and letting levels – no more blue-sky schemes supported by blue-sky prices and bankers.
This normal property market will be a dull place – a dull place that true property professionals feel comfortable to operate in, collecting rents, arranging viewings, organising contracts. No Get-Rich-Quick-Harrys relying on yield compression and ever-rising prices to justify their existence and scoffing at the old hands. Property will not be the subject of chat in the pub or the taxi.
Three things are stopping us getting to this new marketplace. Firstly, we have a semi-dead economy with little new demand for our big stock of vacant buildings. Secondly, there is little or no credit available to enable transactions to happen. No bridging loans, no mortgage loans for housing. Thirdly, confidence is missing. Everyone is afraid of paying too much, of grabbing a falling knife.
All of these contributed to the downward spiral which was acute during 2009 but eased off in the early part of this year. The graph will flatten out and reach a bottom – that bottom will be in different places in different markets and locations.
But the bottom will arrive and it will arrive quietly – it may have arrived in some places.
We will know the bottom has arrived firstly when vendors refuse to sell (or let) at prices that are patently silly and secondly when buyers with funding have the confidence to sign contracts.
What is a silly price? It is hard to define what a silly price is but measures of prices will include replacement cost and recent lettings or sales (however limited), the availability of some credit and/or equity buyers, and also the gut feeling of grey-haired property professionals. But vendors need really to be able to say no to silly offers and not have bankers or other creditors forcing them to accept that price.
There must be some sort of realisation across the board by bankers and receivers/creditors that it is better to hold on to the asset and wait than sell at that “silly” price.
The most important participant in the Irish market is Nama. It has acquired or is acquiring all its assets based on property valuation levels set as of last November. In recognition of the fact that valuation levels at that date were significantly depressed (being about half what they were at the top of the boom),
Nama are paying a small mark-up, averaging about 10 per cent, known as long term economic value.
It is highly unlikely that Nama will sell assets at below its buy-in price and this, in my view, gives us a major yardstick as to what is a possible floor to the market and an indication of what is or is not a silly price. This is not public knowledge but it is not hard to make an educated guess.
Nama is now working through the business plans for its clients and these will provide for sales of the underlying property asset over a period of years. It is highly unlikely that Nama will approve any disposals in these business plans at prices below its buy-in price plus long-term economic value margin.
So Nama in practical terms has probably already put a floor to the market prices for commercial assets. We may be at the floor for Nama-type properties. The same cannot be said for the residential market where prices continue to sag as it is a totally fragmented market with no key player. I will come back to the residential market later.
Two things could upset the floor set by Nama in its marketplace, which is mainly the commercial market: first, disposals by non-Nama banks and their receivers could force down values below those of last November; second, if Nama does not have the patience or the capacity to delay disposals by its clients until the market can absorb those sales at their buy-in prices.
This will be a hard one to call for the Nama board who will want to start getting money back asap. On the other hand, its annual cost of funds is low and the ECB is patient.
With this unofficial floor to the market set by Nama, is now a good time to buy?
With a yield spectrum of 7 per cent-plus on quality Dublin city buildings and reflecting rents that are below replacement cost, I think there is now good value out there for long-term commercial investors.
Putting my money where my mouth is I have personally transferred a chunk of my (depleted) pension fund into quality Irish property both directly by participating in the purchasing of an individual office building and indirectly by acquiring units in unit- linked property funds.
I am advising my risk-tolerant clients to follow suit and some of them are acting on that advice. There is a risk that we may not be quite at the bottom but history shows it is impossible to get timing perfect and one has to take a view. If there is a fall ahead it will not be a big fall and I am quite happy to take that chance with quality Dublin property as time will undoubtedly cure any premature acquisitions.
Turning to the residential market the big issue is that no one is setting any kind of floor – there is no Nama effect. The determination of what is a “silly” price is left to the individual. If he or she wants to sell simply for personal convenience then they may choose to postpone that sale.
But in some cases they may not have any choice but to sell so as to meet other liabilities. Again, if it is a family home there may be some protection but if it is a second home or a holiday home it is likely to be a forced sale with a ripple effect on the rest of the local market.
I would personally be a slow buyer in the residential market unless I was very focused on a particular market segment and could identify value there. The Government should do something to assist confidence in the residential sector such as putting a temporary moratorium on stamp duty to reduce the huge transactional costs associated and encourage individuals to trade up or down. The revenue lost would be small in relation to the positive impact of getting the market moving and the flow through to the overall economy
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