Ireland Faces Construction Costs Conundrum

It is one of the biggest bugbears of Ireland’s real estate market. The cost of building in Ireland is, on average, higher than equivalent European markets. Dublin’s construction costs are higher than almost any other city in Europe, and one of the most expensive globally.

With the pressures of the war in Ukraine, a continuous construction skills shortage and persistently high inflation, the construction conundrum in Ireland could be exacerbated in 2022.

But why is Ireland such a tricky place to build, and what impact are high construction costs having on real estate?

Turner & Townsend’s International Construction Market Survey 2021 found Dublin was the most expensive place to build in the EU, and third in the European Free Trade Area, behind the Swiss cities of Geneva and Zurich at $263 per SF. 

The city was listed as the 12th-most-expensive place to build of major global cities, above contemporaries such as Seattle, which cost $257 per SF, Amsterdam at $223 per SF, Berlin at $216 per SF or Paris at $206 per SF.

Major cities such as London, New York and Tokyo still top the list of hot spots globally that command the highest construction costs; however, Dublin is certainly placing higher than would be expected for a city of its size and an economy the size of Ireland's.

"We have structural, fundamental existential issues with our industry," Mac Group Head of Business Development Peter Browne said. "We have ultimately a skill shortage. We've got an image problem as an industry, so all of this feeds into the challenges that the industry faces."

The cost of building a house now in Ireland versus building a house 25 years ago, or even 15 years ago has doubled, Browne said. Fifteen years ago near-zero energy buildings were not a thing. "You weren't worried about air tightness, it was simple block cavity with render."

The rise in costs for higher-spec buildings is mirrored in other markets. Margins for contractors in Ireland don't differ from those for schemes in other major cities in the UK or Europe, which indicates that rather than making higher profits, contractors are seeing higher input costs for projects from the supply side, either in the cost of labour — which is in short supply — or in materials.

This has impacted construction tender prices. The Society of Chartered Surveyors Ireland’s latest tender price index report, published in April, found that tender prices rose by 13% between January and December 2021.

“Developers and contractors are particularly concerned about the future of price rises and are therefore taking a more conservative approach to risk when negotiating construction contracts,” the SCSI report noted.

“The high price volatility in the sector, which is evident in multiple materials/commodities used in construction (such as insulation, metals, and fuel), is one of the main reasons for continued price inflation."

When it comes to materials, Ireland's position as part of the EU presents something of a quandary. It enjoys all the benefits that the EU's single market creates, but with a population of little over 5 million and a location off the coast of continental Europe, costs of materials are arguably higher than other parts of the economic bloc.

"Ireland has got caught as a sort of a common-law country in the European Union, and as sort of an outlier in all sorts of various construction-related issues such as insurance and risk,” Trinity College Dublin associate Professor of Economics Ronan Lyons said. “There's a lot of uncertainty that doesn't exist in the markets [in Europe] and the market isn't as big as the UK."

Though it is well over a decade since the financial crisis, the legacy of the Irish property boom and bust has had a lingering impact in terms of risk.

Lyons noted that one Swedish supplier in discussions with an Irish developer outlined why it is tougher to supply the Irish market and make the necessary inward investment in building a sales office and market presence in the country.

“For European suppliers, the issue with Ireland is that it is not only a small market, it's also volatile,” he added.

The SCSI report also noted a “nervousness” from its members in recent months.

“Our members who are employed by contractors, the public sector and consultancy firms report that there is a nervousness in the sector at present, especially when tendering for new contracts,” SCSI Chair Of Quantity Surveying Committee Kevin Brady said in the recent tender price report. “Management of risk has become a greater focus for companies to ensure that construction competitions awarded are adequately priced to protect against inflation pressures within the market.”

The impact of both historic high construction costs and the recent inflation spike is clear. It will impact building across all real estate sectors.

National Asset Management Agency chief executive Brendan McDonagh said that construction inflation would have a big impact on the plans to deliver an additional 1,800 homes between 2022 and 2025.

Major developers, while still backing Dublin as a market, note that construction costs will always form part of the mix when it comes to determining the viability of schemes.

“When we are talking to politicians about our planning consents and we're looking at viability and construction costs for me, I have to look at the whole viability of the whole project,” Europa Capital Head of Sustainability & Development Lynn Smith told delegates at Bisnow’s recent State of the Market event in Dublin.

Smith said that funding agreements with local authorities, infrastructure costs and logistics also all play a part in whether an investment decision goes ahead.

Whether the Irish government could facilitate a way of lessening the cost of raw construction materials is an area of interest. The T&T report showed that in some areas Ireland had an above-average cost base for vital construction products.

While Dublin fared well in terms of the cost of reinforced bar and concrete blocks, the cost of plasterboard in Dublin was a third higher than in either Amsterdam, Munich or Paris. Softwood timber also stuck out for its cost, coming in at twice as expensive as the equivalent product in Paris, and over three times more expensive than Amsterdam.

"The government needs to realise that it has a part to play in not only encouraging but in some respects, funding, possibly indirectly and supporting construction industry in the key areas where it can have a real impact," Browne said. "It might have a genuine move-the-needle moment in terms of what it does to construction."