THE FRIDAY INTERVIEW:Michael O'Flynn, O'Flynn Construction
MICHAEL O’FLYNN is a reluctant interviewee. One of the State’s biggest property developers, he is also one of the top-10 borrowers whose loans have been the first to move into the National Asset Management Agency (Nama). But he feels he needs to put his head above the parapet.
O’Flynn concedes that developers share some of the blame for the economic meltdown but argues vehemently that the State still needs a functioning development sector.
He refuses to discuss the financial situation surrounding O’Flynn Construction, one of the largest development firms outside Dublin – if not the largest – or the fact that he is on Nama’s top-10 list. As an unlimited company, O’Flynn Construction does not have to file accounts or disclose financial information publicly.
Despite preferring to operate his firm in private, O’Flynn has stepped forward to represent fellow developers for the Construction Industry Federation group that has held ongoing discussions with Nama.
“We [developers] were one of many components that have to take responsibility for what has happened. The reality is that the environment was such that we didn’t have the control and the regulations that were necessary to stop the madness,” he says.
There was too much credit around and too little equity, he concedes, and “far too many people involved in the business who didn’t bring any skill sets to the table”.
He points out that construction and property grew to account for 24 per cent of gross domestic product (GDP), with housing accounting for more than half of that – 13 per cent – and that many parties were swept up in the property wave.
“Every time a house went up, land went up. Our raw material was going up and we were chasing our tail really; if the first fundamental of business always was to sustain the business, you kept going with it when most people should have stopped, including the banks,” he says. “But people tried to make things sustainable even when they were not. That is a natural business instinct. The overall scale and the madness got to a level that nobody would call stop.”
O’Flynn recalls being concerned about where prices were going in discussions with his banks at the peak of the boom: he was worried “that we were pricing ourselves out of business” and about “the level of borrowing and what would happen if interest rates changed”.
“It is not that the questions weren’t asked,” he says.
He believes many parties are to blame for not calling an end to it. “It was impossible for any one entity to resolve anything and I think that is where the thing fell down.”
The Corkman believes too many people with little or no expertise in development decided to get into the game. He describes them as “Saturday-night property developers – people who met on a Saturday night and decided they’d become property developers”.
“I could not understand the level of borrowings that people could get on property without having any skill sets in terms of planning, design, project management or building other than just financial skill sets to actually get the money,” he says. “I often described it as getting money to buy a big bulldozer but not knowing how to start it up or where the ignition key is.”
Many of these “part-timers” made a lot of money because they operated in a rising market, not because they had business plans.
“Even those with the best skill sets are dealing with a very difficult situation now because of the collapse in value and because there is no market,” he says.
About 50 per cent of O’Flynn’s business is in property investment rather than development. Half of all his business is outside Ireland.
“Nobody in the property industry in Ireland has got it all right. The only person who has got it right is the person who left town three years ago. I don’t know anyone of any scale who has left town three years ago,” he says.
O’Flynn says Anglo Irish Bank, now nationalised, and Bank of Ireland are his main banks, along with AIB and Irish Nationwide Building Society to a lesser degree, all of which are participating in Nama. He has also been financed by Bank of Scotland (Ireland).
Nama will have “a full picture” on all the borrowers’ loans rather than looking at individual projects as the banks had operated, he says.
O’Flynn ran his firm through one structure and avoided relying on personal guarantees to secure loans – a feature that has created severe problems for many of his peers. “I have sympathy for an awful lot of people who gave personal guarantees because they understood them to be a personal commitment as distinct from a financial commitment. It became part of a way of operating that quite frankly didn’t make any sense in the long term.”
O’Flynn admits that, like many developers, he made mistakes. “Of course I have properties coming out in the last few years that, with the benefit of hindsight, I would be better off without,” he says. “People don’t seem to understand that from the day you buy the site to the day you produce product [it] could be anywhere between three and seven years, so it is easy to be an expert looking back after five years.”
O’Flynn set up his firm in 1978 as a small housebuilder. For 20 years, he could not build offices in Cork as the company could not make enough of a return, he says, until the advent of office parks which allowed to build more cheaply with flexible planning.
“That created an awful lot of investment that wouldn’t have happened. Levels increased sufficiently for development and investment to take place in the city centres.”
One of O’Flynn’s landmark buildings is the Elysian Tower, a high-end apartment block in Cork city which, at 17 storeys and 71m (233ft), is Ireland’s tallest building. He told his architects he did not want it to be the tallest in the State, but other projects that would have been higher have been shelved. Sales are slow and many of the apartments are rented. “It is a fantastic building and location but there is no market.”
O’Flynn says construction and property activity has fallen below 6 per cent of GDP but should normalise around 12 per cent for it to be “a functioning market”.
“You have to have a market where people can construct and make some development profit. If you cannot make a development profit, you won’t get funding and if you don’t get funding, you will have a dormant market.”
O’Flynn says Nama will succeed if there is a functioning market that provides new finance.
“Finance is the lifeblood or raw material of our industry – without it we cannot operate,” he says. “Nobody is looking for the heights it went to. Those of us who have been in it for a long time knew the heights were unsustainable.”
O’Flynn points to a joint-venture deal he has agreed with US private-equity firm Westbrook Partners on a £50 million (€36.6 million) 435-bed student accommodation building near Wembley Stadium in London as the kind of deal that can be done despite the Nama-induced paralysis in the property market.
His firm has the site, while one-third of the equity is coming from Westbrook to finance construction and to secure loans for the other two-thirds from UK lender Royal Bank of Scotland (RBS). Anglo Irish Bank had provided the loan to purchase the property but that loan was refinanced with RBS to kickstart the project.
“In the pre-Nama vacuum, banks weren’t going to allow people to invest in anything new so you have two options: do nothing or find another way of doing it,” says O’Flynn. “There is no one anticipating Nama to be approving any development of any scale anywhere for the foreseeable future other than consolidating what is there, figuring out what is best for the country.”
O’Flynn believes Ireland needs to create a “sophisticated” property market if it is to be an industry that allows people to build anew and sell or lease that property. Contrary to public perception, he argues that there will not be an oversupply in certain areas of property for long and that developers need to plan now for future foreign direct investment.
It is wrongly assumed that developers are only focused on housing, he says. O’Flynn is responding to an enquiry seeking 100,000sq ft of space in Cork. There are only two sites in the city that can accommodate this, one of which he owns; if the company cannot get a site, it will go to the UK.
“We can’t go back to stale product and expect that the new world will come and invest, and keep investing,” he says.
The State is export-focused and needs to attract investment, he adds, and a working development sector is a necessary part of this.
“Ireland has to decide, if it is going to continue as the economy we have got a name for, that we have to correct the mistakes but make sure we don’t throw the baby out with the bathwater,” he says. “We are still looking back and there are a lot of answers to be given . . . Before the crisis we didn’t plan for the future and that was wrong but it is also wrong if we don’t plan for the future now.”
ON THE RECORD
Name: Michael O'Flynn
Position: Managing director of O'Flynn Construction
Age: 52
Family: Married with four children
Hobbies: GAA, golf, racing and rugby
Something you might expect: He built Ireland's tallest building, the Elysian Tower in Cork.
Something that might surprise: His horse, China Rock, came fourth in a race at Cheltenham last month.
