The slowdown in the residential property market is having a knock-on effect on the value of sites and developers now need to undertake a complete rethink when master-planning a residential development.
In particular, they need to realise that high-density projects may not suit the market in all locations.
Increasingly, they need to rethink the management of finance and construction costs, as well as the phasing of completions and sales.
This rethink is driven mainly by the banks' changed outlook on speculative medium- term development. It is not so long ago that the financial institutions would only lend on apartments/high-density developments once 40pc of the units were pre-sold.
It will now be imperative that a greater phasing of schemes is given serious consideration at the design and master-planning stages.
From the development perspective, generous returns can still be achieved through correct planning and foresight by reduced construction costs, reduced funding charges if schemes are phased correctly and reduced disposal periods, provided the product is right.
Obviously the type of product is dictated to some extent by the location as well as the site's topography and shape. We believe high-density development in the major city centres and their environs will prove increasingly desirable going forward.
However, in suburban areas mixed housing will prove more suitable from both a development as well as a consumer perspective. This will require a greater emphasis on low-density/housing in the initial stages of any development with the higher-density/apartment element being left until cash flow has been generated from the initial sales.
While some suburban locations are suitable for high-density development near the main transport nodes, local authorities will have to rethink requirements on some suburban sites where they are seeking 25-30 units per acre.
Banks will find it very difficult to fund this type of development in the medium term without pre-sales. The developer in this instance will be in a Catch-22 situation, as purchasers are unlikely to acquire units from plans, resulting in the site remaining undeveloped for some time.
This will also have implications for site values, as speculators will only acquire such sites if significant value is being offered, given the development constraints and risks involved.
Outside the main urban areas it will be "back to basics" in terms of the product type. Houses will be the name of the game.
That said, given the significant oversupply in many of these locations, funding institutions will be very wary of backing any residential development in the medium term. In terms of placing a value on greenfield sites, we are significantly reducing the value attached to high-density schemes in inappropriate locations.
The value of housing sites in the main urban areas will hold up well assuming the product is right and the scheme can be phased correctly.
The main reason for devaluing high-density schemes is based on a number of factors, especially bank funding.
The other significant issues are falling values in completed product, due mainly to oversupply, protracted sales campaigns going forward due to fall in demand for this product type and increased returns required by developers, given the increased risks involved now.
Where product mix and design is correct, we believe land values for residential sites in the greater Dublin area will remain relatively stable. We do believe, however, that land values for high-density schemes in inappropriate locations have fallen considerably.
If you analyse a reduction in the sale price of a completed unit, it has significant implications on the actual site value of that unit.
A 10pc reduction in the sale price will result in a 28pc reduction in the site value, in order to accommodate even a minimum profit margin of 20pc for the purchaser, as well as accommodating the developer's Part V social and affordable housing contribution.
Whilst the development sector is in a state of transition there will be demand for the right product in the right location. Design, phasing and development strategy will be critical for all speculators and financial institutions going forward if development is to take place.
Published in Irish Independent, by Jeremy Kelly, 26 March 2008
