Regional Analysis 2018 Ireland

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* Ireland Market Review - section updated Sept 2018

Derry Scully, Group President at Linesight, reviews the Irish construction industry performance in 2018 so far, and looks forward to what we can expect throughout the remainder of 2018 and beyond.  

Overview

The Irish economy is forecast to continue to grow strongly for the remainder of 2018 and into 2019. The ESRI recently updated its prediction for GDP growth to 8.9% in 2018, followed by 4.5% in 2019. This prediction is informed by stronger-than-expected domestic consumer sentiment, as well as underlying trends in taxation receipts, and is based upon the assumption that a Brexit deal will be in place by March 2019. 

At these rates, Ireland will have the fastest growing economy in the EU, with growth rates at almost twice the Eurozone average.
The economy is approaching full employment with unemployment rates expected to decline to 5.6% in 2018 and 5.0% in 2019. In August, the CSO published statistics showing that the total number of people employed in Ireland reached over 2.25 million in the second quarter of 2018. This is a 3.4% increase from the same quarter in 2017 and represents the highest total ever recorded.
Against this background, it is not surprising that construction is booming also, with most sectors showing significant growth. CSO indices published in June, with some caveats, show that the volume of output in building and construction increased by 7.4% in the first quarter of 2018 when compared with the preceding period. This reflects increases of 5.6%, 5.5% and 1.1% in the volume of residential building work, non-residential building work and civil engineering work respectively.

The economy is reaching almost full employment with unemployment rates expected to decline to 5.6% in 2018 and 5.0% in 2019.

At the beginning of 2018, Linesight predicted that construction output would reach €20.1 billion this year. It now seems likely that this figure will be closer to €21 billion. This represents a growth of almost 64% in the last three years. However, even with these impressive growth rates, the output in 2018 will still only be 55% of the 2007 peak output of €38 billion, albeit it that this was unsustainably high. It will also lag significantly behind the recognised European sustainable level of 10% to 12% of GDP.
Employment in construction is also growing rapidly. The CSO Labour Force Survey published in August 2018 showed direct employment in construction was 137,400, an increase of 25,000 or 22% in two years since the corresponding period in 2016. When indirect jobs are added, the increase is significantly greater.

Sectors

All sectors of the Irish construction industry are contributing to the recovery in output, with the private sector recovery initially led by new commercial office space and office fit-outs in the Greater Dublin Area (GDA). These are continuing, and there was an impressive take-up of over 160,000 sq.m. of office space in the first half of 2018. The recovery in this and other sectors is now spreading to Cork and other major urban centres, but is predominately still concentrated in the GDA.  In August 2018 the new draft guidelines on Urban Development and Building Heights were published, and these will undoubtedly influence future commercial development.
Projects in the Hospitality and Retail sectors are also increasing. Visitor numbers were up 6.7% in the first half of 2018 and 5,000 hotel beds are due to be delivered in the coming years. Irish retail trends of footfall and consumer sentiment are bucking the European trends and leading to increased investment. In the industrial sector, the IDA continues to attract multinational companies to invest in Ireland, particularly in the Data Centre and Life Sciences sectors. In its update for the third quarter of 2018, the IDA reports that FDI companies now directly employ over 210,000 people, representing 10.2% of total Irish employment, 58% of which is outside of Dublin.
In the public sector, Budget 2018 provided for an average increase of 17.4% for the public capital expenditure programme this year, with the provision for housing rising by over 62%. Earlier in the year, the Government also published Project Ireland 2040, which includes the new National Development Plan 2018 - 2027. This provides for a €116 billion plan to upgrade State infrastructure, in line with a population increase of approximately one million people over the next ten years. 

Project Ireland 2040 estimates that 550,000 homes will be required over the next 20 years and the National Development Plan commits €11.6 billion to provide 112,000 new social homes by 2027.

Public capital expenditure is planned to rise from €4.5 billion in 2017 to €5.8 billion in 2018, with further increases to €7.3 and €7.9 billion in 2019 and 2020 respectively. The plan prioritises expenditure on education, housing, roads and hospitals. Amongst the projects included in the plan are new motorways, a second runway for Dublin airport, a metro link from Swords to Sandyford with a stop at Dublin airport, a new university for the South-East and €10.9 billion invested in healthcare.
Residential construction has traditionally represented a major component of the overall Irish construction industry. In recent years, there has been ongoing concern that the annual number of residential units constructed was overstated, as it was based on ESB connections. However, the CSO has now published a new data series that seeks to address this problem. This shows new dwelling completions (which exclude Purpose-Built Student Accommodation (PBSA)) increasing from a low of 4,575 units in 2013 to 14,435 last year. The number of new dwellings completed for the first half of 2018 was an encouraging 7,909, which is 30% more than were built in the same period of 2017. However, this level of output is still well below the required levels. 
Project Ireland 2040 estimates that 550,000 homes will be required over the next 20 years and the National Development Plan commits €11.6 billion to provide 112,000 new social homes by 2027. Private sector housing output is steadily increasing, but significantly more output is needed to cater for demand and to address the housing crisis, particularly in Dublin and our major cities. The build-to-rent (BTR) provisions and growing numbers of PBSA units will help to address these shortages, but demand significantly exceeds supply also in these sectors, as evidenced by recent Linesight research.

Challenges

Although output of the Irish construction industry has risen significantly in recent years, there are a number of challenges and risks to be overcome. The most significant domestic concern is the skills shortage, which arose as construction employment fell to a quarter of its peak level. This skills shortage is affecting main contractors, specialist sub-contractors, as well as the design professions, all of whom are struggling with recruitment difficulties. Training within the industry is ramping up again, with greater numbers of apprentices and school leavers entering third-level construction-related courses, but these will take a number of years to come on-stream.
Another major domestic concern is increasing tender levels, with construction inflation levels running well ahead of general inflation rates. This is fuelled by increasing demand, pressure on wage rates, increases in material prices and regulatory changes. Following a massive fall of 33%, construction prices are now expected to equal 2007 boom-time prices during 2019.
External influences could also adversely impact the recovery of the industry in Ireland. The impact of Brexit has been relatively benign to date, with some positive impacts as international firms chose to relocate to Ireland. However, the general uncertainty about Brexit is bad for confidence levels and this may impact on the overall economic recovery. The fall in the value of sterling is also having negative implications. In the USA, recent taxation changes and the imposition of trade tariffs under the Trump administration are also causing uncertainty. These have resulted in some major corporations repatriating funds and others slowing their investment decisions in Ireland and other locations abroad.

Contributors: Derry Scully, Willie Aherne, Niall Doran, Graham McNeary, Joey Sommerville