Mitchell McDermott InfoCards 2023 –
Key Insights

Mitchell McDermott InfoCards 2023– The key points;

– New report shows construction costs of apartment construction rose by 9.6% in 2022

– This equates to a rise of between €21K to €25K per 2-bed apartment

– The total development cost of such a mid-range suburban 2-bed apartment is now believed to be in excess of €460K

– Construction inflation for commercial offices rose by 12% but is expected to moderate to between 5% and 7% in 2023

– There was a 79% drop in the number of judicial reviews taken against Strategic Housing Developments last year

– But due to a logjam at An Bord Pleanála, 59% of 2022 Strategic Housing Development applications have yet to be decided upon

– This means the future of 29,000 housing units has been stalled

– Mitchell McDermott is calling for planners to be drafted in to clear backlog

– Between 2018 and 2022 a further 31,000 units were subjected to judicial reviews, 10,727 have been quashed and 17,805 are still awaiting a decision from the courts

– In addition, 28,000 units with planning permission have not commenced – half of which are due to viability issues

The construction costs of a two-bed mid-range apartment increased by 9.6% or between €21,000 to €25,000 last year according to a new report.

The report by leading consultants Mitchell McDermott found that the hard costs of building a two-bed, medium rise suburban apartment is now over €240,000.

The main contributors to the increase are mechanical and electrical services, up 18%, concrete up 27%, brickwork, up 39% and reinforcement steel, up 17%.

The €240,000 figure excludes indirect costs, parking, siteworks, margin and VAT. If those are included the total cost of delivering the apartment is in the region of €460,000; the sales price would have to equal or exceed this.

After a rollercoaster of a year general construction inflation increased by 12% in 2022 but is expected to moderate to between 5% and 7% in 2023.

The reason apartment cost inflation is lower than general inflation is due to the fact that the facades of offices are made up of expensive materials such as metals, glass, steel and aluminium and these products were more exposed to price increases.

Paul Mitchell, one of the authors of the report said that while 2022 was a year of two halves there are some signs we may be coming to the end of the current inflationary cycle.

“Construction inflation was on the rise in the early months of 2022 but really began to take off following Russia’s invasion of Ukraine, mainly due to the dramatic rise in materials such as steel other energy-intensive materials such as aluminium and brick. Material prices began to moderate in Q3 and encouragingly plateaued in Q4. For apartment cost inflation the figure for H1 was 6.8%, while in H2 it was 2.8%. So, we are trending in the right direction.”

“Although the number of people employed in construction increased by 25,000 in 2022 to 171,000, we will need another 20-30,000 in the short-term if we are to push inflation lower while increasing apartment output. Given Ireland’s low unemployment rates and the departure of many workers to their home countries post covid this will be a real challenge.”

Planning

According to the report there was a 79% drop in the number of judicial reviews (JRs) taken against Strategic Housing Developments – a fast-track planning process for schemes of 100 apartments or houses. This was even though 2021 saw the highest number of SHDs ever submitted in advance of the scheme being phased out in place of a new Large-Scale Residential Development scheme.

Paul Mitchell says they discovered the reduction was due in large measure to a massive drop off in the number of decisions being made by An Bord Pleanála on SHDs.

“Our analysis of SHD applications in 2022 found that while An Bord Pleanála had granted permission for 26% of applications or almost 13,000 units, it has yet to decide on 59% of submissions made to them – a total of 28,786 units. Everyone knows the Bord has had its issues this year but to have so many units delayed amid a housing crisis is unacceptable. You would imagine this backlog could easily be addressed by drafting in additional temporary resources from private practice here or from the UK and we believe this should be done straightaway.”

“Delays due to judicial reviews, and spiralling construction inflation have all contributed to the dramatic drop off in commencements we are seeing. The fact institutional investors have begun moving away from property investment as interest rates continue to rise has created a very challenging environment and one in which the Government will clearly struggle to hit their Housing for All targets of 33,000 units per annum.”

“However, we believe the real need is closer to 50,000 units a year and in order to scale up supply the priority must be to put a functioning planning system in place. An average apartment block of 150 units can take four years from site purchase to delivery of the first unit. This excludes JR’s and planning delays. While there was a major fall in the number of JRs last year, our analysis shows a total of 31,125 units in SHDs which received planning permission have been subjected to judicial reviews over the past five years. Just 10% or so have gone ahead, 10,727 units were quashed, while 17,805 are still awaiting a decision from the courts – a total of 28,532 units.”

SHD’s Not Commenced

A section of the report focused on tracking the number of SHDs which received planning permission between 2018 and 2022 but have not yet commenced.

It found that of the 103,057 SHD units which received planning during this period, 28,755 or 28% have not yet commenced.

Paul Mitchell said that while some commentary had suggested these units were not being commenced due to land hoarding, their findings suggested a different narrative.

“Our analysis found the issue surrounding non-commencements is not clear-cut but viability features front and centre. Thirty-three per cent of these developments related to regional apartments which are simply not viable. Another 17% haven’t proceeded due to viability challenges. In 17% of cases the site was sold while in a further 10% of cases permission had only recently been granted.”

“Affordable finance rates and a guaranteed buyer or buyers are a pre-requisite to any developer starting an apartment development. If these elements are not in place, supply will not be forthcoming.”

“With regard to SHDs, we have a situation where 28,786 units have been stalled because An Bord Pleanála is yet to decide on them, 28,532 units have been subjected to judicial reviews over the last five years and a further 28,755 units with planning permission have not commenced due in the main to viability issues. That’s just over 86,000 units in total or nearly three years’ worth of current supply, stalled, under review by the courts or not commencing due to viability challenges. That really underlines the scale of the housing crisis and the urgent need to address shortcomings in our planning system” Mr Mitchell concluded.