When Stephen Garvey was invited in 2014 to meet executives from US private equity firm Oaktree in Dublin, he had no idea where it would lead.
“I probably should have googled Oaktree before I went to the meeting,” Garvey muses, in hindsight.
Garvey, a low-key builder during the boom, had of course, heard of the Los Angeles-based outfit – among the first wave of overseas investment firms to snap up distressed assets and loans stemming from Europe’s biggest property crash. But he had “no expectations” of what would come from the meeting, which was set up by a property agent.
As it happens, he talked the then Oaktree European executive, Justin Bickle, out of buying a residential development portfolio the firm had been weighing, saying it might not achieve the internal rate of returns (IRR) that a private equity firm would be targeting. But the encounter would ultimately pave the way for the setting up of Glenveagh Properties, the Dublin-listed housebuilder, where Garvey is now chief executive.
“Justin said he’d never heard of a developer talk about IRR before, which is 1.01 for private equity,” the 42-year-old recalls in his first profile interview. He’s at a 450-unit Glenveagh development at Barnhall Meadows, near Leixlip, where the two cars outside most of the A-rated houses reflects how Covid-19 has much of Ireland working from home.
Oaktree subsequently invited Garvey to London to give a presentation of his views of the market. That resulted in his company, Bridgedale, being hired to develop sites in the Greater Dublin Area on the private equity giant's behalf.
The partnership would culminate in 2017 with Oaktree combining a number of sites it had snapped up following the crash with Bridgedale to form Glenveagh, which floated in Dublin that October on the back of a €550 million initial public offering (IPO).
The group said last month that it has sold, signed, or reserved all the 1,150 homes that it expects to deliver in 2021. And it has already seen buyers reserve 300 homes that will not come on stream until next year.
Glenveagh and Cairn Homes, which floated in mid-2015, are the only Irish housebuilders to go public in the past 24 years. Is Garvey surprised there haven’t been more?
“I think there was a sense among a lot of the older developers that the banks were going to open up some day and 5 per cent debt was going to return and things were going to go back to normality,” he says. It hasn’t happened.
Churned out
In the UK, in 1988, 80 per cent of new homes were being delivered by small builders, Garvey notes. Today it’s the reverse, with 80 per cent being churned out by the top 15, mainly publicly-quoted, companies. In Ireland, Glenveagh and Cairn between them will account for about 10 per cent of the 22,000 homes that Banking and Payments Federation Ireland expect will be built this year.
The next eight top privately-owned companies account for up to a further 10 per cent.
“If we’re going to be building 35,000 units a year, as is needed, we’ll need to grow a number of scale operators in this country to deliver that quantum of houses,” he says. “There is plenty of white space for other operators to come in.”
Garvey, the son of a Kilcock, Co Kildare, plasterer, irked his father by quitting school at 15.
“In fairness to my dad, he gave me a job straight away. But he probably worked me as hard as humanly possible in the first few weeks to see if I would change my mind. I didn’t. It was the mid-90s and housebuilding was picking up. I could see the opportunities open up quite quickly,” he says.
By the time he was 20, Garvey had about 100 people working for him as he built up one of the biggest plastering contractors in the State. Clients included Menolly Homes, Glenman Corporation and McCabe Builders.
Garvey set up is own housebuilding business, Bridgedale, in 2003, with his business partner at the time, Paul McNerney, initially buying nine sites in Athlumney in Navan, Co Meath. "We weren't known to anyone. But there were banks willing to sit down with us. Getting finance was not difficult."
The duo quickly moved on a plot of 15 sites, and, from there, to one with 40, he says.
“But I remember at the end of 2005, we were looking at a number of developments and just felt that things had gotten a bit out of hand with the land prices that were out there.”
A few other things raised red flags. One was when he went to a Bridgedale development in Celbridge around that time to hand over keys to a civil servant just starting off on his career, who had received a bank loan to buy the house for €350,000. “It just didn’t make sense. The industry was building 90,000 houses a year and you could feel that there was too much credit in the system.”
Cancellations
Another came when Garvey spotted cancellations ticking up in April and May of 2006 – even though there were plenty of others willing to take up the properties. “Yes, we kept selling houses at the time, but people weren’t looking at the rate of cancellations.
“There were a number of factors. With so many homes being built, people were spoilt for choice. With a general election [due the following year] there was a lot of talk about stamp duty. Also, at the time, rents were relatively low.”
It would be early 2007 before Irish house prices started to drop. By the time Lehman Brothers collapsed and Brian Cowen's government was forced to run to the aid of Irish banks in September 2008, Garvey was expecting home values to drop 20-30 per cent.
Two months later, Garvey was on a break in New York for a few days as Citigroup, once the world's largest bank, found itself teetering on the brink of collapse. "I remember sitting up in the hotel one night and doing a couple of calculations. I concluded that if house prices corrected by 40 per cent, we were all in dire trouble. I came home and decided: that's it, we're getting out of this as quickly as possible."
The company had a few developments in the works at the time, including 60 houses in Trim, Co Meath. “If the market moved by 5 per cent, we cut by 20 per cent, and we quickly cleared off our debts.”
While Bridgedale continued to tick along on a small scale, Garvey spotted a potential turning point in 2012 – a year before Irish residential prices reached a trough, almost 55 per cent below their peak – as the number of properties available for rent began to fall sharply.
Bridgedale purchased its first site following the financial crisis in Ballyboughal, north Co Dublin, from Ulster Bank, as the UK-owned lender grappled with a spike in problem property loans. The bank also provided financing for the deal and went on to use Garvey's outfit to offload further soured projects – before the fateful meeting with Bickle.
Big project
The first big project with Oaktree was the landmark marina village project in Greystones, Co Wicklow, a Sisk Group-led public-private partnership mothballed during the downturn. The US private equity firm's targeted investment opportunities (TIO), then headed by Bickle, became a financial backer in 2015 following the exit of Park Developments and brought Bridgedale on board to build.
TIO rolled most of its Greystones land into Glenveagh – alongside projects in Clonee and Navan, in Co Meath – as part of the IPO. The group is focused on suburban starter homes with an average selling price about €300,000 and apartment blocks presold to investment funds for the rental market.
Bickle, an urbane London City lawyer by background, quit his plush Knighsbridge office with Oaktree to become Glenveagh's CEO at the time of the flotation. John Mulcahy, a former chief executive and chairman of Jones Lang LaSalle Ireland and one-time head of portfolio management at Nama, was hired as executive chairman and Garvey became chief operating officer.
With demand for housing rebounding, residential property prices growing at an annual rate of more than 12 per cent at the time, and few developers with access to equity finance, international investors were prepared to back a private-equity-type executive incentive scheme.
Founder shares
The plan involved the issue of 200 million so-called founder shares – split 90 million each for Bickle and Garvey, and 20 million for Mulcahy – earmarked for conversion into ordinary shares over five years, subject to the stock price rising at a minimum annual rate of 12.5 per cent.
The scheme echoed one set up for Cairn Homes’s IPO in 2015, but proved to be much less lucrative.
While 80 per cent of the 100 million Cairn founder shares converted into stock on the back of its strong share price run in the three years after its IPO, just 9.5 per cent of Glenveagh’s founder shares have converted, as the company’s stock has failed to hit the requisite targets.
The scheme is set to run its natural five-year course in 2022 and the board plans to bring Garvey and Mulcahy in under its general long-term incentive plan from that time. Garvey owns 1.66 per cent of the stock.
While Glenveagh’s shares raced almost 26 per cent higher within three months of the flotation, it and rival Cairn subsequently sold off – enough to kibosh a third Irish housebuilder flotation, by another US private equity firm, Lone Star, that was being lined up in 2018.
Mounting concerns that year about Brexit, mortgage availability as Central Bank lending rules continued to bite, and rising building costs, were compounded by a global stock-market wobble in late 2018, resulting in American fund managers pulling back from Europe.
An ill-timed €213 million follow-on equity raise by Glenveagh in July 2018 to finance more acquisitions and development also acted as a drag. A move at the same time by Oaktree to sell down half of its 16.5 per cent post-IPO stake also raised concerns about the firm’s views of the building industry.
Bickle resigned in August 2019 to return to the UK, with Garvey – who has two young children with his wife Kathryn – slotting naturally into the CEO role.
Tailspin
Then Covid-19 struck, sending global financial markets into a tailspin. Shares in Glenveagh slid to a low almost 60 per cent off their IPO price as the Irish construction industry went into lockdown for two months and investors fretted about whether there’d be a market after the pandemic.
While most Irish housebuilding were hit by another 13-week construction shutdown at the start of 2021, Glenveagh, currently operating across 20 sites, has stuck to its target of delivering 1,150 homes this year.
Sitting on a landbank that has capacity for 16,600 units, Glenveagh plans to hike annual output to 3,000 units by 2024.
The two listed housebuilders have managed, by virtue of their scale, to keep increases in their building costs this year to about half the 8-10 per cent inflation being experienced by smaller operators, amid soaring timber, steel and aggregate prices.
Glenveagh swung into a €21.4 million gross profit in the first half of 2021, from a €15.2 million loss for the same period last year. Oaktree sold down most of its remaining shares this year, taking advantage of a strong stock price rally. The firm now owns less than 1.2 per cent of Glenveagh.
Targeting delivery
Garvey welcomes the Government’s new Housing for All strategy, which is targeting the delivery of 300,000 new homes in the Republic by 2030. It includes an average 9,500 new social homes and 2,000 “cost-rental” homes – where rents are targeted at 25 per cent below the market level – a year.
Glenveagh’s Leixlip development, delivering 55 cost-rental units for an approved housing body, is one of the first such schemes in the State.
Garvey says the Government’s plan for a shared-equity scheme for first-time buyers will help get young people on to the property ladder. “Back in 2005 and 2006, the average age of a customer buying a home from us was around 28. Today it’s more like 35 or 36.”
Will that not add to house-price inflation at a time when Irish home prices, according to Central Statistics Office data this week, are rising at an annual rate of 8.6 per cent?
“If this is such a profitable industry, why aren’t more people at it? The cost and viability of delivering a home is much higher than it was 10 or 15 years ago,” he says, citing a significant uptick in building standards on foot of various regulations. “People say land is driving costs, but the average cost of plots coming into the business today is about €26,000 or €27,000. Land is an element but it’s not the driving force.”
Expensive rental accommodation
Glenveagh and Cairn have taken aim in the past month at the Central Bank’s mortgage rules, introduced in 2015 and currently under review. Both highlight that the element that limits most borrowers to taking on a loan of no more than 3.5 times income is keeping thousands of would-be buyers in expensive rental accommodation.
The rules were brought in to prevent another credit-fuelled property bubble and stop households taking on debt they couldn’t afford. But they are imposing another kind of financial hardship, according to housebuilders.
Mortgage payments
Cairn highlighted last week, in a presentation for analysts, that mortgage payments – on an average house costing €372,000 for a first-time buyer who has borrowed 90 per cent of the cost – amount to almost €1,300 a month. The market rent for an equivalent three-bed house in Lucan, Co Dublin, is €2,350.
Both listed housebuilders say the rules have hit industry output, as smaller, debt-reliant builders, in particular, have had to question whether they would be able to sell homes on to people with access to mortgages.
“The majority of smaller developers are funded by alternative finance [providers, rather than banks],” says Garvey. “They need to factor in a minimum margin to get finance. Then they need to prove to the lender that they can sell enough units at a point in time to repay their loans. Finance costs end up getting higher the riskier the project. It’s a double-edged sword.”
