Paul McNeive: 'Build-to-sell' apartments will require targeted subsidy


With signs that the rate of growth in residential construction is slowing, the focus is back on viability - and particularly for apartments.

One man with a compelling analysis of the topic is Gary Corrigan, a managing director at Hines Real Estate Ireland, a leading developer, investor and real estate manager.

Mr Corrigan told me that, in some cases, it can cost almost twice as much to build an apartment, as it does a house.

With 70pc of demand in Dublin for one and two-bed units, and a need to increase city density, some form of subsidy will be required if we want to see apartments being built, for sale, in our cities.

Mr Corrigan sees the evolution of the "build to rent" market as a success, and argues that the way forward is not to restrict that sector but to get the "build to sell" market to the same level.

The history of apartment development in Dublin shows that subsidies have generally been required.

From the 1930s to the 1950s, Dublin City Council built swathes of inner-suburban housing, with a 60pc subsidy.

Thereafter, apartment development was only viable in prime locations, until the Urban Renewal Bill of 1986 introduced tax incentives for apartment development in areas of urban blight.

The Celtic Tiger era of cheap credit saw a boom in apartment development, even as tax incentives withered.

The market collapse then reduced apartment values below replacement cost, and the raising of design and construction standards, which followed alongside the recovery, has combined to render apartment development unviable again, in many locations.

Mr Corrigan says that the price of building a two-bedroom apartment is close to €350,000 (of which €70,000 is vat and levies). So, adding in site-cost and profit, a developer needs to sell for at least €450,000, which is too expensive for most buyers.

Mr Corrigan gave examples of two Dublin schemes where apartments priced at €450,000-€500,000 are selling at the rate of one per month.

So a 200-unit scheme would take four years to sell-out, which is not regarded as viable liquidity by a financier.

However, at a rent of €1,600-€2,000 per month, an institutional investor can obtain a 4pc return, and commit to buy at the scale needed to fund an apartment development.

Mr Corrigan told me that the government should prioritise apartment building over house building, and focus on the "build to own" apartment market.

However, Mr Corrigan says, whilst subsidies will be needed, those subsidies need to be targeted, to avoid inflating the market, and should target those most in need of the subsidy.

One option, he suggests, is to consider the 'equity loan' concept, becoming more prevalent in London.

For example, the buyer would pay €350,000 for the unit, with the government holding a €100,000 equity loan in the property.

That €100,000 would be funded by the government not taking the vat and levies on the unit, and extending the "help to buy" scheme, but converting the tax rebate under that scheme into a loan.

The net cost to government would be low, because it would be delaying the payment of taxes on marginal units, that would not have been built without the equity loan being available.

In the UK, Homes England lends the purchaser up to 40pc of the cost of a new home, in return for equity. No interest is charged for five years, and then is payable at 1.75pc.

The deposit required falls to 5pc and the monthly mortgage payments can fall significantly, as the mortgage can be reduced to as low as 55pc of the purchase price.

The equity loan must be repaid after 25 years, or earlier, if you sell. When the owner sells, they repay the same proportion of proceeds as their equity loan.

Homes England shares the risk - if property values fall, you pay back less than you borrowed.

Food for thought, in our under-supplied market.


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