(1) Why are construction costs in the Republic of Ireland twice those in Northern Ireland?
(2) Why are prime rents in Belfast one half of those in prime Dublin?
(3) Why has residential property dropped by more from peak values in Northern Ireland than in the Republic?
If Irelandis serious about regaining its competitive edge, perhaps one of the first steps needed is to make the National Competitiveness Council (NCC) more competitive. On Thursday (June 23rd, 2011), it produced its annual “Cost of Doing Business in Ireland” 2011 competitiveness survey using figures, mostly from….. 2009. So if you want to read an historical text, you might get some satisfaction from the NCC’s annual report. If you want to know about what has been generally happening in the past 18 months, look elsewhere. This entry examines what the report had to say about property.
But first, turning to the three questions at the opening. The Society of Chartered Surveyors in Ireland annually publishes rebuilding costs in the Republic, their latest survey is analysed here. In Northern Ireland the Association of British Insurers (ABI) /RICS Building Cost Information Service has a calculator (free registration required) which calculates rebuilding costs. In the Republic rebuilding costs this year vary between €119-169 psf; in Northern Ireland, as of this morning the standard cost of rebuilding a 1,000 sq ft 3-bed semi-detached house is GBP 69,000, that is GBP 69 psf or at current exchange rates of GBP 1 = €1.1252, €77.64 psf. So why does construction cost one price in Dundalk in the Republic, yet in Newry, 23kms away it costs 50% less? Wages, and in particular the wages set out in the Registered Employment Agreements (REAs) might be partly to blame but if you’re a building company in the Republic you pay 12.5% corporation tax and 26% in the North, so should high wages and low corporation tax not cancel each other?
Secondly, according to its most recent annual outlook, property powerhouse CB Richard Ellis reports that prime office space rents for €15 psf inBelfast and €30 psf inDublin. Okay Belfast is still by some standards a regional backwater without the financial services or technology hubs that exist in Dublin, scenes of savagery in the Short Strand this week will not help the city’s image and the corporate tax rate in the UK is still 26% and the betting on here is that Northern Ireland will find it difficult to financially justify lowering that rate on a regional basis because of the accompanying cut in Westminster funding that under the EU Azores principle must accompany the setting of regional differential tax rates. Northern Ireland is also in the sterling area and international companies prefer the stability (!, yes even after this week’s events in Greece) and lower currency risks of being in the bigger currency. But still, that our costs are twice those of Belfast?
As regards the third point we have really beaten ourselves up in the Republic over the collapse in the property market. We lost the run of ourselves, we had easy money stuffed down our throats to buy houses, planning authorities were greedy and incompetent, the financial regulatory system let us down, government was venal and hubristic, the media changed perceptions with the sexy portrayal of property, prices spiraled out of control ending up costing more than eight times the average wage, we were building half the number of houses each year of the UK which has 15 times the population, ghost estates in the middle of no-where, the ECB taking its eye off the ball….. Right, so why is it that property prices in Northern Ireland are down 44% from peak whilst in the Republic they’re down by just 40.8%?
In truth the report by the NCC does tangentially address some of the above issues, but what it fails to do is to explicitly expose the extent of the anti-competitive practices in the Republic. It does refer, softly, to the following:
(1) The creation of residential and commercial property registers to foster price discovery which may lead to a better functioning marketplace
(2) The abolition of upward only rent review clauses which mean that for some commercial tenants in Ireland, they are paying rents appropriate to the boom.
(3) The examination of Joint Labour Committee agreements (JLCs) and REAs to foster a better functioning labour market
(4) Reform of personal bankruptcy arrangements
Property costs are dealt with from page 42 of the NCC’s report. It might be of interest that there is a suggestion that the normal vacancy rate in Dublin is now 15%, up from 7% previously and that there is an imminent shortage of large-scale prime property.
NAMA Wine Lake 
I’d like to add to this – why is average rent on residential property equivalent to 45% of average take home pay? Rents have only fallen in the upper tranches of properties, barely at all in the lower end.
Agreed
@Laura/Mark, I suppose relatively high levels of Rent Assistance might be partly to blame. Here are the latest levels and there is much anecdotal evidence that these allowances are distorting the market
http://www.welfare.ie/EN/Schemes/SupplementaryWelfareAllowance/Pages/RentSupplement.aspx
Very interesting post which suggests that property prices are a long, long way from the bottom. Maybe, someone could drill down into the NI and ROI building costs to identify the differences for materials, supervsion, labour, plant hire, fees etc.
@Brian, “Maybe, someone could drill down” Someone like a competition council, maybe a national one!
The other question is why commercial property owners are prepared to leave empty buildings with zero income rather than accept reduced rents? They can only do this if they can afford to, or if not acting this way would upset the cartel by enabling a general price fall? Still it should not be worthwhile to be able to indulge a rate of zero. So why have vacancies climbed faster than rents falling?
Don’t comparisons with NI have to start with the fact the UK debased its currency by 25%. Good neighbours!
@SG, fair point but when a country’s currency devalues, that makes their exports more attractive to countries with stronger currencies. So how many Northern Irish building firms have been engaged on work here in the Republic? Because that should have been a natural consequence of devaluation. And if they did devalue and construction materials became cheaper then presumably we would have started imports from Northern Ireland; where’s the evidence of that?
I think there may be less of a problem than you think. The question is whether the SCS figures are correct. I am reliably informed that buildings costs are about €60-70 per square foot to first fix.
In Dublin, it costs €125,000 to build a standard 1,000 sq. ft. 3 bedroom semi detached home. That includes development, siteworks, fees and local authority contributions. It excludes any offsite costs, VAT, land, overheads and profit.
Brian’s point about drilling down in order to identify the anomalies is an excellent one and something that I would have done a few years ago out of pure curiosity, but today…. I couldn’t be bothered. Two parish pump entities, one rowdy the other supine, both in different ways living off their neighbours.
@ Laura,
The cost of providing a residential property is so high that it is a struggle to make a profit. The revenue have a IT 70 form which explains various costs which can be included and not included.
For example, buy a two bed apartment for 200K in South Dublin. Here would be some of the costs.
Insurance 350,
Block management fee = 1200,
Interest on 200K at 5% = 10,000, but only 75% of this cost can be offset against profit for taxation purposes.
Capital repayments = The money that you pay back to reduce the loan, this cannot be used in profit / loss calculations.
NPPR fee = 200, again this cannot be subtracted from your profit, and may be increased to 500 / year in the next budget.
PRTB Fee = 70E per tennant,
In addition there are high social costs, damage by other tennants to the communial areas, i.e. elevator, underground car park, damage to carpets, windows. This would be reflected in the management charge.
Furniture / fabric maintenance of the apartment, allowed 15% of this cost over a certain number of years, I think 6, thereafter dropping to 10% for the next 4,
In addition there is your own time which you have to spend maintaining the property, dealing with tennants, sorting out problems, finding new clients etc.
So when you sum it all up, I don’t believe it makes a good business plan. Landlords are operating in the realm of taxation on a loss, more and more costs to the landlord are being introduced / increased which cannot be subtracted against income for taxation purposes.
The only real gain might be in capital appreciation of the property in the long term, but this is looking very unlikely for a number of years to come, perhaps 5 or 7. And if you do buy low now, and sell high in 15 years time you will be liable for Capital gains tax. Unless you live in it for more than 12 months prior to selling it.
There is also the part V risk factor, where if you buy in a upmarket new housing estate, the local council can put in 25% of the units as social housing. I believe the affordable aspect of Part V is no longer in use. This may have an impact on the value of your investment, depending on your perspective of course.
You would actually make more money on deposit in a savings account, and just paying dirt tax of 25% on the interest earned. Less hassle, and depending where you put your money, less risk.
@Sporthog
Good comprehensive reply. You say (correctly I’m sure) “You would actually make more money on deposit in a savings account, and just paying dirt tax of 25% on the interest earned.”
This is also true of very many other business sectors. In the past, I have done several studies of profitability in the SME sector which showed that ROCE was often quite high while profit margins were slim or non-existent. However further probing showed that the capital employed in many of the businesses was negligible (due to overdependence on trade credit, short-term loans and mininal profit reserves). In most cases the businesses were really “working for their bank”. After allowing for risk, they would have been better off running a savings account as their business.
@ Brian Flanagan,
Well ultimately in the example I gave above it would depend on the rental income, I would imagine it would be in the region of around 900 / month. Which would make 10,800 per year. Even if you got 1,000 / month that is still only 12,000 year. The numbers just don’t add up. It’s just not profitable.
Trying to find the sweetspot, where the landlord does make a profit, the tennant gets accomodation of a good standard at a reasonable rent, and the taxman takes a fair cut is not easy.
Unfortunately it appears to be the conundrum where it is more profitable not to provide a service, not just in rental property, but as you have mentioned in other areas of business.
Why take the risk? Especially with interest rates going up, our bankruptcy laws (Change for 2012?), taxation rules changing, and the risk of Part V,?
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