Davis Langdon Review 2012

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In this its 37th year, we look at the medium term outlook for the industry as a whole, key industry, sector, and regional developments, as well as developments on the international stage. We are happy to report some initial signs of stabilisation in the industry but also demonstrate that the industry is operating at wholly unsustainable levels in terms of output

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Davis Langdon Review 2012

  1. 1. REVIEWDavis Langdon Ireland Annual Review 2012
  2. 2. AECOM’s global capabilities:ArchitectureBuilding EngineeringConstruction ServicesDesign + PlanningEconomicsEnergyEnvironmentGovernmentMiningOil + GasProgram, Cost, ConsultancyProgram ManagementTransportationWaterWith approximately 45,000employees around the world,AECOM serves clients in morethan 130 countries.
  3. 3. ContentsINTRODUCTION 1 BUSINESS INTELLIGENCE 20 Pat Gunne, Green PropertyOVERVIEW 2 Bill Nowlan, W.K. NowlanMedium Term Outlook Maurice Mortell, TelecityConstruction Costs & Tender Prices Donal Murphy, Bank of IrelandWhere now for the Public Sector?NAMA: Is the bottom line everything? GEOGRAPHIES 26 Island of IrelandSECTOR DEVELOPMENTS 8 UKPublic Global MarketsCommercialRetail TECHNICAL DATA 38Residential Indicative Building CostsHotels, Sports & Culture Performance Bond ChecklistInfrastructure & Industry Project Planning Checklist Development Budget DriverINDUSTRY DEVELOPMENTS 14Alternative Funding Sources for the DAVIS LANGDON NEWS 44Property Industry PromotionsWork Outs by Asset Managers Public Sector WorkshopRepair & Maintenance Examples of Recently Completed ProjectsAbnormally Low Tenders DAVIS LANGDON PEOPLE 46
  4. 4. Introduction Paul Mitchell Director Head of Office – IrelandWe are delighted to welcome you as getting its just comeuppance for the Some of the ideas or conceptsto this year’s Annual Review of the fallout of the boom. We currently have mentioned above are tried and trustedconstruction industry. We have included an industry that has had 50% of its mechanisms used in the delivery ofa wide range of commentary and top ten contractors become insolvent projects in other jurisdictions andanalysis on the Irish construction since 2007, some remaining contractors solve a real need in delivering criticalindustry, looking at each of the sectors choosing not to bid for certain public infrastructure. We need a champion atand recent industry developments, work due to the cost of procurement the highest levels within governmentplus our colleagues give an update on and risks associated with the public who will work towards delivering awhat’s happening in the global markets. works contract (even in this market!) sustainable construction industry.We have also included a business and ongoing sub-contractor insolvency/intelligence section which features a liquidity issues. Consultancy practices On the brighter side we have seen thenumber of interviews with prominent are experiencing similar difficulties. positive effects of the Foreign Directindustry figures who give us their Some ideas that the Government could Investment secured by the Industrialthoughts on their sectors and areas of consider include: Development Agency (IDA) Ireland,expertise. etc. Also, the recent announcement The easy wins: by National Asset ManagementWhilst on a global level construction - Introduce Procurement Passports Agency (NAMA) to inject €2 billion intooutput is stable, if somewhat stagnated - Review handcuffs of Circular 10/10 construction over a four year periodin the short term, our domestic - Procure projects with committed to complete construction projectsmarket has continued its decline funding and address the shortfall in supplyalbeit at a slower rate. Our estimate - Alter award criteria to deter below of appropriate space is extremelyof construction output for 2012 is cost tenders welcome. This represents a 6% per€7.75 billion, down 9% on last year annum (p.a.) increase in constructioncompared to a reduction of 27% the More difficult but achievable: output if it is delivered. We have alsoprevious year. So, the good news is that - Prioritise labour intensive projects seen some of the large funds enter thethe contraction is slowing; the bad - Deliver the capital programme market with purchases such as Onenews is that the market is operating - Review the Capital Works Warrington Place which is a real sign ofat a completely unsustainable level. Management Framework (CWMF) by confidence and stability.In our overview section we show, even including partnering type contract.with an optimistic 15% year-on-year - Bring the Real Estate Investments We hope you enjoy the read and wouldgrowth from 2014, it could take until Trust (REIT) legislation into law like to take this opportunity to thank2020 to reach the optimum level of all our clients and colleagues for youroutput required for a proper functioning Leadership required; continued support during the yearindustry. - Stimulus Package, e.g. healthcare and look forward to providing more focused business solutions to you in the comingIn last year’s review we called for - Encourage Pension Funds into year.leadership from the Government in market, e.g. Student Accommodation,terms of supporting the construction Social housing Paul Mitchellindustry and acknowledging the - Promote Qualifying Investor Funds crucial role that the construction (QIF’s) in funding property & sector plays in the economy. We were construction programmes, e.g. not alone in our call but apart from primary care centressome behind-the-scene meetings and - Consider Project Bonds to deliver various gestures, there has been little infrastructure, e.g. Broadband and Director, Head of Office – Irelandor no action. It would appear that the Power paul.mitchell@davislangdon.comconstruction sector continues to be - Engage with the Professional viewed in the negative context of the Bodies to generate workable property industry and somehow seen solutions Introduction | 1
  5. 5. The Model Arts and Niland Gallery, Sligo.(image courtesy of Paul Tierney Photography) ConsultantsOverview
  6. 6. The aftershocks of the financialcrisis continue to dominate theframing of the Exchequer budgetsand domestic demand generally.The last 12 months have certainly Medium Term Outlook levels which are unsustainable even inbeen less “eventful” than the previous Of course what happened yesterday is the short term. We believe there is ancouple of years in terms of economic of relatively little importance compared urgent need to re-visit the strategy inshocks and financial upheavals. The to what happens tomorrow. In this this regard and as we highlight in thefact that we haven’t had any further regard the publication of the public following opinion piece the economysignificant banking debt added to capital expenditure plans in the annual needs an increase in investment inthe already seismic burden or had budget is always keenly awaited. social and productive infrastructure tothe need to introduce mini-budgets As has been the trend for the last provide both increased attractivenessmid-year could be seen as a sense of number of years, the December 2011 to business and to act as a stimulus tostability returning to the economy — if Budget included a multi-annual Public general economic growth levels whichyou take the glass half full approach Capital Programme (PCP) extending out are struggling to stay out of recessionto economics. Certainly we feel that to 2016 (see Table 1). territory.it is imperative that everyone takesthe glass half full approach, however, Unfortunately, the past experience of The construction industry has beenalways remaining mindful of the such multi-annual capital programmes existing on a virtual treadmill forbaseline we are measuring against. has been their propensity to vary the last four years with the resultThat baseline has been tracking very radically as opposed to their reliability that whilst we have not progressed,low since the sheer drop experienced in terms of not changing. Of course this everyone still standing is leaner andin 2008 and the aftershocks of the very characteristic of change could be fitter. The reality is that the race isfinancial crisis continue to dominate used as precedent to instigate positive probably only half run, and with thethe framing of the Exchequer budgets change to the “programme” laid out for passing of the fiscal compact in theand domestic demand generally. the next three years. The PCP for 2013 medium term the requirements of the represents a further 14% reduction (in troika programme and/or the marketsIn addition, as a small open economy, value terms) on that approved for 2012 will demand that public spending willwe are significantly impacted by and this would further reduce output continue to be sharply restrained. Weactivity levels in foreign markets and in in the construction industry below will be reliant on a boost in Foreignparticular Europe. The last 12 monthshave been plagued by the neverending string of crisis summits at the Public Capital Programme - Direct Exchequer Capital Funding €MEuropean level which have furtherunsettled confidence, notwithstanding 2012 2013 2014 2015 2016 2012 - 2016the weakening of the Euro having Transport, Tourism & Sport 1,231 900 879 818 818 4,646some positive impacts in terms of (mostly road maintenance) making our exports more competitivein global markets. Environment, Community 861 726 575 574 574 3,310 & Local Government Jobs, Enterprise & Innovation 514 458 457 454 451 2,334 Education & Skills 430 415 475 475 415 2,210 Health 390 390 390 390 390 1,950 Other 509 484 477 542 605 2,617 TOTAL 3,935 3,373 3,253 3,253 3,253 17,067 TABLE 1 : MULTI-ANNUAL CAPITAL INVESTMENT FRAMEWORK 2012-2016 Overview | 3
  7. 7. Tomás KellyRegional DirectorMedium Term OutlookDirect Investment (FDI) and indigenous Figure 1: Construction Output Scenario Trackerexport companies, which we appear to 40,000 Optimumbe seeing the beginnings of, to mitigate 35,000 Construction Outputthe reductions elsewhere in the private (Based on 12% ofsector. We expect output levels to 30,000 GNP) €’000’sbottom out in 2013 before showing low 25,000 Constructionsingle digit growth in 2014 onwards. 20,000 Output €’000’s 15,000 ConstructionThere is a real danger of a skills Output 10,000shortage materializing across a number (Scenario A 10%of the key craftsmen and professional 5,000 p.a. growth) €’000’sgroups. Construction 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Output (Scenario B 15%“To illustrate the long path to recovery p.a. growth) €’000’sfacing the construction industry,Figure 1 shows the sustainable levelof output for the industry (based on TABLE 2 : Construction Output Projections (e) Estimated (f) ForecastThe Society of Chartered SurveyorsIreland (SCSI) Report stating 12% ofGross National Product) based on 2% Construction Output €m €m €mGNP growth and for the purposes of 2011 2012(e) 2013(f)the example two scenarios of 10% perannum and 15% per annum growth CENTRAL BANK 8,822 7,862 7,426in construction output. We know from Tender Prices % -1.10 —experience that the growth/declinerates of construction output are Volume Change % -9.90 -5.50cyclical but even with these ambitious SCSI 8,684 7,448 6,956growth examples it would be 2018or 2023 before the sustainable Tender Prices % — — level would be reached. In respect Volume Change % -14.50 -6.60of our output projections in Table 2, DAVIS LANGDON 8,500 7,755 7,827there are inevitably downside riskshowever, hopefully the recent NAMA Tender Prices % 3.00 3.00announcement of investment of €2 Volume Change % -11.40 -2.00billion over the next four years will go some way to insulating against such industry and those of other services and it didn’t seem to matterrisks. As a measure of the significance commentarys in the industry. too much as people’s incomes wereof this NAMA announcement, if the €2 rising similarly.billion is spread evenly over the four Construction Costs &years the €500 million in 2013, would Tender Prices Needless to say the adjustment hasbe equivalent to the proposed reduction Increased competitiveness was a much been sharp and none more so thanin the Public Capital Programme.” sought after aspiration during the later in the construction industry, however part of the Celtic Tiger period and with in common with other sectors theTable 2 outlines a summary of our some justification as everyone had cost base has been less elastic thanprojections for the construction got used to paying more for goods and prices. Tender prices saw a cumulative4 | Overview
  8. 8. National University of Ireland, Galway - New Engineering Building, Galway. (image courtesy of Neil Warner Photography)
  9. 9. It is not only consultants and contractors that findpublic projects tough going. Individuals within publicbodies have been faced with their own range ofchallenges, including a moratorium on recruitment,non-renewal of fixed term contract staff, earlyretirements, re-deployments, being forced to acceptbelow cost tendering and decentralisation.37.5% drop between 2007 and 2010 increase at modest levels of on average level of €3.3 billion per annum. Howeverinclusive whereas official statistics circa 3% p.a. in 2012 and similar to consultants and contractors it iswould indicate that costs have been modest increases in 2013, with the seen as an extremely challenginglargely static (and in some instances cautionary note that the industry may environment to do business in.increasing) in the same period. Of experience a shortage of competitioncourse, labour costs have in reality in certain sectors and in particular for Some of the key reasons for this are:dropped further through a combination high value contracts.of salary cuts and reduced overtime 1. Cost of Procurement procedures payments, etc. The announcement Where now for the Public and Tenderingin June 2010 and implementation in Sector? 2. Cost focus of tender process February 2011 of the 7.5% reduction Davis Langdon, an AECOM company’s leading to “race to the bottom”in Registered Employment Agreement estimate of the construction industrywage rates was indicated as a in 2012 is €7.75 billion as compared 3. Risk transferstemporary measure to be reviewed thus to an output in 2011 of €8.5 billion.we would expect murmurings of such The recent SCSI Construction Industry 4. Cost incurred on cancelled projectsa review to emerge in the second half report (prepared by DKM Economic 5. Resources & Skills deficit in public of 2012 with arguments on both sides Consultants) has identified that a sector clients(unions and employers) for upward and sustainable level of constructiondownward movements respectively. output in a mature economy should be It is not only consultants and circa 12% of GNP (or 10% of GDP). contractors that find public projectsOn the materials side, the continuing tough going. Individuals within publicincreasing energy costs, growing Based on GNP of €129 billion/GDP bodies have been faced with theirdemand in developing countries and of €161 billion in 2011 a sustainable own range of challenges, includingweakness in the Euro will keep upward level of output would be in circa € a moratorium on recruitment, non-pressure on imports in particular. 16 billion. This is over double the renewal of fixed term contract staff, current projected output. So the real early retirements, re-deployments andIn summary, we would anticipate question is, in a number of years when decentralisation.construction costs of circa +2% in 2012 (hopefully) stability and a sustainableand +2.5% in 2013. output level returns to the market, what Whilst the number of projects has sort of construction industry will we diminished, the workload on eachIn terms of tender prices, after the have in Ireland? project has increased due to thesharp decline referred to above, 2011 challenges of the economic climatesaw some stability return to the The current industry is characterised and the new procedures and contractsmarket and we recorded an average by uncertainty, insolvency, below cost introduced through the Capital Works3% increase. We would see this return tendering and conflict. This, combined Management Framework. Theseto tender price increases more a with the massive reduction in output, procedures have been introduced withcorrection of prices having overshot any has resulted in a collapse in morale in little training and are subject to change.possible reduction in costs, rather than the industry and a wide-spread skills The introduction of the Departmentthe restoration of profits in 2011. drain, both from the industry and the of Finance Circular 10/10, whilst well country. intentioned, placed another regulatoryWhilst we continue to see tenders being burden on project and procurementsubmitted which could be considered The Multi Annual Capital Investment managers in the public sector.“potentially abnormally low,” their Framework (MACIF) (see Table 1prevalence is reducing. We would on page 3), shows a stable level of The net effect of all these issues isanticipate tender prices to continue to spending over the next four years at a that the area of the Irish construction6 | Overview
  10. 10. National Gallery of Ireland, Shaw Room, Dublin.industry that one would expect to price, before embarking on fundingbe the most stable is a very difficult construction projects.place to do business in. The fear is thatdynamic and innovative players in Irish However, NAMA has played some roleconstruction industry will tire of the in getting projects moving, whetherchallenges of public sector projects through supporting the borrowers inand will turn their focus to emerging completing housing schemes, providingelements of the private sector such staple finance to schemes beingas the Foreign Direct Investment (FDI) purchased by investors or completionmarket or growth markets overseas. of schemes using receivers.The potential knock-on effect ofthis would be to leave public sector The previous 12 months have probablyconstruction projects in a place been the most productive in actualcharacterised by confrontation, poor delivery of the individual businessperformance and the associated plan objectives leading to a number ofchallenges to successful delivery of distressed asset disposals that requiregood projects. We are already seeing construction activity during theirexamples of this on the ground. workout phase, albeit not amounting to any appreciable turnover.NAMA: Is the bottom lineeverything? NAMA have approved working andThey certainly have had a busy year. development capital advances ofIn last year’s annual review published €1.1 billion of which €506 millionJune 2011, the focus was on completing relates to Ireland. This expenditurethe transfer of the loans. However, is being advanced through its debtorthe intervening period has seen NAMA companies, i.e. borrowers whose loansmake significant strides in the area of have been deemed eligible and haveenforcement. been transferred to the group.In July, NAMA published a list of 847 In 2012/13 the best prospect one can 1200properties which were in receivership hope for from NAMA in relation to what 1,169 1,119or administration, a number which it can do for the construction industry 1000 1,093 1,040steadily rose throughout the year to is the disposal of assets/sites that 800 8871,169 at the end of March 2012 (see are in demand, e.g. incomplete office 847Figure 2). blocks with ready to go end users/ 600 tenants, unfinished semi-detached, 400NAMA have stated that it has housing schemes that are in demand,completed its loan evaluation of etc. Obviously, the successful entry of 200business plans covering 97% of the these schemes to market is dependentloans on its balance sheet as at the end on the right purchase price as opposed 0 Jul 11 Aug11 Nov11 Dec11 Feb 11 Mar12of March 2012. to any other factor. However, given the demand for offices, for example, from Figure 2:So what does all this mean for the multi-nationals and the limited amount Properties in receivership/administrationconstruction industry? Obviously of suitable stock in the appropriateone of the stated objectives of NAMA areas, it is likely that this year will beis to dispose of assets, at the right more fruitful than the last. Overview | 7
  11. 11. The National Gallery of Ireland, Milltown Wing, Dublin. ExpertSectorDevelopments
  12. 12. Across all sectors, the key trendhas been the reduction in thecontract values of projects inrecent years.Last year we highlighted the seismic Figure 3: Estimated Sector Breakdown of Construction Industry 2012shift in the construction industry (SCSI/Davis Langdon Estimates)output over the five year period from2006 to 2011. Namely the collapse Industry (6%)of the residential sector and the Commercial (5%)return of the public sector civil and Other Private Non-National (2%)general building programme to being Education (6%)the primary source of output. Not Health (4%)surprisingly then there has been a Energy (13%)sharp focus on movements in thatprogramme which we will review in our Roads (10%)sector review. Water & Sanitary Services (8%) Transport (3%)Last year we also signalled the Telecommunication (2%)emergence of encouraging signs in the Other public Non-Residential (3%)Irish export market as well as Foreign Residential (38%)Direct Investment (FDI) sectors, andthankfully these early signs appear to allocation. Figure 4 illustrates thebe bearing fruit. departmental allocations and the One of the difficulties being percentage adjustment in 2011. experienced in the first half of 2012Across all the sectors, the key trend has been the slow progression of publichas been the reduction in the contract (For further details of Budget 2012 sector projects. There have been avalues of projects; reflecting both the Public Capital Programme please number of reasons, however, the twodecrease in tender prices in the last contact Tomás Kelly at tomas.kelly@ most prevalent relate to the area ofnumber of years combined with the davislangdon.com ) public procurement.reduced scope of works being carriedout. Figure 2 illustrates the sector Figure 4 : Public Capital Programme Budget Direct Exchequer Funding 2011 & 2012breakdown of the industry output in €m 10%2012. 1600 0%Public 1400 -10%The Government announced the broad 1200parameters of their 2012 Public Capital 1000 -20%Programme when they published their -30%Infrastructure and Capital Investment 8002012-2016 document in November 600 -40%2011 and further detail and breakdown 400 -50%was provided in the budget lastDecember. 200 -60% 0 -70%The Multi Annual Capital Investment Environment, Communications, Transport Tourism and Sport Community & Local Government Jobs, Enterprise & Innovation Education & Skills Health Agriculture , Food & Marine Energy & Natural Resources OPW OtherFramework (MACIF) 2012 provisionshowed a 16% drop on the 2011 figures Percentage changewhich has meant every department Output 2011has seen a reduction in their capital Output 2012 Sector Developments | 9
  13. 13. Telecity Datacentre, Dublin. JFK Primary School, Limerick.10 | Sector Developments
  14. 14. John O’Regan Anthony McDermott Mark SmithDirector Regional Director AssociatePublic Commercial RetailFirstly, there appeared to be a the commercial office fit-out sector From a retailers perspective, thesignificant slowdown in the number of was still reasonably active in 2011. Government’s decision not to proceedetender contract notices in 2011 and with legislation in relation to Upwardthe second half in particular. Due to Activity in the commercial office sector Only Rent Reviews combined with thethe long sequence of events required is looking steady for 2012. Take up increase in the Value Added Tax (VAT)from notice placement, procuring is down for the 1st quarter of 2012 rate has created much angst and aconsultants, obtaining statutory compared to the first quarter of 2011 viewpoint that it will be later ratherconsents and advertising and tendering but this is mainly due to prolonged than sooner for the retail market as amain contract works, any interruption negotiations, the “one off” Montreveto whole to improve.to this cycle is likely to slow down the take up (45,000 square feet) last yearcapital programme. and some businesses looking to curtail Murmurs of planning reform in relation expansion until the economic climate to the current retail size cap to allowThe other factor has been the improves. companies considering large operatingincreasing duration required in store’s such as Wal-Mart and Costcothe tender evaluation phase. This Demand for office space in Dublin is or even Tesco-Extra stores have beenhas arisen for a number of reasons actually up 70% for the first quarter of aired in documents about Ireland’sincluding: 2012. Tenant activity has seen the likes Budgetary and Reform Plans sent to of Google, Central Bank, BNY Mellon, German parliamentary committees.- the prevalence of very low tenders Capita, Goodbody Stockbrokers all requiring greater analysis and looking for office accommodation. However, seeds of optimism can clarification; be seen and for certain retailers, There has also been some office take expansion plans have and are being- on lower value projects the up outside of the Dublin area such as drawn presently. New entrants have shift towards Most Economically PayPal and Prometrics in Dundalk and come into the market or are looking Advantageous Tenders (MEAT) Hewlett Packard in Galway. at entering the market, most notably as opposed to lowest price Banana Republic have been reported (notwithstanding the benefits of There should be continued office fit-out as targeting a larger store on the same) activity in the coming year largely due top of Grafton Street. New franchise- increased number of challenges to FDI announcements. stores have opened such as Eason’s to the procurement process from opening new franchise stores in unsuccessful tenderers In terms of new build office Mullingar, Balbriggan, Kilkenny and developments there is little or no Carlow and AIM, the franchise operatorFrom the construction industry activity nor is there any foreseen for the of Iceland, opening new store’s inperspective, and the wider economy, it next six months at least. One significant Coolock, Clonmel, Ashbourne andis essential that these obstacles are new build development going ahead Carlow, plus other retailers mainly inminimised to ensure value for money is to the design stage is the high-profile the pharmaceutical, food and discountachieved and most importantly that the Central Bank offices in Dublin. sectors pushing expansion and re-economic impact of this investment location strategies.in terms of jobs and stimulus is Retailmaximised. The Irish Retail Market is still very For new entrants and existing retailers, challenging with a number of high- the availability of favourable terms withCommercial profile closures in the first six months regards to rent free periods, period ofAlthough 2011 was another tough year of 2012. lease and rent and/or in certain cases,economically for the property market, the build cost for certain retailers who Sector Developments | 11
  15. 15. Andrew Thompson, Eoin DunphyAssociate, Residential, Associate, Data CentresHotels, Sport & Cultureprefer to own their own properties are Again, we would anticipate that most The redevelopment of Pairc Ui Chaoimhproviding the impetus for potential of the existing overhang of housing is unfortunately the only real significantmarket expansion. stock will be first in the shopping list project on a national scale to progress. for local authorities, however, some With limited public funding availableResidential limited public residential developments (€30 million announced recently forIt was another tough year for the will proceed, most notably those in the the “Sports Capital Programme”)residential sector in 2011. In our 2011 regeneration areas such as the north the likelihood of any real significantReview, we projected house completion and south side of Limerick city. projects moving in either the private orunits for both the private and public public sector is slim. Some works willsectors to be 10,000 units. Department also commence at the National Sportsof Environment, Community & Local Hotels, Sports & Culture Campus at Abbotstown.Government statistics show that Continued pressure in these sectors10,480 units were completed for both seems to be the common theme in Culture Sectorthe Private and Public sectors. This is recent years. Whilst there may be some In general, the outlook for the culturea drop of circa. 28% on the 2010 figure small movements in the sports sector, sector in 2012 is for little or no growth.of 14,602 units. Projecting forward for there will be even less in the culture The recent budget shows reductions2012 we would anticipate between sector and the hotel sector not realising in Government spending in this sector5,000 and 7,500 units to be completed. any increase in construction activity. with forecasts of circa €44 million to be given to the Department of Arts,Private Sector Hotel Sector Heritage & Gaeltacht, circa €100Current growth is again being restricted It is worth reminding ourselves that in million going to the Office of Publicby weak consumer demand, unstable 2004 there were circa 48,000 bedrooms Works (OPW) and circa €21 millioneconomic status and the uncertainty but by 2008 there were circa 64,000 — going to tourism. Of this combined totalregarding the availability of finance a 34% increase in capacity to match a of €165 million it remains to be seenand also future capital values. With the demand that rose by just 12-13%. how much will be released into culturalcurrent supply overhang of available type construction projects.units both completed and near With the existing room supplycompleted, it is unlikely to be much outstripping demand, there is unlikelymovement here although in certain to be any real movement in newareas of the Capital, 3 and 4 bed semi- development in this sector in 2012, anddetached houses are in demand. we may in fact witness some partially completed works being demolished.Public Sector One of the eagerly awaited hotels inThe net housing need figure at present Dublin that is scheduled for completionshows that 98,318 households were in early next year is The Marker Hotel inneed of social housing support at 31st the Dublin Docklands.March 2011. Sports Sector 2011 saw the completion of some interesting projects in this sector, including the iconic UCD Student Learning, Leisure and Sports Complex and the University of Limerick Pavilion and Outdoor Synthetic Pitches project with four full-size, fully floodlit pitches.12 | Sector Developments
  16. 16. University College Dublin - Student Learning, Leisure & Sports Facility, Dublin. (image courtesy of Donal Murphy Photography)Infrastructure & Industry data centre industry which has seen Multinational global businesses areThe outlook for the civil sector is a phenomenal growth over the past five reviewing strategies and looking forcase of contrasting fortunes — on years throughout Ireland and Europe. growth opportunities from varyingthe one hand roads and rail having The attractive climactic conditions for geographies’ through foreign directdelivered a national motorway optimizing free cooling low seismic investments. The companies thatnetwork and significant investment activity, and sufficient Electricity embark on such initiatives face andin the greater Dublin area with the Supply Board (ESB) supply has helped have to deal with many complex andLUAS respectively, would appear to to guarantee this region as one of the local issues on an ongoing basis.be destined for a number of years of main the areas of choice for long-termsignificantly reduced expenditure. On data centre development. The pharmaceutical sector has shownthe other hand, with the advent of the strong investment in Ireland forgovernment policy on the introduction The challenge for data centre 2012, with companies such as Mylan,of water charges and the establishment developers now is how to keep up with Allergan, Amgen and Eli Lilly, to nameof Irish Water, significant investment the insatiable customer demand for but a few, that are either currentlyshould be made. We are also likely to space and ensure that your business is or planning to invest heavily in theirsee strong investment in the energy ahead of the pack in securing those all operations for 2012. AECOM has asector. important resources required to deliver proven track record in this sector on that demand, whether that be the globally and is expanding its presenceIn terms of industry, as flagged earlier, expertise or the relevant technologies. in this sector in Ireland as well as2012 has seen a renewed stream With time as the driver, data centre maintaining its service with currentof development from indigenous clients need teams that have the Irish pharmaceutical companies.manufacturers performing strongly in proven expertise and track recordsthe export markets and foreign direct in delivering programs in multipleinvestment inflows. This of course is locations concurrently using tried andextremely welcome and a sign that our tested low cost models which meet thecompetitiveness has improved against highest standards.that of some of our competitors.One specific example would be the Sector Developments | 13
  17. 17. IndustryDevelopments ProfessionalUniversity College Dublin - Student Learning, Leisure & Sports Facility, Dublin.(image courtesy of Donal Murphy Photography)
  18. 18. One of the features of the industry from aclient and consultant perspective in the lastcouple of years, and likely to continue in themedium term, has been the level of activityaside from actual construction works.Every year sees the list of industry Alternative funding sources for not pay tax within the company andissues dominating the agenda change the Property Industry therefore avoids double taxation. Itand evolve as the participants, clients, The primary sources of property must pay out a high proportion (90%consultants and contractors grapple finance are well known and include: in the UK) of its property income towith the challenges of the day. In its shareholders. It works through2011, we looked at subjects such - Private equity, buying shares in a listed propertyas The Capital Works Management - Short-term and long-term finance company that has elected for REITFramework (CWMF), NAMA, Insurance from financial institutions, status and operates in accordanceValuations, etc. - State funding, with REIT regulations. These - Institutional investors, e.g. pension regulations are intended to ensureThis year we summarise a cross funds. the company is primarily engaged insection of some of the key industry property investment, rather than indevelopments that have been the We know that private equity is scarce, development.subject of much discussion and/or debt finance is not available at themarket change this year. levels required, state funding is on the The Government has stated that they decline and that institutional investors will introduce the legislation and it are eager but cautious. Where once is expected imminently. There are we could depend on a significant currently over 20 REITs in the UK, development finance package with a including household names from small amount of equity all wrapped Hammerson to Land Securities with together in a suitably “geared” package, a total market cap in excess of €25 we now know that this is no longer an billion. So, how would REITs help in an option. Irish context? Firstly, Nama could avail of it and transfer some of its €31 billion So, is it just a matter of adjusting the loan book into a REIT for investors. ingredients and changing the recipe? NAMA has recently stated that this Do we have the right ingredients, or would be an attractive option for them, indeed, enough of them? Recent new should the legislation be passed. (and improved) recipes being explored recently include: Secondly, the current international investors who are seeking to purchase - Real Estate Investment Trust (REIT) assets in the Irish market, could - Equity partnerships/Private Rental avail of a transparent and regulated Sector (PRS) investment vehicle that would be - Project bonds professionally managed and generate a return for their investment. This Real Estate Investment Trust would have the effect of restoring the (REIT) international confidence somewhat A REIT is a company that manages a and provide a tried and trusted conduit portfolio of real estate to earn profits through which they would conduct for shareholders. The main benefit their affairs, without having to be and attraction of a REIT is that it does directly involved in the management Industry Developments | 15
  19. 19. Paul Mitchell Neil McBethDirector, Head of Office Associate, Due Diligenceof the individual assets. As mentioned Pike Architects, incorporates the countries have been looking at ways toearlier, REITs are not permitted to lend example whereby a promoter (private, fund these projects without such creditinto development. However, one would local authority, housing association) wrapping.expect that in the context of a strong obtains land and develops a residentialcovenant, a REIT providing the long- scheme which is then “bought out” In October of last year, the Europeanterm finance that a bank or banking by an investor (e.g. pension fund, etc). Union adopted a legislative proposalsyndicate would be in a strong position The residents then pay a capital rent launching the pilot phase of the €50to provide development finance. (cost of scheme plus annual return billion Europe 2020 Project Bond to investor), the capital rent being Initiative. The initiative aims to reviveMaybe this Utopian example is not that 10-20% lower than the market rent. and expand capital markets to financefar off when you consider the pent- Any payment above the capital rent is large European infrastructure projectsup investor demand, the impending treated as equity, or buying part of your in the fields of transport, energy andshortage of premium office space to home, with full ownership being the information technology. Although thesatisfy the incoming multi-nationals, ultimate goal. “project bonds” proposal from thethe value in the marketplace and the European Commission is subject to therequirement for the banks to restart Project Bonds approval of European governments,lending into properly geared deals. A project bond is a fund set up to they have indicated that funding would finance a specific project or group be available to upgrade the Dublin-Equity Partnerships/Private of projects. They were typically used Belfast rail link, as well as transportRental Sector (PRS) to fund large infrastructure projects connections in the ports of Dublin andThe basic model for development in and were very common in the United Cork.the residential sector, for the most States and South America. Insteadpart, is Develop and Dispose, i.e. of using traditional bank lending, the As this is only the pilot phase it is likelythe developer purchases the site, project company could raise the senior to take some time before we see aconstructs the residential stock and debt through project bond issues. direct impact on project funding in thethen sells it to homeowners/private Capital market investors would buy the local market.investors. One of the scenarios where bonds if an investment grade creditan equity partnership comes into play rating, preferably at least A-, could be So, in relation to alternative sources ofis when the ultimate purchaser is not achieved. funding it does not appear as thoughin a position to secure the finance we are on the cusp of a breakthroughto purchase their own property, e.g. Owing to the inherent risk in directly in the near future. Looking at the fewpotential purchaser can’t obtain a funding construction projects, they transactions that have taken placemortgage. There are various forms of were insured by “monoline” insurers in over the past year, it would appearEquity partnerships, particularly in the a process known as “credit wrapping.” to be more a case of using the bestUS, whereby the ultimate residents own However, these insurers faltered during ingredients available and sticking totheir homes or shares in the overall the downturn due to guaranteeing grandma’s old tried and trusted recipedevelopment. billions of dollars worth of sub-prime than any type of haute-cuisine. debt, and projects have stalled asA proposal being led in the Irish a result. In response to this andcontext by James Pike, of O’Mahony burgeoning investor coffers, different16 | Industry Developments
  20. 20. The National Gallery of Ireland, Dublin. Industry Developments | 17
  21. 21. National University of Ireland, Galway - New Engineering Building, Galway. (image courtesy of Neil Warner Photography)At the very least, a detailed Work Outs by Asset Managers modeling of all the inputs under The financial crisis in Ireland has left us the various development/work-outanalysis of a potentially permutations, including critiquing with a significant number of distressedabnormally low tender will and incomplete construction projects the disposal strategy options.assist in developing an and a long list of developer andeffective risk mitigation contractor insolvency casualties. - Unraveling of historical deals and agreementsprogramme. Inevitably, when one goes to open The lack of action on unfinished developments has led to additional up the file on a development that risks for stakeholders that range from has stopped prematurely, there additional costs due to simple neglect will be a myriad of agreements and and lack of upkeep, to health, safety deals. Needless to say it is only and environmental issues. In many those with liabilities attached that cases, the inaction and lack of funding are being brought to your attention, has only served to reduce the value of so a methodical approach and the asset for the long term. The work commercial awareness are key to out path is not for the faint hearted and resolving these. requires intense effort and tenacity from the outset, to ensure a successful - Obtaining certification for disposal outcome. There are many challenges This problem is encountered on for stakeholders, which become most projects and is usually solved apparent from the outset, and these through negotiation with the require experienced professionals to certifiers or, if not possible, using a assist in identifying and navigating new team, exhaustive surveys and a pathway to delivering the project. certificates with certain caveats. Amongst the key challenges are: Activity to date has been predominantly - Self funding mechanisms driven by non-nama institutions that The availability of finance, or lack are intent on exiting the Irish market. of, has been much publicised so it is The recent announcement by NAMA not surprising that this is probably is welcome news and should see a the biggest challenge for funders in sizeable increase in activity in this area. moving a work-out strategy forward. After that it is then important, where Repair & Maintenance possible, that the development With the sharp decline in the level of is phased in such a manner that new build construction, an increasing will generate revenue to fund the amount of the industry focus has remaining phases. turned to the Repairs, Maintenance and Improvement (RMI) sector. The RMI - Getting the disposal strategy right sector has of course also seen a decline Interlinked with the funding in output, but not to the same extent, mechanism is the issue of developing therefore, as a proportion of the overall a sustainable business model. This total it has increased significantly (SCSI will require careful consideration of Construction Industry report estimates the key drivers and then testing it at 41% in 2012 compared to 19% these through thorough financial in 2006 per the DKM Construction18 | Industry Developments
  22. 22. Stuart Griffin John O’ReganAssociate, Project DirectorManagementIndustry Review and Outlook 2010 actively managing their real estate and European Union (EU) procurementReport). we are working with others to develop guidelines and directives. These asset registers, including schedules of must be scrupulously followed by theOf course, the need for repairs and condition and planned and preventative client or there is a risk of a successfulmaintenance is ever present. Real maintenance schedules. challenge to the process which wouldestate that is not maintained will start result in the outcome of the processto diminish over time in functionality The improvements segment of RMI has being overturned or damages becomingand become unfit for purpose. As also been experiencing greater activity due to the injured party.soon as the client takes possession than new build, as organisations haveof the building the wear and tear of been downsizing or re-organising to There is detailed guidance available onthe building and its fabric starts. Once sub-let space. In some cases where in the steps to be taken in assessing ALT’sone system or element fails, there is a different climate clients may have and these involve seeking clarificationsgenerally a consequential knock-on chosen the new build option, they are and additional information from theeffect on other elements and systems. now making the decision to refurbish tenderer in question. By demandingFor example, if a hole appears in a roof their existing space. this level of information and employingcovering, there will inevitably be water expert analysis from the quantitydamage on the internal fabric of the Abnormally Low Tenders (ALT’s) surveyor and design team, the clientbuilding and services. Should the plant Have you ever received (or submitted) can obtain a very clear picture of howand equipment and services start to an abnormally low tender for the bid was prepared and how robustfail due to water ingress, the knock-on consultancy services or construction the price is.effect of down time from staff and works?users not being able to use the building Davis Langdon’s experience of publicwill be significant. Have you ever rejected a tender sector tendering is that it is rare for a because it was abnormally low? tender to be rejected as abnormally lowFrequent and regular repair and I think the answer to the first question but that it is critical that the detailedmaintenance is the most cost effective above would be a resounding yes assessment is carried out. Often theway for providing and retaining a good from just about everybody involved investigation results in the bidderfunctional building. The inspection of in tendering in the Irish construction realising the challenges that theirexisting buildings is key to effective market. tender presents and withdrawing theirasset maintenance and management. tender. In other cases, the investigationIdentifying and analysing the problems, The answer to the second question uncovers issues that can be resolvedassessing the risks, and establishing a is harder and the answer may well prior to contract and hence avoidingstrategic way forward for maintaining depend on whether you are operating in potential claims. At the very least,and repairing the building is key. Most the private or the public sector. a detailed analysis of a potentiallyrepair and maintenance of buildings It is not uncommon for the lowest bid abnormally low tender will assist inis reactive, where designers and sub to be passed over in the commercial developing an effective risk mitigationcontractors work to address issues world. Are these decisions always programme. Typical mitigationas they arise, and clients spend little fair — maybe not — but in the private measures include increased provisiontime assessing, scheduling, planning sector, as long as the tender documents of onsite cost, programme, qualityand budgeting to prevent such issues are structured right, it is the clients and safety monitoring, increasedarising. Resources allocated to call. The disappointed contractor or contingency provision, increasedevaluating and putting plans in place to consultant has no come back. focus on project administration andrepair and maintain real estate How about the public sector? structured project managementanticipating and planning to address The position here is much more processes involving principals of all theissues before they become problems, complicated. There are defined bodies involved.is money well spent. Some clients are processes both in national and Industry Developments | 19
  23. 23. LeadersBusinessIntelligence7 & 8 St James’ Square, London.
  24. 24. We believe it is important to listento and understand the issues fromthe key leaders in the industryDavis Langdon, an AECOM company, Pat Gunne,has extensive knowledge and Managing Director, Green Propertyexperience across the full spectrumof service lines and sectors in the Commercial:industry. However, notwithstanding Q Stamp duty reduction; Upwardthis track record, we firmly believe it is Only Rent Review (UORR) clarity, etc.key to any appointment, big or small, Positive changes but what is theto first listen to and understand our effect?client’s requirements. A The changes you mention are significant to the extent thatIn the same way, when we are writing investment in real estate hadour annual review, we believe it is become a binary issue. Onceimportant to listen to and understand the UORR came on the table forthe issues concerning key leaders discussion, and it was surrounded byin the industry and in the current uncertainty, the market shut down soclimate people who are at the coalface it has been significant to the extentin terms of delivering or facilitating that Ireland is investable again,growth in key sectors in the coming Finance: however, in terms of activity, theyears. Q Debt financing, is there any out market hasn’t started trading in any there? meaningful way.We thought you would like to listen A The Irish banking system is entirelytoo! dominated by NAMA. Bank of Ireland To re-ignite the market, you need (BOI) and Allied Irish Bank (AIB) external capital investment becauseSo we have summarised in question have both said they want to lend the domestic equity has beenand answer format, interviews we to the sector, however, both banks effectively wiped out due to theconducted with a number of thought are trying to reduce their overall extent of the collapse in the market.leaders on what they see as the exposure to commercial property. Netchallenges, solutions, and more lending to real estate in the United Q Poor credit ratings, second rate importantly, the likely trends in their Kingdom (UK) is negative, in Ireland investments — is it a case of no sectors in the short to medium term. it is that multiplied by 10 and we thanks from investors? will be in that net negative lending A Yes and no. The funds will want environment for the next three to five to buy shiny buildings, with shiny years. tenants, in grade A locations. There is only a certain amount of that and it Q Government — if you could ask for represents a tiny part of the market. one wish? A The government can only control the On the other hand, the reason Irish part of the solution; they cannot Ireland is seen as attractive for US control what happens with foreign private equity is that it is seen as “in owned banks, all of which are in distress.” Up to now the pricing gap retreat. has been too wide, but given that we are now in year five of the meltdown, The biggest thing they could do I suspect the level of market activity would be to restructure their deal will slowly begin to improve. with the troika on their own capital Business Intelligence | 21
  25. 25. JFK Primary School, Limerick.“ The Government can only structure and accept that a good accepting that they are a long-term chunk of NAMA is a long-term mortgage bank. control the Irish part of the mortgage bank as opposed to a solution; they cannot control grind down agency as it is a constant They also could start selling Irish real what happens with foreign overhang on the market. estate in lot sizes and packaged in a owned banks, all of which are format which meets the investment Q Once the debt and liquidity return, appetite of the major international in retreat.” we will have a sharp upturn in funds. They might not like the price, property in terms of prices. True or however, we either accept that the False? capital is external private equity or A To try doing the crystal ball not. The overriding objective of NAMA gazing when there is so much macro must be to re-create a market and uncertainty is of limited value. At to do so they need to sell. Ultimately the moment we are taking the view the market determines the pricing that the macro is a pronlonged and not the November 2009 entry workout at the European and indeed point which Nama had no control global level, but particularly around over when it was being cast in stone. the euro area. Having said that, if They’re trying their best, but it’s a you buy central Dublin real estate very challenging environment. at below reinstatement cost, with income to get you through however Q Any lessons to be learned from our many years, and with arbitrage on a nearest neighbours? debt package, then that probably is a A Lloyds for me have been very good risk adjusted investment. Who refreshing in their approach, knows whether we are right or wrong, obviously they have taken a lot that is the view we are taking, and of pain but they are dealing with the majority of our investment focus the resolution in a very pragmatic remains in the UK. way. Typically they are avoiding, where possible, in dealing with it Distressed Property: through the courts, and instead are Q What would you change/enhance sitting down and having sensible about the way Nama operates discussions with borrowers in an today? attempt to resolve their problems A The changes at the top have been through a consensual process. very positive and they have done well in the UK, their challenge is around the Irish market. They are trying to be part of the solution in terms of the lack of liquidity by saying that they are willing to put in debt on deals where they are selling which is crucial and one step away from 22 | Business Intelligence
  26. 26. “ This is the fourth recession that I have experienced in business. So I would say nothing will change, it will just be different the next time. Lessons do not get remembered for longer than ten years.” Bill Nowlan, Funding Managing Director, W.K. Nowlan & Q When do you foresee the funding Associates impasse resolving itself and what its likely effect will be on property Q What would you see as the key values? lessons from the financial crisis A I believe that the money will be found that should be learned by the because we just cannot, at a political property industry? level, continue to keep grinding A Property booms and busts are facts people down. But I do think that you of life, you can go back generations, have to have the controls in place, go back millennia — Cicero put his so I would think that after this treaty pension fund into property. is in place. Once funding returns, I believe that house prices in Dublin This is the fourth recession that I will spike very rapidly. If you ask me have experienced in business. So where I would actually speculate I would say nothing will change, it my money, now is to buy land in Dun will just be different the next time. Laoghaire or on the Luas line, I think Lessons do not get remembered for that will go like a train. longer than 10 years. NAMA Q In terms of the residential property Q Have you a sense of what the market, what do you see as the fate NAMA strategy is towards managing for the sea of Ghost Estates? their Irish portfolio? A You have to slice and dice this, first A I think what you are beginning to see of all there are ghost estates that happening is that they are dribbling are: property out through the receivers to - well built houses but for which see what will happen. there is no demand because of Q Is the mini boom in Foreign Direct their location and then there Investment (FDI) a saviour for our You can’t push a piece of string and is, ailing property industry? I think NAMA have a problem in that - poor quality accommodation A Saviour is probably not the right they have this huge need to actually in inappropriate locations. word; it is probably going to be get property out there but it has to an important factor. One of the come on the demand side. At the In the first case, the price will fall things we need to do is put in the moment, they are concentrating their to a point at which they will be infrastructure to encourage FDI — I efforts in the UK and overseas and bought, whereas in the second case think this is where our planning the big question is should they just demolition will be the only option in a comes in. drop prices down? lot of instances. So, in short, you have to look at each situation and decide whether this is for holiday homes, the JCB or time. Business Intelligence | 23

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