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Archive for May 12th, 2010

The straight answer to the first question is that it depends. The traditional approach to valuation where a willing buyer and willing seller both acting with perfect market knowledge is a theoretical ideal generally – in Ireland where there is such secrecy as regards settled prices for land transactions, neither buyer nor seller will have anything close to “perfect market knowledge”. So how would you go about valuing a site?

Last week on Vincent Browne’s “Tonight” programme on TV3 on 5th May, 2010, one of Vincent’s guests was the architect and valuer Emer O’Siuchru. The subject of the programme was the continuing unravelling of the Irish property and banking crisis. Emer referred us back to the time before the property boom when the cost of the site as a component of the total price of a home was benchmarked at 15%. Of course there are two other main components of property construction – labour and materials so working out 15% of the total cost is always going to be like nailing jelly to the wall. However, various sources produce estimates of building costs and using such estimates, guide prices can be estimated for sites if we are to assume the old 15% rule is still relevant.

Ireland would not appear to have as comprehensive a source of building costs as say, the UK, which has the Association of British Insurers and the Building Cost Information Service, part of the Royal Institution of Chartered Surveyors (try their calculator free here, it can be used for Northern Ireland as well as Great Britain – the results might startle you). However various domestic sources produce figures and perhaps they give an overall sense of the prices that obtain today. Before starting, it is worth saying that there is no such thing as a standard square metre or foot of home space – costs will depend on national location (cities are typically more expensive for labour and contractor rates), type of property (psf costs of multistorey buildings tend to be cheaper than single storey because they rely on the same foundation), precise location (availability of utilities, own well vs mains water, sewage connection vs septic tank) and characteristics of the land (slope and elevation, clearance issues). So what follows will need to be considered in a very general sense. The following use square feet, rather than metres.

The Society of Chartered Surveyors in Ireland produce rebuilding costs, commonly used for buildings insurance, and their latest estimates in April 2010 record an annual fall in costs from the previous year. They estimate the rebuilding cost of a 2-storey 1270 sq ft semi-detached home in County Dublin at €160/psf. Their last annual publication of rebuilding costs is from 2009 and is available here. Rebuilding costs include demolition and site clearance which are not separately estimated. Using the BCIS calculator above, the cost per square foot in Northern Ireland in May 2010 would be €71/psf (using a GBP 1 = EURO 1.15 exchange rate) including demolition and site clearance. Demolition and clearance costs are generally estimated at the €10-20k level in the UK. If the demolition and clearance costs are €15k both in the Republic and the North, then the building costs would be €148/psf in the Republic and €59/psf in the North. Why the great difference given both the North and Republic are EU members and road distances are not significant? I have asked the SCS and will update this post with the information contained in any reply. The Department for the Environment Housing and Local Government also produce statistics on the House Building Price Index which tells us that the latest prices available in February 2010 are 1% lower than the peak reached in September 2008 – although not directly related it is interesting that property prices are 35% off the peak reached at the start of 2007 and although property prices have returned to 2002 levels, building costs are still 20%+ greater than in 2002. Unfortunately the Index doesn’t translate to a general building cost per square foot.

The SCS, however appears to be on the high side compared with a vast number of other sources in the State. These appear to point to rates from €75 psf though the maximum I have seen is €150 psf. The Irish Association of Self Builders claim to have the largest construction-related website in the State. You will find what appears to be a lot of useful information on their website, though remember you would expect to incur the cost of a master contractor if you didn’t go to the trouble of self-building. This organisation  doesn’t produce a headline building cost – instead it examines the detail of each individual component of the process and the user can then work out their own costs. The Self Build in Ireland forum is a social forum and there are unverified claims of costs of around €80/psf. The furniture.ie portal estimated costs at €75-150 in 2006.

However if we take the SCS building costs of say €148/psf that would imply that a 2500 sq ft property would cost €370,000 to build. If one were to choose to build in a rural area it would not be unreasonable to expect such a house to be sited on one acre. Applying the 15% total cost rule of thumb that apparently applied before the boom, that would imply that €370,000 represents 85% of the cost and that the site should therefore cost €65,000. If one was able to use the North’s building costs, then the 2500 sq foot house would cost €147,500 to build and would imply a site cost of €26,000. Valuation is by no means a precise science but a quick perusal of asking prices on DAFT.ie would indicate that average rural prices are well in excess of €65,000 per acre (there are exceptions) but there are practically no sites available at less than €26,000. This would imply that sites have some way to fall if there is to be a return to the 15% site-component-cost rule.

The above doesn’t claim precise scientific accuracy – after all, what is so special about the 15% rule of thumb and how exactly was it derived? However for those who talk about a return to pre-boom pricing the rule may have some application and if so, it would appear sites may still be overpriced. Also why exactly are our building costs so out of kilter with our neighbours up North?

UPDATE: 15th May, 2010, The Construction Industry Federation is reported by the Independent to be seeking a 20% reduction in certain categories of wages for those employed in the construction industry. The article says “It [CIF] will also claim it cannot compete with contractors in the North who are undercutting members legally obliged to pay the set rates.” With rebuilding rates of upto €177 psf in the State compared with €71 psf in the North, you can see why CIF might be taking the position they have. UPDATE: 2nd July, 2010. The Labour Court has issued its opinion that construction wage rates should be cut by 7.5% and the matter will now be considered by the unions. Meanwhile with sterling appreciating against the euro, the difference between North and the Republic has narrowed slightly but building rates in the Republic would appear to be continuing close to double the level of the North.

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NAMA Act to be amended

The Irish Times reports today that the Department of Finance last night stated that it, the Department, would be obliged to amend the NAMA Act to reflect that part of the EU Decision which disallowed NAMA obtaining information from the Revenue [Irish Tax Authority] on NAMA borrowers. The EU were concerned that NAMA would obtain a competitive advantage over other borrowers, something some would argue it already has in its powers to appoint receivers and operationally,  in rolling over debt.

So no great consequences from the amendment as it merely confirms legislatively what the EU has decided.

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