New report shows construction sector is now under Celtic Tiger levels of pressure and is in danger of overheating

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New report shows construction sector is now under Celtic Tiger levels of pressure and is in danger of overheating

Market is being stoked by cost inflation which is rising at 5-6% per annum

Ireland’s construction sector is now under ‘Celtic Tiger’ levels of pressure and is in danger of overheating according to a new report.

The report by leading consultants Mitchell McDermott found that construction output grew by 12% to €23bn in 2019. However, the number of construction workers only grew by,
6,000 or 4%.

Paul Mitchell, one of the authors of the report predicted output would increase by a further 10% this year to over €25bn.

Output is out stripping our already constrained supply chain, and this is a worrying trend going forward. In fact, demand is at levels of constraint similar to the Celtic Tiger, especially in Dublin.”

This is reflected in the continuing cost inflation we are seeing in the market. Construction prices increased by 6.6% in 2019 and we expect them to rise by between 5 and 6% in 2020. Based on our figures an office building which cost €20m to build in 2015 would cost €25.2m at the beginning of 2020, an increase of 26%.

That level of increase is just not sustainable. The main cost drivers are labour, materials, risk and the imbalance in supply and demand.”

Housing

While the number of housing unit completions has gone from around 6,000 in 2018 to 21,500 last year, this is still far below the 34,000 which most commentators say the market requires.

Last year saw a huge surge in the number of planning permissions for apartments, 19,000 in all. However, as Mitchell points out, construction has yet to get underway for many of them and when it does, they will take another 18-24 months to complete.

If they all do go ahead, it will amount to a doubling of our current residential output in two years to just under 40,000 units. Indeed, several political parties in the run up to the election are promising that this will be the state’s housing output for the next five years. That’s 200,000 new units in total. Given the constraints in the sector, the key question is who will build these units? We estimate up to 30,000 additional workers would be required to reach that level of output.

Office, Hotel, Student

According to the report hotel and office construction are reaching full capacity and while there is still strong demand for student accommodation, the latter is facing viability and affordability issues.

Significant office schemes came through last year with Salesforce, Amazon, Facebook, Google and the ESB all to the fore. While hotels in Dublin are nearly at demand, there is still a way to go for student accommodation. However, these schemes are facing increasing competition from co-living site purchasers. In fact, we would say that the prices being paid for student accommodation sites are now threatening their viability as their rents were already at a high level.”

According to the report a scarcity of Tier 1 contractors for large schemes, continuing labour supply issues and an increase in the use of modular construction will be key elements in the market in 2020.

The Mitchell McDermott info-cards are available at or on the company’s new app MMCD Intel.

Article Published: 30/01/2020