Are we looking at another construction boom in Ireland? The Sunday Business Show with Conall Ó Móráin
Conall Ó Móráin interviews me on Today FM about positive signs in the construction sector. They are there indeed, but is there a risk that it might overheat again?
Listen to the podcast here.
0:42 Conall lists several signs that the construction sector is recovering. I remind listeners how, at its peak, construction had a very unhealthy proportion of our GDP.
1:00 It’s now at a much lower percentage, but it’s still about half of the long-run average. There is a huge amount of capacity there.
1:22 The new mortgage figures are also interesting: new mortgage lending is up 71% in terms of value. No doubt about it, there is new money finding its way into the economy, but how much?
1:32 As an investor, how can you gain exposure to the property sector without buying bricks and mortar or becoming a landlord yourself?
1:46 The investment vehicle that’s the answer to the above also happens to point to serious potential. One of the three REITs in Ireland, Hibernian, could still invest up to €250 million in the Irish economy. There is a lot of demand, which means it’s an opportunity for somebody to build to answer it.
2:09 Conall is surprised that I see good tidings in the mortgage figures of all things! After all, there is a lot of anecdotal evidence that it’s immensely difficult to get a mortgage. I refer to the reported proof that there is new money coming in.
2:30 But if the mortgages are being approved, how many of them are being drawn down? And this is where the real issue is: I may be approved for a mortgage, but if I can’t find a house that is within my price range, I’m not going to draw down the money. That’s a first pain point in this recovery: the difference between mortgage lending and mortgage draw down.
3:10 Conall asks, am I saying to people they should get into the construction industry?! If your company was involved in construction or was looking to construction, then the vast majority of evidence points out that now would be a great time. It’s interesting that the Ulster Bank Construction PMI Report for June 2014 shows that delivery times for construction companies have lengthened considerably (you can also read the report here). This means they’re not able to service demand with as much speed; staff can’t be recruited fast enough, supplies can’t be imported fast enough and order books are slowly accelerating into the future.
3:58 Last time I was on the show, somebody texted in, saying recovery is only happening in Dublin. And you might say something similar about the construction sector. This recovery is focused on urban centres for two very specific reasons.
4:30 Again, this creates opportunities, even for construction companies situated in more rural areas.
5:00 There’s no doubt that there is a price frenzy in Dublin at the moment. But NAMA for example could come to our aid: they have the money, the stock and the contacts to solve what might be our biggest problem. That’s another opportunity.
5:30 Conall reminds me that we made a “holy mess” (his words!) of it the last time. How would I suggest putting a cap on it, so that we don’t run into the same madness again? What is the key indicator at which point I’d press that red button and say “Take a step back here”?
5:51 Rates of return are the tell-tale sign. If I was buying property in 2007, I might have made 2% rental yield on that. That was an absolute red flag, because I would have made more money on a savings account in the bank.
6:03 If you’re getting to the point of the 100% mortgage, that is also a red flag. I don’t think we’re anywhere near either of those two: the amount of money being lent out is nowhere near a credit bubble.
6:20 What we should be focusing on is not how much could be lent out, but what people can buy with it. The figure of the overall lending amount is not real. If you’ve seen the documentary Who’s buying Ireland, you will know that the money is coming from two interesting sources, one being cash investors.
6:58 It also comes from outside investors who want to take advantage of commercial property, an investment offering 15% return at the moment. I don’t know of any other type of investment that would lock in such a return for a number of years, as long term tenancy agreements have done in recent years.
7:23 On the other hand there’s a decline in civil engineering activity, because the capital expenditure on the part of the government has decreased.
7:33 One statistic that should be of huge interest to the banks: a key impediment for 32% of construction companies is that they haven’t sufficient access to credit.
7:55 … And the Association of Chartered Surveyors announced we could have up to 30,000 jobs in this sector in 2018. The skills shortage is yet another opportunity for recruitment and upskilling.
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