2. AECOM’s global capabilities:
Architecture
Building Engineering
Construction Services
Design + Planning
Economics
Energy
Environment
Government
Mining
Oil + Gas
Program, Cost, Consultancy
Program Management
Transportation
Water
With approximately 45,000
employees around the world,
AECOM serves clients in more
than 130 countries.
3. Contents
INTRODUCTION 1 BUSINESS INTELLIGENCE 20
Pat Gunne, Green Property
OVERVIEW 2
Bill Nowlan, W.K. Nowlan
Medium Term Outlook
Maurice Mortell, Telecity
Construction Costs & Tender Prices
Donal Murphy, Bank of Ireland
Where now for the Public Sector?
NAMA: Is the bottom line everything? GEOGRAPHIES 26
Island of Ireland
SECTOR DEVELOPMENTS 8
UK
Public
Global Markets
Commercial
Retail TECHNICAL DATA 38
Residential Indicative Building Costs
Hotels, Sports & Culture Performance Bond Checklist
Infrastructure & Industry Project Planning Checklist
Development Budget Driver
INDUSTRY DEVELOPMENTS 14
Alternative Funding Sources for the DAVIS LANGDON NEWS 44
Property Industry Promotions
Work Outs by Asset Managers Public Sector Workshop
Repair & Maintenance Examples of Recently Completed Projects
Abnormally Low Tenders
DAVIS LANGDON PEOPLE 46
4. Introduction
Paul Mitchell
Director
Head of Office – Ireland
We are delighted to welcome you as getting its just comeuppance for the Some of the ideas or concepts
to this year’s Annual Review of the fallout of the boom. We currently have mentioned above are tried and trusted
construction industry. We have included an industry that has had 50% of its mechanisms used in the delivery of
a wide range of commentary and top ten contractors become insolvent projects in other jurisdictions and
analysis on the Irish construction since 2007, some remaining contractors solve a real need in delivering critical
industry, looking at each of the sectors choosing not to bid for certain public infrastructure. We need a champion at
and recent industry developments, work due to the cost of procurement the highest levels within government
plus our colleagues give an update on and risks associated with the public who will work towards delivering a
what’s happening in the global markets. works contract (even in this market!) sustainable construction industry.
We have also included a business and ongoing sub-contractor insolvency/
intelligence section which features a liquidity issues. Consultancy practices On the brighter side we have seen the
number of interviews with prominent are experiencing similar difficulties. positive effects of the Foreign Direct
industry figures who give us their Some ideas that the Government could Investment secured by the Industrial
thoughts on their sectors and areas of consider include: Development Agency (IDA) Ireland,
expertise. etc. Also, the recent announcement
The easy wins: by National Asset Management
Whilst on a global level construction - Introduce Procurement Passports Agency (NAMA) to inject €2 billion into
output is stable, if somewhat stagnated - Review handcuffs of Circular 10/10 construction over a four year period
in the short term, our domestic - Procure projects with committed to complete construction projects
market has continued its decline funding and address the shortfall in supply
albeit at a slower rate. Our estimate - Alter award criteria to deter below of appropriate space is extremely
of construction output for 2012 is cost tenders welcome. This represents a 6% per
€7.75 billion, down 9% on last year annum (p.a.) increase in construction
compared to a reduction of 27% the More difficult but achievable: output if it is delivered. We have also
previous year. So, the good news is that - Prioritise labour intensive projects seen some of the large funds enter the
the contraction is slowing; the bad - Deliver the capital programme market with purchases such as One
news is that the market is operating - Review the Capital Works Warrington Place which is a real sign of
at a completely unsustainable level. Management Framework (CWMF) by confidence and stability.
In our overview section we show, even including partnering type contract.
with an optimistic 15% year-on-year - Bring the Real Estate Investments We hope you enjoy the read and would
growth from 2014, it could take until Trust (REIT) legislation into law like to take this opportunity to thank
2020 to reach the optimum level of all our clients and colleagues for your
output required for a proper functioning Leadership required; continued support during the year
industry. - Stimulus Package, e.g. healthcare and look forward to providing more
focused business solutions to you in the coming
In last year’s review we called for - Encourage Pension Funds into year.
leadership from the Government in market, e.g. Student Accommodation,
terms of supporting the construction Social housing Paul Mitchell
industry and acknowledging the - Promote Qualifying Investor Funds
crucial role that the construction (QIF’s) in funding property &
sector plays in the economy. We were construction programmes, e.g.
not alone in our call but apart from primary care centres
some behind-the-scene meetings and - Consider Project Bonds to deliver
various gestures, there has been little infrastructure, e.g. Broadband and Director, Head of Office – Ireland
or no action. It would appear that the Power paul.mitchell@davislangdon.com
construction sector continues to be - Engage with the Professional
viewed in the negative context of the Bodies to generate workable
property industry and somehow seen solutions
Introduction | 1
5. The Model Arts and Niland Gallery, Sligo.
(image courtesy of Paul Tierney Photography)
Consultants
Overview
6. The aftershocks of the financial
crisis continue to dominate the
framing of the Exchequer budgets
and domestic demand generally.
The last 12 months have certainly Medium Term Outlook levels which are unsustainable even in
been less “eventful” than the previous Of course what happened yesterday is the short term. We believe there is an
couple of years in terms of economic of relatively little importance compared urgent need to re-visit the strategy in
shocks and financial upheavals. The to what happens tomorrow. In this this regard and as we highlight in the
fact that we haven’t had any further regard the publication of the public following opinion piece the economy
significant banking debt added to capital expenditure plans in the annual needs an increase in investment in
the already seismic burden or had budget is always keenly awaited. social and productive infrastructure to
the need to introduce mini-budgets As has been the trend for the last provide both increased attractiveness
mid-year could be seen as a sense of number of years, the December 2011 to business and to act as a stimulus to
stability returning to the economy — if Budget included a multi-annual Public general economic growth levels which
you take the glass half full approach Capital Programme (PCP) extending out are struggling to stay out of recession
to economics. Certainly we feel that to 2016 (see Table 1). territory.
it is imperative that everyone takes
the glass half full approach, however, Unfortunately, the past experience of The construction industry has been
always remaining mindful of the such multi-annual capital programmes existing on a virtual treadmill for
baseline we are measuring against. has been their propensity to vary the last four years with the result
That baseline has been tracking very radically as opposed to their reliability that whilst we have not progressed,
low since the sheer drop experienced in terms of not changing. Of course this everyone still standing is leaner and
in 2008 and the aftershocks of the very characteristic of change could be fitter. The reality is that the race is
financial crisis continue to dominate used as precedent to instigate positive probably only half run, and with the
the framing of the Exchequer budgets change to the “programme” laid out for passing of the fiscal compact in the
and domestic demand generally. the next three years. The PCP for 2013 medium term the requirements of the
represents a further 14% reduction (in troika programme and/or the markets
In addition, as a small open economy, value terms) on that approved for 2012 will demand that public spending will
we are significantly impacted by and this would further reduce output continue to be sharply restrained. We
activity levels in foreign markets and in in the construction industry below will be reliant on a boost in Foreign
particular Europe. The last 12 months
have been plagued by the never
ending string of crisis summits at the Public Capital Programme - Direct Exchequer Capital Funding €M
European level which have further
unsettled confidence, notwithstanding 2012 2013 2014 2015 2016 2012 - 2016
the weakening of the Euro having Transport, Tourism & Sport 1,231 900 879 818 818 4,646
some positive impacts in terms of (mostly road maintenance)
making our exports more competitive
in global markets. Environment, Community 861 726 575 574 574 3,310
& Local Government
Jobs, Enterprise & Innovation 514 458 457 454 451 2,334
Education & Skills 430 415 475 475 415 2,210
Health 390 390 390 390 390 1,950
Other 509 484 477 542 605 2,617
TOTAL 3,935 3,373 3,253 3,253 3,253 17,067
TABLE 1 : MULTI-ANNUAL CAPITAL INVESTMENT FRAMEWORK 2012-2016
Overview | 3
7. Tomás Kelly
Regional Director
Medium Term Outlook
Direct Investment (FDI) and indigenous Figure 1: Construction Output Scenario Tracker
export companies, which we appear to
40,000 Optimum
be seeing the beginnings of, to mitigate
35,000 Construction Output
the reductions elsewhere in the private (Based on 12% of
sector. We expect output levels to 30,000 GNP) €’000’s
bottom out in 2013 before showing low 25,000 Construction
single digit growth in 2014 onwards. 20,000 Output €’000’s
15,000 Construction
There is a real danger of a skills Output
10,000
shortage materializing across a number (Scenario A 10%
of the key craftsmen and professional 5,000 p.a. growth) €’000’s
groups. Construction
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Output
(Scenario B 15%
“To illustrate the long path to recovery p.a. growth) €’000’s
facing the construction industry,
Figure 1 shows the sustainable level
of output for the industry (based on
TABLE 2 : Construction Output Projections (e) Estimated (f) Forecast
The Society of Chartered Surveyors
Ireland (SCSI) Report stating 12% of
Gross National Product) based on 2% Construction Output €m €m €m
GNP growth and for the purposes of
2011 2012(e) 2013(f)
the example two scenarios of 10% per
annum and 15% per annum growth CENTRAL BANK 8,822 7,862 7,426
in construction output. We know from
Tender Prices % -1.10 —
experience that the growth/decline
rates of construction output are Volume Change % -9.90 -5.50
cyclical but even with these ambitious SCSI 8,684 7,448 6,956
growth examples it would be 2020
or 2023 before the sustainable Tender Prices % — —
level would be reached. In respect Volume Change % -14.50 -6.60
of our output projections in Table 2, DAVIS LANGDON 8,500 7,755 7,827
there are inevitably downside risks
however, hopefully the recent NAMA Tender Prices % 3.00 3.00
announcement of investment of €2 Volume Change % -11.40 -2.00
billion over the next four years will go
some way to insulating against such
industry and those of other services and it didn’t seem to matter
risks. As a measure of the significance
commentarys in the industry. too much as people’s incomes were
of this NAMA announcement, if the €2
rising similarly.
billion is spread evenly over the four
Construction Costs &
years the €500 million in 2013, would
Tender Prices Needless to say the adjustment has
be equivalent to the proposed reduction
Increased competitiveness was a much been sharp and none more so than
in the Public Capital Programme.”
sought after aspiration during the later in the construction industry, however
part of the Celtic Tiger period and with in common with other sectors the
Table 2 outlines a summary of our
some justification as everyone had cost base has been less elastic than
projections for the construction
got used to paying more for goods and prices. Tender prices saw a cumulative
4 | Overview
8. National University of Ireland, Galway - New Engineering Building, Galway.
(image courtesy of Neil Warner Photography)
9. It is not only consultants and contractors that find
public projects tough going. Individuals within public
bodies have been faced with their own range of
challenges, including a moratorium on recruitment,
non-renewal of fixed term contract staff, early
retirements, re-deployments, being forced to accept
below cost tendering and decentralisation.
37.5% drop between 2007 and 2010 increase at modest levels of on average level of €3.3 billion per annum. However
inclusive whereas official statistics circa 3% p.a. in 2012 and similar to consultants and contractors it is
would indicate that costs have been modest increases in 2013, with the seen as an extremely challenging
largely static (and in some instances cautionary note that the industry may environment to do business in.
increasing) in the same period. Of experience a shortage of competition
course, labour costs have in reality in certain sectors and in particular for Some of the key reasons for this are:
dropped further through a combination high value contracts.
of salary cuts and reduced overtime 1. Cost of Procurement procedures
payments, etc. The announcement Where now for the Public and Tendering
in June 2010 and implementation in Sector?
2. Cost focus of tender process
February 2011 of the 7.5% reduction Davis Langdon, an AECOM company’s
leading to “race to the bottom”
in Registered Employment Agreement estimate of the construction industry
wage rates was indicated as a in 2012 is €7.75 billion as compared 3. Risk transfers
temporary measure to be reviewed thus to an output in 2011 of €8.5 billion.
we would expect murmurings of such The recent SCSI Construction Industry 4. Cost incurred on cancelled projects
a review to emerge in the second half report (prepared by DKM Economic 5. Resources & Skills deficit in public
of 2012 with arguments on both sides Consultants) has identified that a sector clients
(unions and employers) for upward and sustainable level of construction
downward movements respectively. output in a mature economy should be It is not only consultants and
circa 12% of GNP (or 10% of GDP). contractors that find public projects
On the materials side, the continuing tough going. Individuals within public
increasing energy costs, growing Based on GNP of €129 billion/GDP bodies have been faced with their
demand in developing countries and of €161 billion in 2011 a sustainable own range of challenges, including
weakness in the Euro will keep upward level of output would be in circa € a moratorium on recruitment, non-
pressure on imports in particular. 16 billion. This is over double the renewal of fixed term contract staff,
current projected output. So the real early retirements, re-deployments and
In summary, we would anticipate question is, in a number of years when decentralisation.
construction costs of circa +2% in 2012 (hopefully) stability and a sustainable
and +2.5% in 2013. output level returns to the market, what Whilst the number of projects has
sort of construction industry will we diminished, the workload on each
In terms of tender prices, after the have in Ireland? project has increased due to the
sharp decline referred to above, 2011 challenges of the economic climate
saw some stability return to the The current industry is characterised and the new procedures and contracts
market and we recorded an average by uncertainty, insolvency, below cost introduced through the Capital Works
3% increase. We would see this return tendering and conflict. This, combined Management Framework. These
to tender price increases more a with the massive reduction in output, procedures have been introduced with
correction of prices having overshot any has resulted in a collapse in morale in little training and are subject to change.
possible reduction in costs, rather than the industry and a wide-spread skills The introduction of the Department
the restoration of profits in 2011. drain, both from the industry and the of Finance Circular 10/10, whilst well
country. intentioned, placed another regulatory
Whilst we continue to see tenders being burden on project and procurement
submitted which could be considered The Multi Annual Capital Investment managers in the public sector.
“potentially abnormally low,” their Framework (MACIF) (see Table 1
prevalence is reducing. We would on page 3), shows a stable level of The net effect of all these issues is
anticipate tender prices to continue to spending over the next four years at a that the area of the Irish construction
6 | Overview
10. National Gallery of Ireland, Shaw Room, Dublin.
industry that one would expect to price, before embarking on funding
be the most stable is a very difficult construction projects.
place to do business in. The fear is that
dynamic and innovative players in Irish However, NAMA has played some role
construction industry will tire of the in getting projects moving, whether
challenges of public sector projects through supporting the borrowers in
and will turn their focus to emerging completing housing schemes, providing
elements of the private sector such staple finance to schemes being
as the Foreign Direct Investment (FDI) purchased by investors or completion
market or growth markets overseas. of schemes using receivers.
The potential knock-on effect of
this would be to leave public sector The previous 12 months have probably
construction projects in a place been the most productive in actual
characterised by confrontation, poor delivery of the individual business
performance and the associated plan objectives leading to a number of
challenges to successful delivery of distressed asset disposals that require
good projects. We are already seeing construction activity during their
examples of this on the ground. workout phase, albeit not amounting to
any appreciable turnover.
NAMA: Is the bottom line
everything? NAMA have approved working and
They certainly have had a busy year. development capital advances of
In last year’s annual review published €1.1 billion of which €506 million
June 2011, the focus was on completing relates to Ireland. This expenditure
the transfer of the loans. However, is being advanced through its debtor
the intervening period has seen NAMA companies, i.e. borrowers whose loans
make significant strides in the area of have been deemed eligible and have
enforcement. been transferred to the group.
In July, NAMA published a list of 847 In 2012/13 the best prospect one can 1200
properties which were in receivership hope for from NAMA in relation to what
1,169
1,119
or administration, a number which it can do for the construction industry 1000
1,093
1,040
steadily rose throughout the year to is the disposal of assets/sites that
800
887
1,169 at the end of March 2012 (see are in demand, e.g. incomplete office
847
Figure 2). blocks with ready to go end users/ 600
tenants, unfinished semi-detached,
400
NAMA have stated that it has housing schemes that are in demand,
completed its loan evaluation of etc. Obviously, the successful entry of 200
business plans covering 97% of the these schemes to market is dependent
loans on its balance sheet as at the end on the right purchase price as opposed 0
Jul 11 Aug11 Nov11 Dec11 Feb 11 Mar12
of March 2012. to any other factor. However, given the
demand for offices, for example, from
Figure 2:
So what does all this mean for the multi-nationals and the limited amount
Properties in receivership/administration
construction industry? Obviously of suitable stock in the appropriate
one of the stated objectives of NAMA areas, it is likely that this year will be
is to dispose of assets, at the right more fruitful than the last.
Overview | 7
11. The National Gallery of Ireland, Milltown Wing, Dublin.
Expert
Sector
Developments
12. Across all sectors, the key trend
has been the reduction in the
contract values of projects in
recent years.
Last year we highlighted the seismic Figure 3: Estimated Sector Breakdown of Construction Industry 2012
shift in the construction industry (SCSI/Davis Langdon Estimates)
output over the five year period from
2006 to 2011. Namely the collapse Industry (6%)
of the residential sector and the Commercial (5%)
return of the public sector civil and Other Private Non-National (2%)
general building programme to being
Education (6%)
the primary source of output. Not
Health (4%)
surprisingly then there has been a
Energy (13%)
sharp focus on movements in that
programme which we will review in our Roads (10%)
sector review. Water & Sanitary Services (8%)
Transport (3%)
Last year we also signalled the Telecommunication (2%)
emergence of encouraging signs in the Other public Non-Residential (3%)
Irish export market as well as Foreign Residential (38%)
Direct Investment (FDI) sectors, and
thankfully these early signs appear to allocation. Figure 4 illustrates the
be bearing fruit. departmental allocations and the One of the difficulties being
percentage adjustment in 2011. experienced in the first half of 2012
Across all the sectors, the key trend has been the slow progression of public
has been the reduction in the contract (For further details of Budget 2012 sector projects. There have been a
values of projects; reflecting both the Public Capital Programme please number of reasons, however, the two
decrease in tender prices in the last contact Tomás Kelly at tomas.kelly@ most prevalent relate to the area of
number of years combined with the davislangdon.com ) public procurement.
reduced scope of works being carried
out. Figure 2 illustrates the sector Figure 4 : Public Capital Programme Budget Direct Exchequer Funding 2011 & 2012
breakdown of the industry output in €m 10%
2012. 1600
0%
Public 1400
-10%
The Government announced the broad 1200
parameters of their 2012 Public Capital 1000
-20%
Programme when they published their
-30%
Infrastructure and Capital Investment 800
2012-2016 document in November 600 -40%
2011 and further detail and breakdown
400 -50%
was provided in the budget last
December. 200
-60%
0
-70%
The Multi Annual Capital Investment
Environment,
Communications,
Transport Tourism
and Sport
Community &
Local Government
Jobs, Enterprise &
Innovation
Education & Skills
Health
Agriculture , Food
& Marine
Energy & Natural
Resources
OPW
Other
Framework (MACIF) 2012 provision
showed a 16% drop on the 2011 figures Percentage change
which has meant every department Output 2011
has seen a reduction in their capital Output 2012
Sector Developments | 9
14. John O’Regan Anthony McDermott Mark Smith
Director Regional Director Associate
Public Commercial Retail
Firstly, there appeared to be a the commercial office fit-out sector From a retailers perspective, the
significant slowdown in the number of was still reasonably active in 2011. Government’s decision not to proceed
etender contract notices in 2011 and with legislation in relation to Upward
the second half in particular. Due to Activity in the commercial office sector Only Rent Reviews combined with the
the long sequence of events required is looking steady for 2012. Take up increase in the Value Added Tax (VAT)
from notice placement, procuring is down for the 1st quarter of 2012 rate has created much angst and a
consultants, obtaining statutory compared to the first quarter of 2011 viewpoint that it will be later rather
consents and advertising and tendering but this is mainly due to prolonged than sooner for the retail market as a
main contract works, any interruption negotiations, the “one off” Montreveto whole to improve.
to this cycle is likely to slow down the take up (45,000 square feet) last year
capital programme. and some businesses looking to curtail Murmurs of planning reform in relation
expansion until the economic climate to the current retail size cap to allow
The other factor has been the improves. companies considering large operating
increasing duration required in store’s such as Wal-Mart and Costco
the tender evaluation phase. This Demand for office space in Dublin is or even Tesco-Extra stores have been
has arisen for a number of reasons actually up 70% for the first quarter of aired in documents about Ireland’s
including: 2012. Tenant activity has seen the likes Budgetary and Reform Plans sent to
of Google, Central Bank, BNY Mellon, German parliamentary committees.
- the prevalence of very low tenders Capita, Goodbody Stockbrokers all
requiring greater analysis and looking for office accommodation. However, seeds of optimism can
clarification; be seen and for certain retailers,
There has also been some office take expansion plans have and are being
- on lower value projects the
up outside of the Dublin area such as drawn presently. New entrants have
shift towards Most Economically
PayPal and Prometrics in Dundalk and come into the market or are looking
Advantageous Tenders (MEAT)
Hewlett Packard in Galway. at entering the market, most notably
as opposed to lowest price
Banana Republic have been reported
(notwithstanding the benefits of
There should be continued office fit-out as targeting a larger store on the
same)
activity in the coming year largely due top of Grafton Street. New franchise
- increased number of challenges to FDI announcements. stores have opened such as Eason’s
to the procurement process from opening new franchise stores in
unsuccessful tenderers In terms of new build office Mullingar, Balbriggan, Kilkenny and
developments there is little or no Carlow and AIM, the franchise operator
From the construction industry activity nor is there any foreseen for the of Iceland, opening new store’s in
perspective, and the wider economy, it next six months at least. One significant Coolock, Clonmel, Ashbourne and
is essential that these obstacles are new build development going ahead Carlow, plus other retailers mainly in
minimised to ensure value for money is to the design stage is the high-profile the pharmaceutical, food and discount
achieved and most importantly that the Central Bank offices in Dublin. sectors pushing expansion and re-
economic impact of this investment location strategies.
in terms of jobs and stimulus is Retail
maximised. The Irish Retail Market is still very For new entrants and existing retailers,
challenging with a number of high- the availability of favourable terms with
Commercial profile closures in the first six months regards to rent free periods, period of
Although 2011 was another tough year of 2012. lease and rent and/or in certain cases,
economically for the property market, the build cost for certain retailers who
Sector Developments | 11
15. Andrew Thompson, Eoin Dunphy
Associate, Residential, Associate, Data Centres
Hotels, Sport & Culture
prefer to own their own properties are Again, we would anticipate that most The redevelopment of Pairc Ui Chaoimh
providing the impetus for potential of the existing overhang of housing is unfortunately the only real significant
market expansion. stock will be first in the shopping list project on a national scale to progress.
for local authorities, however, some With limited public funding available
Residential limited public residential developments (€30 million announced recently for
It was another tough year for the will proceed, most notably those in the the “Sports Capital Programme”)
residential sector in 2011. In our 2011 regeneration areas such as the north the likelihood of any real significant
Review, we projected house completion and south side of Limerick city. projects moving in either the private or
units for both the private and public public sector is slim. Some works will
sectors to be 10,000 units. Department also commence at the National Sports
of Environment, Community & Local Hotels, Sports & Culture Campus at Abbotstown.
Government statistics show that Continued pressure in these sectors
10,480 units were completed for both seems to be the common theme in Culture Sector
the Private and Public sectors. This is recent years. Whilst there may be some In general, the outlook for the culture
a drop of circa. 28% on the 2010 figure small movements in the sports sector, sector in 2012 is for little or no growth.
of 14,602 units. Projecting forward for there will be even less in the culture The recent budget shows reductions
2012 we would anticipate between sector and the hotel sector not realising in Government spending in this sector
5,000 and 7,500 units to be completed. any increase in construction activity. with forecasts of circa €44 million to
be given to the Department of Arts,
Private Sector Hotel Sector Heritage & Gaeltacht, circa €100
Current growth is again being restricted It is worth reminding ourselves that in million going to the Office of Public
by weak consumer demand, unstable 2004 there were circa 48,000 bedrooms Works (OPW) and circa €21 million
economic status and the uncertainty but by 2008 there were circa 64,000 — going to tourism. Of this combined total
regarding the availability of finance a 34% increase in capacity to match a of €165 million it remains to be seen
and also future capital values. With the demand that rose by just 12-13%. how much will be released into cultural
current supply overhang of available type construction projects.
units both completed and near With the existing room supply
completed, it is unlikely to be much outstripping demand, there is unlikely
movement here although in certain to be any real movement in new
areas of the Capital, 3 and 4 bed semi- development in this sector in 2012, and
detached houses are in demand. we may in fact witness some partially
completed works being demolished.
Public Sector One of the eagerly awaited hotels in
The net housing need figure at present Dublin that is scheduled for completion
shows that 98,318 households were in early next year is The Marker Hotel in
need of social housing support at 31st the Dublin Docklands.
March 2011.
Sports Sector
2011 saw the completion of some
interesting projects in this sector,
including the iconic UCD Student
Learning, Leisure and Sports Complex
and the University of Limerick Pavilion
and Outdoor Synthetic Pitches project
with four full-size, fully floodlit pitches.
12 | Sector Developments
16. University College Dublin - Student Learning, Leisure & Sports Facility, Dublin.
(image courtesy of Donal Murphy Photography)
Infrastructure & Industry data centre industry which has seen Multinational global businesses are
The outlook for the civil sector is a phenomenal growth over the past five reviewing strategies and looking for
case of contrasting fortunes — on years throughout Ireland and Europe. growth opportunities from varying
the one hand roads and rail having The attractive climactic conditions for geographies’ through foreign direct
delivered a national motorway optimizing free cooling low seismic investments. The companies that
network and significant investment activity, and sufficient Electricity embark on such initiatives face and
in the greater Dublin area with the Supply Board (ESB) supply has helped have to deal with many complex and
LUAS respectively, would appear to to guarantee this region as one of the local issues on an ongoing basis.
be destined for a number of years of main the areas of choice for long-term
significantly reduced expenditure. On data centre development. The pharmaceutical sector has shown
the other hand, with the advent of the strong investment in Ireland for
government policy on the introduction The challenge for data centre 2012, with companies such as Mylan,
of water charges and the establishment developers now is how to keep up with Allergan, Amgen and Eli Lilly, to name
of Irish Water, significant investment the insatiable customer demand for but a few, that are either currently
should be made. We are also likely to space and ensure that your business is or planning to invest heavily in their
see strong investment in the energy ahead of the pack in securing those all operations for 2012. AECOM has a
sector. important resources required to deliver proven track record in this sector
on that demand, whether that be the globally and is expanding its presence
In terms of industry, as flagged earlier, expertise or the relevant technologies. in this sector in Ireland as well as
2012 has seen a renewed stream With time as the driver, data centre maintaining its service with current
of development from indigenous clients need teams that have the Irish pharmaceutical companies.
manufacturers performing strongly in proven expertise and track records
the export markets and foreign direct in delivering programs in multiple
investment inflows. This of course is locations concurrently using tried and
extremely welcome and a sign that our tested low cost models which meet the
competitiveness has improved against highest standards.
that of some of our competitors.
One specific example would be the
Sector Developments | 13
17. Industry
Developments
Professional
University College Dublin - Student Learning, Leisure & Sports Facility, Dublin.
(image courtesy of Donal Murphy Photography)
18. One of the features of the industry from a
client and consultant perspective in the last
couple of years, and likely to continue in the
medium term, has been the level of activity
aside from actual construction works.
Every year sees the list of industry Alternative funding sources for not pay tax within the company and
issues dominating the agenda change the Property Industry therefore avoids double taxation. It
and evolve as the participants, clients, The primary sources of property must pay out a high proportion (90%
consultants and contractors grapple finance are well known and include: in the UK) of its property income to
with the challenges of the day. In its shareholders. It works through
2011, we looked at subjects such - Private equity, buying shares in a listed property
as The Capital Works Management - Short-term and long-term finance company that has elected for REIT
Framework (CWMF), NAMA, Insurance from financial institutions, status and operates in accordance
Valuations, etc. - State funding, with REIT regulations. These
- Institutional investors, e.g. pension regulations are intended to ensure
This year we summarise a cross funds. the company is primarily engaged in
section of some of the key industry property investment, rather than in
developments that have been the We know that private equity is scarce, development.
subject of much discussion and/or debt finance is not available at the
market change this year. levels required, state funding is on the The Government has stated that they
decline and that institutional investors will introduce the legislation and it
are eager but cautious. Where once is expected imminently. There are
we could depend on a significant currently over 20 REITs in the UK,
development finance package with a including household names from
small amount of equity all wrapped Hammerson to Land Securities with
together in a suitably “geared” package, a total market cap in excess of €25
we now know that this is no longer an billion. So, how would REITs help in an
option. Irish context? Firstly, Nama could avail
of it and transfer some of its €31 billion
So, is it just a matter of adjusting the loan book into a REIT for investors.
ingredients and changing the recipe? NAMA has recently stated that this
Do we have the right ingredients, or would be an attractive option for them,
indeed, enough of them? Recent new should the legislation be passed.
(and improved) recipes being explored
recently include: Secondly, the current international
investors who are seeking to purchase
- Real Estate Investment Trust (REIT) assets in the Irish market, could
- Equity partnerships/Private Rental avail of a transparent and regulated
Sector (PRS) investment vehicle that would be
- Project bonds professionally managed and generate
a return for their investment. This
Real Estate Investment Trust would have the effect of restoring the
(REIT) international confidence somewhat
A REIT is a company that manages a and provide a tried and trusted conduit
portfolio of real estate to earn profits through which they would conduct
for shareholders. The main benefit their affairs, without having to be
and attraction of a REIT is that it does directly involved in the management
Industry Developments | 15
19. Paul Mitchell Neil McBeth
Director, Head of Office Associate, Due Diligence
of the individual assets. As mentioned Pike Architects, incorporates the countries have been looking at ways to
earlier, REITs are not permitted to lend example whereby a promoter (private, fund these projects without such credit
into development. However, one would local authority, housing association) wrapping.
expect that in the context of a strong obtains land and develops a residential
covenant, a REIT providing the long- scheme which is then “bought out” In October of last year, the European
term finance that a bank or banking by an investor (e.g. pension fund, etc). Union adopted a legislative proposal
syndicate would be in a strong position The residents then pay a capital rent launching the pilot phase of the €50
to provide development finance. (cost of scheme plus annual return billion Europe 2020 Project Bond
to investor), the capital rent being Initiative. The initiative aims to revive
Maybe this Utopian example is not that 10-20% lower than the market rent. and expand capital markets to finance
far off when you consider the pent- Any payment above the capital rent is large European infrastructure projects
up investor demand, the impending treated as equity, or buying part of your in the fields of transport, energy and
shortage of premium office space to home, with full ownership being the information technology. Although the
satisfy the incoming multi-nationals, ultimate goal. “project bonds” proposal from the
the value in the marketplace and the European Commission is subject to the
requirement for the banks to restart Project Bonds approval of European governments,
lending into properly geared deals. A project bond is a fund set up to they have indicated that funding would
finance a specific project or group be available to upgrade the Dublin-
Equity Partnerships/Private of projects. They were typically used Belfast rail link, as well as transport
Rental Sector (PRS) to fund large infrastructure projects connections in the ports of Dublin and
The basic model for development in and were very common in the United Cork.
the residential sector, for the most States and South America. Instead
part, is Develop and Dispose, i.e. of using traditional bank lending, the As this is only the pilot phase it is likely
the developer purchases the site, project company could raise the senior to take some time before we see a
constructs the residential stock and debt through project bond issues. direct impact on project funding in the
then sells it to homeowners/private Capital market investors would buy the local market.
investors. One of the scenarios where bonds if an investment grade credit
an equity partnership comes into play rating, preferably at least A-, could be So, in relation to alternative sources of
is when the ultimate purchaser is not achieved. funding it does not appear as though
in a position to secure the finance we are on the cusp of a breakthrough
to purchase their own property, e.g. Owing to the inherent risk in directly in the near future. Looking at the few
potential purchaser can’t obtain a funding construction projects, they transactions that have taken place
mortgage. There are various forms of were insured by “monoline” insurers in over the past year, it would appear
Equity partnerships, particularly in the a process known as “credit wrapping.” to be more a case of using the best
US, whereby the ultimate residents own However, these insurers faltered during ingredients available and sticking to
their homes or shares in the overall the downturn due to guaranteeing grandma’s old tried and trusted recipe
development. billions of dollars worth of sub-prime than any type of haute-cuisine.
debt, and projects have stalled as
A proposal being led in the Irish a result. In response to this and
context by James Pike, of O’Mahony burgeoning investor coffers, different
16 | Industry Developments
21. National University of Ireland, Galway - New Engineering Building, Galway.
(image courtesy of Neil Warner Photography)
At the very least, a detailed Work Outs by Asset Managers modeling of all the inputs under
The financial crisis in Ireland has left us the various development/work-out
analysis of a potentially permutations, including critiquing
with a significant number of distressed
abnormally low tender will and incomplete construction projects the disposal strategy options.
assist in developing an and a long list of developer and
effective risk mitigation contractor insolvency casualties. - Unraveling of historical deals and
agreements
programme. Inevitably, when one goes to open
The lack of action on unfinished
developments has led to additional up the file on a development that
risks for stakeholders that range from has stopped prematurely, there
additional costs due to simple neglect will be a myriad of agreements and
and lack of upkeep, to health, safety deals. Needless to say it is only
and environmental issues. In many those with liabilities attached that
cases, the inaction and lack of funding are being brought to your attention,
has only served to reduce the value of so a methodical approach and
the asset for the long term. The work commercial awareness are key to
out path is not for the faint hearted and resolving these.
requires intense effort and tenacity
from the outset, to ensure a successful - Obtaining certification for disposal
outcome. There are many challenges This problem is encountered on
for stakeholders, which become most projects and is usually solved
apparent from the outset, and these through negotiation with the
require experienced professionals to certifiers or, if not possible, using a
assist in identifying and navigating new team, exhaustive surveys and
a pathway to delivering the project. certificates with certain caveats.
Amongst the key challenges are:
Activity to date has been predominantly
- Self funding mechanisms driven by non-nama institutions that
The availability of finance, or lack are intent on exiting the Irish market.
of, has been much publicised so it is The recent announcement by NAMA
not surprising that this is probably is welcome news and should see a
the biggest challenge for funders in sizeable increase in activity in this area.
moving a work-out strategy forward.
After that it is then important, where Repair & Maintenance
possible, that the development With the sharp decline in the level of
is phased in such a manner that new build construction, an increasing
will generate revenue to fund the amount of the industry focus has
remaining phases. turned to the Repairs, Maintenance
and Improvement (RMI) sector. The RMI
- Getting the disposal strategy right sector has of course also seen a decline
Interlinked with the funding in output, but not to the same extent,
mechanism is the issue of developing therefore, as a proportion of the overall
a sustainable business model. This total it has increased significantly (SCSI
will require careful consideration of Construction Industry report estimates
the key drivers and then testing it at 41% in 2012 compared to 19%
these through thorough financial in 2006 per the DKM Construction
18 | Industry Developments
22. Stuart Griffin John O’Regan
Associate, Project Director
Management
Industry Review and Outlook 2010 actively managing their real estate and European Union (EU) procurement
Report). we are working with others to develop guidelines and directives. These
asset registers, including schedules of must be scrupulously followed by the
Of course, the need for repairs and condition and planned and preventative client or there is a risk of a successful
maintenance is ever present. Real maintenance schedules. challenge to the process which would
estate that is not maintained will start result in the outcome of the process
to diminish over time in functionality The improvements segment of RMI has being overturned or damages becoming
and become unfit for purpose. As also been experiencing greater activity due to the injured party.
soon as the client takes possession than new build, as organisations have
of the building the wear and tear of been downsizing or re-organising to There is detailed guidance available on
the building and its fabric starts. Once sub-let space. In some cases where in the steps to be taken in assessing ALT’s
one system or element fails, there is a different climate clients may have and these involve seeking clarifications
generally a consequential knock-on chosen the new build option, they are and additional information from the
effect on other elements and systems. now making the decision to refurbish tenderer in question. By demanding
For example, if a hole appears in a roof their existing space. this level of information and employing
covering, there will inevitably be water expert analysis from the quantity
damage on the internal fabric of the Abnormally Low Tenders (ALT’s) surveyor and design team, the client
building and services. Should the plant Have you ever received (or submitted) can obtain a very clear picture of how
and equipment and services start to an abnormally low tender for the bid was prepared and how robust
fail due to water ingress, the knock-on consultancy services or construction the price is.
effect of down time from staff and works?
users not being able to use the building Davis Langdon’s experience of public
will be significant. Have you ever rejected a tender sector tendering is that it is rare for a
because it was abnormally low? tender to be rejected as abnormally low
Frequent and regular repair and I think the answer to the first question but that it is critical that the detailed
maintenance is the most cost effective above would be a resounding yes assessment is carried out. Often the
way for providing and retaining a good from just about everybody involved investigation results in the bidder
functional building. The inspection of in tendering in the Irish construction realising the challenges that their
existing buildings is key to effective market. tender presents and withdrawing their
asset maintenance and management. tender. In other cases, the investigation
Identifying and analysing the problems, The answer to the second question uncovers issues that can be resolved
assessing the risks, and establishing a is harder and the answer may well prior to contract and hence avoiding
strategic way forward for maintaining depend on whether you are operating in potential claims. At the very least,
and repairing the building is key. Most the private or the public sector. a detailed analysis of a potentially
repair and maintenance of buildings It is not uncommon for the lowest bid abnormally low tender will assist in
is reactive, where designers and sub to be passed over in the commercial developing an effective risk mitigation
contractors work to address issues world. Are these decisions always programme. Typical mitigation
as they arise, and clients spend little fair — maybe not — but in the private measures include increased provision
time assessing, scheduling, planning sector, as long as the tender documents of onsite cost, programme, quality
and budgeting to prevent such issues are structured right, it is the clients and safety monitoring, increased
arising. Resources allocated to call. The disappointed contractor or contingency provision, increased
evaluating and putting plans in place to consultant has no come back. focus on project administration and
repair and maintain real estate How about the public sector? structured project management
anticipating and planning to address The position here is much more processes involving principals of all the
issues before they become problems, complicated. There are defined bodies involved.
is money well spent. Some clients are processes both in national and
Industry Developments | 19
24. We believe it is important to listen
to and understand the issues from
the key leaders in the industry
Davis Langdon, an AECOM company, Pat Gunne,
has extensive knowledge and Managing Director, Green Property
experience across the full spectrum
of service lines and sectors in the Commercial:
industry. However, notwithstanding Q Stamp duty reduction; Upward
this track record, we firmly believe it is Only Rent Review (UORR) clarity, etc.
key to any appointment, big or small, Positive changes but what is the
to first listen to and understand our effect?
client’s requirements. A The changes you mention
are significant to the extent that
In the same way, when we are writing investment in real estate had
our annual review, we believe it is become a binary issue. Once
important to listen to and understand the UORR came on the table for
the issues concerning key leaders discussion, and it was surrounded by
in the industry and in the current uncertainty, the market shut down so
climate people who are at the coalface it has been significant to the extent
in terms of delivering or facilitating that Ireland is investable again,
growth in key sectors in the coming Finance:
however, in terms of activity, the
years. Q Debt financing, is there any out
market hasn’t started trading in any
there?
meaningful way.
We thought you would like to listen A The Irish banking system is entirely
too! dominated by NAMA. Bank of Ireland
To re-ignite the market, you need
(BOI) and Allied Irish Bank (AIB)
external capital investment because
So we have summarised in question have both said they want to lend
the domestic equity has been
and answer format, interviews we to the sector, however, both banks
effectively wiped out due to the
conducted with a number of thought are trying to reduce their overall
extent of the collapse in the market.
leaders on what they see as the exposure to commercial property. Net
challenges, solutions, and more lending to real estate in the United
Q Poor credit ratings, second rate
importantly, the likely trends in their Kingdom (UK) is negative, in Ireland
investments — is it a case of no
sectors in the short to medium term. it is that multiplied by 10 and we
thanks from investors?
will be in that net negative lending
A Yes and no. The funds will want
environment for the next three to five
to buy shiny buildings, with shiny
years.
tenants, in grade A locations. There is
only a certain amount of that and it
Q Government — if you could ask for
represents a tiny part of the market.
one wish?
A The government can only control the
On the other hand, the reason
Irish part of the solution; they cannot
Ireland is seen as attractive for US
control what happens with foreign
private equity is that it is seen as “in
owned banks, all of which are in
distress.” Up to now the pricing gap
retreat.
has been too wide, but given that we
are now in year five of the meltdown,
The biggest thing they could do
I suspect the level of market activity
would be to restructure their deal
will slowly begin to improve.
with the troika on their own capital
Business Intelligence | 21
25. JFK Primary School, Limerick.
“ The Government can only structure and accept that a good accepting that they are a long-term
chunk of NAMA is a long-term mortgage bank.
control the Irish part of the mortgage bank as opposed to a
solution; they cannot control grind down agency as it is a constant They also could start selling Irish real
what happens with foreign overhang on the market. estate in lot sizes and packaged in a
owned banks, all of which are format which meets the investment
Q Once the debt and liquidity return, appetite of the major international
in retreat.” we will have a sharp upturn in funds. They might not like the price,
property in terms of prices. True or however, we either accept that the
False? capital is external private equity or
A To try doing the crystal ball not. The overriding objective of NAMA
gazing when there is so much macro must be to re-create a market and
uncertainty is of limited value. At to do so they need to sell. Ultimately
the moment we are taking the view the market determines the pricing
that the macro is a pronlonged and not the November 2009 entry
workout at the European and indeed point which Nama had no control
global level, but particularly around over when it was being cast in stone.
the euro area. Having said that, if They’re trying their best, but it’s a
you buy central Dublin real estate very challenging environment.
at below reinstatement cost, with
income to get you through however Q Any lessons to be learned from our
many years, and with arbitrage on a nearest neighbours?
debt package, then that probably is a A Lloyds for me have been very
good risk adjusted investment. Who refreshing in their approach,
knows whether we are right or wrong, obviously they have taken a lot
that is the view we are taking, and of pain but they are dealing with
the majority of our investment focus the resolution in a very pragmatic
remains in the UK. way. Typically they are avoiding,
where possible, in dealing with it
Distressed Property: through the courts, and instead are
Q What would you change/enhance sitting down and having sensible
about the way Nama operates discussions with borrowers in an
today? attempt to resolve their problems
A The changes at the top have been through a consensual process.
very positive and they have done well
in the UK, their challenge is around
the Irish market. They are trying to
be part of the solution in terms of
the lack of liquidity by saying that
they are willing to put in debt on
deals where they are selling which
is crucial and one step away from
22 | Business Intelligence
26. “ This is the fourth recession that I have
experienced in business. So I would
say nothing will change, it will just be
different the next time. Lessons do not get
remembered for longer than ten years.”
Bill Nowlan, Funding
Managing Director, W.K. Nowlan & Q When do you foresee the funding
Associates impasse resolving itself and what
its likely effect will be on property
Q What would you see as the key values?
lessons from the financial crisis A I believe that the money will be found
that should be learned by the because we just cannot, at a political
property industry? level, continue to keep grinding
A Property booms and busts are facts people down. But I do think that you
of life, you can go back generations, have to have the controls in place,
go back millennia — Cicero put his so I would think that after this treaty
pension fund into property. is in place. Once funding returns, I
believe that house prices in Dublin
This is the fourth recession that I will spike very rapidly. If you ask me
have experienced in business. So where I would actually speculate
I would say nothing will change, it my money, now is to buy land in Dun
will just be different the next time. Laoghaire or on the Luas line, I think
Lessons do not get remembered for that will go like a train.
longer than 10 years.
NAMA
Q In terms of the residential property Q Have you a sense of what the
market, what do you see as the fate NAMA strategy is towards managing
for the sea of Ghost Estates? their Irish portfolio?
A You have to slice and dice this, first A I think what you are beginning to see
of all there are ghost estates that happening is that they are dribbling
are: property out through the receivers to
- well built houses but for which see what will happen.
there is no demand because of Q Is the mini boom in Foreign Direct
their location and then there Investment (FDI) a saviour for our You can’t push a piece of string and
is, ailing property industry? I think NAMA have a problem in that
- poor quality accommodation A Saviour is probably not the right they have this huge need to actually
in inappropriate locations. word; it is probably going to be get property out there but it has to
an important factor. One of the come on the demand side. At the
In the first case, the price will fall things we need to do is put in the moment, they are concentrating their
to a point at which they will be infrastructure to encourage FDI — I efforts in the UK and overseas and
bought, whereas in the second case think this is where our planning the big question is should they just
demolition will be the only option in a comes in. drop prices down?
lot of instances.
So, in short, you have to look at each
situation and decide whether this is
for holiday homes, the JCB or time.
Business Intelligence | 23
