Building 50,000 homes a year will require €20 billion in development finance annually, according to the Department of Finance. In a new report assessing the “funding landscape” for residential development, the department calculated that the 29,751 housing units completed in 2022 required development funding, both public and private, of about €11.4 billion.
This would have to almost double to achieve the enhanced 50,000 units a year target, which is expected to be adopted as the national target later this year.
To meet this level of output, the sector would require funding of €20.4 billion a year, with the majority of that – €16.9 billion – coming from private resources, the department said.
It noted that the share of public funding – €3.5 billion – was bigger under the enhanced target because of “the increased costs in funding apartment development”.
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The department’s report, which was informed by various stakeholders including lenders, developers, investors, approved housing bodies and local authorities, concluded that the recent rise in interest rates (and funding costs) was having only a “marginal impact” on viability.
It did note, however, that finance “remains a challenge” for smaller developers, who are often reliant on securing private equity on a project-by-project basis. Nonetheless, there was strong investor appetite, particularly for the social and affordable segment of the market because of the State’s involvement, the report said.
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The biggest stumbling block to future housing development was the uncertainty around planning, it said. A six-month planning delay can reduce a projected 10 per cent return on a development project to 8 per cent while a 12-month delay can reduce the return to 6 per cent.
The Government is hoping the incoming Planning Bill will speed up decision-making and de-risk the process for developers.
Another challenge highlighted by stakeholders was the service infrastructure required to bring land to the development phase. “Lenders generally do not have the appetite to fund land without planning permission given the uncertainty around the timelines for the planning process and the risk of judicial review and de-zoning of land,” it said.
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Stakeholders also noted that there appeared to be a “two-tier land market” operating. “There is heightened competition for land which has planning permission, and consequently there is no resetting of land prices in this segment,” the report said, noting there was very little appetite to purchase or fund land that does not have planning principally because of the risks attached to the planning process here.
The State’s involvement in forward-funding arrangements, whereby developers are drip-fed finance on completion of milestones, was also highlighted as a potential risk for the State. In the event of projects running over cost or being held up, “the State may be required to step into an uncompleted site and engage another developer to complete the development”.
The report also noted that, with the rise in interest rates, institutional funding for build-to-rent apartment development had dried up considerably with “the State increasingly seen as the predominant supporter of apartment delivery in the current market”.
While viability initiatives such as the Government’s Croí Cónaithe scheme, which provides grants to resurrect derelict or vacant properties, were positive, some stakeholders deemed them difficult to access and not available to all development types.
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