Ireland market 2021
Ireland market 2021
Irish economic and construction review
The first quarter of 2021 has passed, marking a full year of pandemic-induced impacts on the Irish economy and construction. Ireland is the only country across Europe with a partial lockdown of the industry. While this is disappointing, given that the 5th of April will mark 19 weeks of construction shutdowns during the pandemic, we are hopeful that a widespread roll-out of vaccines will result in a resurgence in activity for the second half of the year. Linesight Director, Stephen Ashe, discusses the 2020 performance, as well as exploring what we expect of 2021.
The impact of COVID-19 has been both far-reaching and significant, and is likely to impact the domestic economy and labour market for the foreseeable future, exacerbated by the extended lockdown of parts of the construction industry.
Final year national accounts from the Central Statistics Office put GDP growth at 3.4% for 2020, in contrast to the contraction previously anticipated, and ahead of the European Commission and Central Bank’s projections of 3% and 2.5% respectively. This relatively robust performance is being attributed to the multinational sector, and to the strength of Irish exports, particularly with regards, to pharmaceuticals, as well as computer and business services. However, it is worth noting that the quarterly performances varied, and in Q4, Ireland recorded the EU’s sharpest quarterly economic contraction, falling 5.1% during the second lockdown. Looking at the year in its totality, Ireland was the only European country in 2020 to record positive economic growth, with an average contraction of 6.8% across the EU.
Exchequer returns, published in January, anticipated a €19 billion Government budget deficit for 2020, compared to the €1.85 billion surplus recorded in 2019, with a reduced tax take and COVID-related packages the primary reasons for this. However, this would still place Ireland as having the smallest budget deficit in the Eurozone for the year. In terms of the tax take for 2020, this was down 3.6%, with corporation tax the only headline category in which an increase was recorded. Excluding recipients of the Pandemic Unemployment Payment (PUP), unemployment remained at a 5.8% seasonally adjusted rate in January 2021, as it was in December, marking a 0.7% increase year-on-year. This December figure is slightly below the 7.5% recorded for the EU for the same period.
It has been a challenging year for Irish construction, with COVID containment measures bringing the industry to a halt in the early stages of the pandemic, and unfortunately, this has been the case again at the start of 2021. Following two growth months to round out 2020, the Ulster Bank Purchasing Managers’ Index dropped from 52.3 to 21.2 in January 2021, with under 50 denoting contraction. This marked the largest decline in activity since April and May 2020, with the first lockdown having instigated a downturn to 4.5 and 19.9 respectively. February 2021 saw a modest improvement at 27.0.
The disproportionate extended lockdown for parts of construction is indeed very disappointing and questionable. As noted by the Construction Industry Federation (CIF), HSE monitoring of the construction industry has consistently shown negligible levels of COVID-19 cases associated with the construction industry. The uncertainty of continued site lockdowns is impacting Ireland’s attractiveness at an FDI level, with each week of closures costing approximately €200 million in construction output. This is unsustainable as each week goes on. A fully functioning construction sector is essential to ensure Ireland remains a competitive place to do business, and the continued lockdown could lead to reputational damage at an international level.
The value of construction output was €24.7 billion in 2020, which is a reduction of 7.3%, or almost €2 billion, when compared with 2019. Assuming the industry reopens on the 5th April, it is estimated that full output for the year will be in the region of €21.6 billion – a reduction of €3 billion on 2020 and €5 billion on 2019. These declines underscore the impact of the pandemic on the construction industry, particularly when you consider that the industry was on an upward trajectory in 2019. However, it is clear to us that demand has not been dampened, but rather, activity has been delayed.
In terms of industry employment, following the stark decline from 148,000 employed in construction in Q1 2020 to 129,000 in Q2, there was somewhat of a recovery to 137,000 in Q3, before a slight dip again in Q4 to 136,400. Looking to the present time and a more current indicator, the beginning of March saw almost 50% of all construction workers in receipt of the Pandemic Unemployment Payment (PUP) (59,867) – this equates to a weekly cost in excess of €20 million. Another key issue associated with the extended lockdown is the ability to retain and attract foreign workers who have returned home. These key workers are paramount to the industry’s success, in terms of its ability to meet demand.
Sectors deemed non-essential, such as private housing and commercial property have been severely impacted together with the sectors that rely on tourism and trade, such as hotels and retail. Other key sectors, such as data centres, life sciences, high-tech and logistics, continue to accelerate at pace. Demand is booming in these sectors and is anticipated to continue for the coming year.
Thanks to a late resurgence in Q3 and Q4, there were 20,676 residential completions in 2020. This is a reduction of 411 on 2019 levels and the residential sector recorded the weakest sectoral performance, with production contracting by 19.2% in 2020.
The projection for 2021 residential completions currently stands at 16,000 units, representing an 8,000-unit reduction on pre-lockdown projections. This is nowhere near the numbers needed to tackle the housing crisis, with the Central Bank estimating that 34,000 new homes must be built every year up to 2030 to meet projected demand. Institutional multifamily investment continues to be attractive, with a considerable proportion of stock subject to forward sale. Again, the continued lockdown in construction may impact this sector if it continues.
Hospitality and retail
Hospitality and retail continue to be the main casualties of the pandemic, but we are starting to see interest in this space supported by pricing discounts. Those renegotiating existing leases are seeing rental reductions of up to 20%, and new lettings can command more substantial discounts in some locations. New retail developments are understandably slow to start until confidence is restored in the sector. Grocery and convenience retailers continue to trade well throughout the pandemic.
The reality within the hospitality sector is that that until the vaccination programme has been rolled out, lockdown restrictions have eased and international travel resumes once again, conditions will remain challenging. Occupancy rates were down by 56.7% in Dublin in January year-on-year, and 36.5% nationwide (excluding Dublin).
While significant commercial office developments are proceeding on-site, the uncertainty around the shape of the future office workplace will slow demand and, although transactional activity was down last year, a strong Q4 2020 softened the impact. Some occupiers are opting to extend leases until there is further certainty, although it is worth noting that given the relative strength of the market pre-pandemic and the fact that the majority of development was not speculative, the sector was well-placed to withstand the pressure.
Healthcare was one of the sectors that witnessed limited lockdown. It is a sector that continues to perform well in both public and private investment.
Industrial and logistics
Industrial and logistics was a sector that enjoyed buoyancy in 2020 in Ireland, as the expedited shift towards e-commerce and Brexit boosted demand, and vacancy rates were reported to have hit lows of 2% over the year. This is due to continue into 2021.
A recent report by Host in Ireland estimated that the construction spend on new data centres in Ireland will amount to €1.5 billion in 2021. In total, the pipeline of new data centres will amount to circa. €6.7 billion (construction value) between 2021 and 2025. This sector has been left largely unscathed by the pandemic and remains a key sector for Linesight, both in Ireland and globally.
Challenges and opportunities
Construction lockdown duration
There is an acute sense of frustration in the industry around the duration of the construction lockdown. While it is acknowledged that the Government needed to take action and make difficult decisions to curb the spread of the virus, the distinct lack of communication, clarity or certainty provided is having an extremely negative impact on all stakeholders involved, from funders to sub-contractors. As noted by the CIF, the industry is an international exemplar of safety, and functions well under COVID-19 restrictions. Since January 4th, it has been operating at approximate 40% capacity with minimal cases on sites. Recent data from Construction Information Services, the CIF’s research partner, found that approximately 50% of projects over €1 million are currently operational, suggesting about 40,000 workers on-site, with just 39 cases associated with construction. This indicates just how safe construction sites have been made, rendering any lockdown unnecessary and demonstrating that the CIF Standard Operating Procedures have proven to be extremely effective. In addition to the above, the criteria that permit certain construction works to continue, including public housing, but do not permit the building of private housing in the midst of a housing crisis, are highly questionable. The output loss in construction of €3 billion is expected to generate a further reduction in GDP of €2.04 billion, as well as reducing the tax take for the exchequer by €0.42 billion.
Ultimately, as confirmed by consultations with FIEC, the European Construction Industry Federation and members of Euroconstruct as part of the recent EY-DKM report on behalf of the CIF, Ireland is the only country in Europe to partially shut down construction. We implore the Government to carefully consider the lack of rationale behind this industry lockdown and open sites fully as a matter of urgency.
The results of our recent survey on the impact of Brexit on construction are outlined later in this Handbook. Supply chain issues and associated costs, certification and risk allocation of contracts is undoubtedly challenging. We are seeing significant increases in the cost of key materials such as steel, insulation and timber, largely driven by increased logistics costs and supply chain constraints. Mitigation strategies include reviewing and revising standard specifications, earlier procurement, and reviewing supply chain routes utilising non-UK land bridges from continental Europe. It is also imperative that contracts are amended with clear risk allocation.
The current Strategic Housing Development (SHD) process has been significantly hampered by a marked increase in Judicial Reviews (JRs). These Judicial Review processes are, at a minimum, delaying major residential projects, and in some cases, causing a complete cancellation. The SHD process was designed to fast-track the planning process for residential units in order to deliver much-needed housing stock.
In addition to this, the SHD process is due to expire in Q1 2022 and there are no communicated plans in place for a new arrangement as of yet. We expect SHD applications to increase in the second half of this year in the absence of certainty around the future of the SHD process.
The ‘Urban Development and Building Height Guidelines’ set out a new and updated national planning policy on building heights in relation to urban areas, elaborating on the strategic policy framework set out in ‘Project Ireland 2040’ and the ‘National Planning Framework’. These are part of a suite of integrated measures and policy shifts to break the current patterns and development trends for our cities and towns, to create more compact and integrated communities. As can be seen by recent cases in the Docklands, the actual application of these guidelines is proving to be challenging and inconsistent. This is adding to uncertainty, particularly in Strategic Development Zones.
There is a lot of misleading commentary that discusses typical residential development costs. In reality, the issue is complex, as the costs and hurdles associated with development vary hugely across different areas of our cities. These are often conveniently overlooked by some commentators when talking about housing supply challenges.
Irish Institutional Property (IIP) prepared a report in October 2020 clearly outlining the Irish housing supply and affordability challenge. Linesight assisted IIP with this report, providing cost data from over 10,000 residential units under construction or in planning.
Figures contained within this report are further reinforced by the publication of the ‘Real Cost of New Apartment Delivery’ by the Society of Chartered Surveyors Ireland in January 2021.
Affordability remains a critical issue, and solutions such as cost rental and shared equity are welcomed.
Institutional investment and Foreign Direct Investment (FDI) are cornerstones of the real estate market. As noted in a report prepared for IIP by Jim Power Economics, “Institutional investment is playing an important and valuable role in the Irish real estate market and economy, and the populist criticisms of the sector fail to understand the critical role played by the sector in enabling economic recovery and growth. The reality is that institutional investment became a feature of the Irish property market at a time when the market was in deep crisis; when domestic investment had dried up; and when development was brought to a standstill due to the restricted availability of investment capital from the banking sector due to the financial crisis”.
According to the report, international investment accounted for 72% of total investment in the Irish real estate market in 2019. This was from a near zero base in 2007. As an open economy, Ireland is heavily dependent on institutional investment and it is imperative that Government policy encourages this.
In its most recent quarterly update, the Central Bank forecast a growth rate of 3.8% for 2021. However, this figure is based on the assumption that the current extent of COVID restriction measures will not carry over into the second half of the year.
While we noted cautious optimism in our September 2020 update in terms of existing projects and new pipeline at the time, a recovery is largely dependent on the duration of the pandemic, and given the resurgence of the virus and the subsequent lockdown at the beginning of 2021, recovery is likely to be less than straightforward for the foreseeable future. However, while construction has faced a challenging and disappointing start to the year, with all non-essential works halted under the Level 5 constraints, demand is still very strong and we are hopeful of a H2 vaccine bounce. Brexit will remain a challenge to the industry at large, specifically with regards to the supply chain, and our recent market sentiment survey that features later in this publication will outline the specific concerns and thoughts on this.
In summary, we remain positive about the outlook for the industry in 2021, assuming that the second part of the year will face less COVID-related restrictions. The pandemic has altered our lives in countless ways and has also served as a catalyst for some positive impacts in terms of digitisation and innovation, which should be more widely embraced as alternative means to deliver projects as we plan for beyond 2021.
The reopening of construction in Ireland is urgent at this point, and the successful delivery of projects in the National Development Plan and Project Ireland 2040 requires the industry to be fully open for business, appropriately resourced and working efficiently, while also delivering value for money. The wider policy agenda for construction in the medium term is to improve productivity and sustainability, as well as further developing its use of technology, as outlined above, all of which can only be addressed by having a fully operational industry.