Home Directory Deloitte Ireland LLP Increased construction activity is resulting in labour shortages and adding to increased costs – Deloitte Report

Increased construction activity is resulting in labour shortages and adding to increased costs – Deloitte Report

Q3 2021 has seen increasing market activity across Ireland’s construction industry as the country and economy recovers from COVID-19 restrictions, according to a Deloitte report.

The emergence from restrictions has resulted in increased building activity across the residential and commercial sectors as developers seek to catch up on building timelines to reach newly-agreed practical completion dates. However, this surge in construction output has resulted in labour shortages and increased costs on building materials related to Brexit and supply issues throughout the continent. The latest Society of Chartered Surveyors Ireland (SCSI) tender index has shown that costs rose by 7% nationally in the first half of 2021.

Commenting on the report John Doddy, Partner, Deloitte Real Estate Advisory said: “At a time when house prices have increased by 12.4% annually – as per the latest CSO Residential Property Price Index – these increased costs could push house prices even higher, but ultimately there is a ceiling at which potential purchasers can afford to buy. These increased costs, coupled with a ceiling on affordability, could lead to viability issues on development sites.

“The number of planning applications submitted during Q3 2021 is down twenty-nine schemes relative to Q2 2021 but, in terms of overall units, this is up 16%. This is most likely a direct result of developers preparing for the reopening of the sector. This trend is amplified further down the development timeline, with granted schemes up 66%.

“Commencement notices are down this quarter, but this is to be expected given the release of the pent-up, shovel-ready sites, once the industry opened back up after the relaxation of restrictions earlier this year.”

Despite the industry stabilising after the COVID-19 lockdown and subsequent reopening, there is still a lot of uncertainty with the planning system and escalating construction costs are a concern, according to Deloitte’s Real Estate Planning & Development Statistics for Q3 2021.

Residential market

Similar to the previous quarter, there remains a steady shift away from apartment development where developers have acknowledged the workforce’s desire to avail of a work-life balance, which has resulted in an increased number of housing developments in both the Greater Dublin Area and the rest of Ireland. Data pertaining to the first three quarters of the year has shown a wider development spread nationally with less of a focus on the Dublin market, due in part to the new ways of working.

While the level of planning applications submitted in Q3 2021 did not hit the levels seen in Q2 2021 due to the pent-up demand when the economy reopened, it is evident that Q3 2021 represents a significant rise in the level of national planning activity when compared with Q1 2021.

Of the 130 new schemes for which planning applications were submitted in Q3 2021, 27% were in Dublin, 41% in the rest of Leinster, with the remaining 32% in the rest of Ireland.

Subject to commencement in Q3, 2021 has continued in a similar vein to Q1 and Q2 this year with developers choosing to focus on constructing houses as opposed to apartments. A total of 2,427 apartment units and 4,104 housing units were subject to commencement notices in Q3 2021 and are set to be delivered across Ireland. A further unclassified 352 units of mixed development (approx. 90/10 apartment/house mix) is also contained within this.

Doddy said that the number of housing units entering the development pipeline is an important part of the residential market outlook.

“It is worth noting that Q3 2021 has the largest number of pipeline units compared to any previous period for which data has been collected as part of this report.”

Office market

Demand for both new and existing stock has doubled that of Q2 2021, with vacancy rates in the Dublin market contracting slightly for the first time since the onset of COVID-19. In contrast, the appetite for office development nationally has significantly reduced since the beginning of the COVID-19 pandemic, with only seven planning applications for large office schemes across the whole of Ireland being lodged in Q3 2021.

Unsurprisingly, take-up in the Dublin suburbs outstripped city centre requirements where they accounted for 58% of office take up in the capital. It is increasingly likely this trend will continue as employers and employees seek to minimise commuting times to transition to new ways of working.

Over the last number of quarters there has been a shift in the focus of office development. A larger portion of office development commencements are beginning to be seen outside of Dublin. In Q3 2021, one-third of large-scale office developments commenced in Dublin, while one-third commenced in the rest of Leinster and one-third commenced in the rest of Ireland.

The office sector has also witnessed increased activity throughout Q3 as the workforce across the professional services, tech and public sectors, among others, continues to increase. This uptake in employment, together with the ability of employers to now access the country to undertake property viewings, has seen the market’s vacancy rates contract, with a large quantum of accommodation now reserved and pre-let.

Doddy commented: “There remains a reduced pipeline of office accommodation being brought to the market in the capital due to the cessation of building activity throughout the various lockdowns, which will likely result in increased rental levels as demand continues to grow as the economy continues to reopen.

Lease terms of 10 years with five yearly break clauses have become more prevalent as tenants seek increased flexibility having regard to hybrid models of working.”

15/12/2021