This article was first published in the April 2018 Ireland edition of Accounting and Business magazine.

Construction was a pillar of Ireland’s Celtic Tiger boom that brought wealth to the country before the global financial crisis hit in 2008. Now, 10 years on, the Irish building sector is once again fuelling economic growth, with construction activity having significantly increased in the past 14 months, according to Jamie O’Hanlon, an accountant and managing director of Dublin and Portlaoise-based Avid Partners. 

Construction is an important part of this accounting practice’s client base, and O’Hanlon notes that the building business in Ireland has ticked up still further, ‘especially since the start of 2018 and I expect a further increase from March onwards’.

As ever, however, when a sector starts to grow rapidly, there are teething troubles – notably too few skilled workers and a shortage of working capital. Helping his clients secure finance is a key role for O’Hanlon, who has had a decade of experience in restructuring indebted construction clients after the Irish property and banking sectors collapsed between 2008 and 2010.

Negotiating with financial institutions to help rebuild balance sheets is a skill which O’Hanlon has honed as Avid helped clients work out what he, maybe euphemistically, terms ‘legacy issues’. He says: ‘We have been quite successful in working with the banks, in some cases to write off debt, while other debts were restructured with longer defined payment mechanisms, including profit sharing, allowing the companies to keep trading.’

Another accountant with construction industry clients believes the sector is now older and wiser, having become ‘more sophisticated’ since the crash, and listening to advice from professional advisers. Compared with the Celtic Tiger era’s bidding wars for development land, builders are now more inclined to ‘work backwards’, assessing potential development costs before purchasing a site, explains Laurence May, a principal at KPMG’s Irish auditing business. ‘They look at it in terms of the space and how much rent it will yield to decide the worth of a development. For example, 100,000 sq ft at €25 a sq ft means you spend €2.5m and a yield of 10% means the building is worth €25m. Then you figure out how much you can afford to pay for the site.’

The big challenge for his construction clients today, says Galway-based May, is to source finance for housing projects: ‘Most of the cranes on the Dublin skyline are building commercial property. The cost of land, VAT and inflation in the price of materials has made residential properties unviable for many builders.’ Regulations on minimum apartment sizes for instance – introduced to counter worries over shoddy building practices – means developers can fit fewer units into a development, explains May. 

However, while builders may struggle to find profits in house building, on a positive note, May sees more sources of finance and welcomes the fact that initial development financing has shifted from banks to sources such as venture capital and hedge funds. Often, once a project is completed and leased it is possible to refinance, asking banks for a lower rate of interest than demanded by the high-risk financier.

Avid is actively helping clients secure new finance: ‘We are seeking finance from alternative UK lenders at 5.5% to 8%. [Irish] banks are cherry picking the top end of the market while SME-sized building companies are not being serviced and increasingly seeking out new sources, such as peer-to-peer lenders, private investors and financing from UK banks and investors.’

As Ireland races to build houses and infrastructure, accountants are key in keeping building firms in the black this time around. ‘An accountant can propose savings on the costs of resources and operational expenses but also manage cashflows, including debtors and debt obligations with the banks, through financial and cashflow modelling,’ explains Claire Healy, tax partner at Mazars in Dublin: ‘The impact of new developments, additional employees or increased debt on cashflow can be assessed to mitigate future surprises.’ During planning, adds Healy, ‘potential growth options and the financial viability of potential construction contracts or developments can be tested with sensitivity and break-even analyses’.

Growth models

Accountants can also keep clients up to date with government regulations and initiatives, such as social housing incentives, notes Healy. The early involvement of accountants during development planning is important to ensure that compliance with housing regulations and criteria triggering government incentives ‘are met in a financially viable manner’, she adds. Cashflow and financial modelling can help assess potential growth projects, assist in setting unit prices and determine the commercial and financial viability of construction contracts or developments, she says.

O’Hanlon believes that construction firms have learnt from the crash and ‘will be better able to see the signals of a downturn and manoeuvre accordingly’.

Developers too are smarter, he suggests. In 2008-10, some landowners had been left high-and-dry when bank financing dried up and property values fell, because they were waiting for post-development income in four years’ time. Now they are looking for some early income on land purchases, maybe from selling smaller single units: ‘They’ve learned you should take some of the stake back and into your pocket.’

Construction companies and property developers must ‘understand the real value of construction stock and when it becomes unaffordable to proceed with the purchase of development land or building out of construction sites. Keep a watchful eye for unsustainable valuations,’ he advises. 

Mark Godfrey, journalist