Corporate Interview: Cairn Homes
Michael Stanley
Michael Stanley

Michael Stanley is Co-founder and CEO of Cairn Homes since 2015. He was previously CEO of Stanley Holdings following its demerger from Shannon Homes (the Stanley family founded Shannon Homes). Michael has a strong pedigree in residential development and the broader property industry and also has extensive experience in the packaging, energy, agritech and healthcare sectors.

Where did it all start for Cairn Homes?
I grew up in homebuilding, my Dad and uncle set up Shannon Homes in the early 1970’s. We made the decision to mothball our family business in 2008 but when the green shoots were reappearing in 2013, I decided it was time to get back into the industry.

Our industry fell off the edge of a cliff in 2009, when land previously owned privately by homebuilders fell into the hands of what I call “unnatural owners” – NAMA, banks and international private equity firms that had bought out distressed loan books. By unnatural, I mean that these were effectively land owners with no development capability.

My Co-Founder Alan McIntosh and I knew in 2014 that opportunities would exist in Ireland to acquire a lot of large residential sites as these unnatural owners began to deleverage. This was a “once in a career opportunity” to acquire a landbank of scale at a very attractive price. I had secured funding to develop Parkside in Balgriffin, however none of these private equity funders were interested in the bigger picture – a lot of land was coming to the market, and there were no capitalised homebuilders to buy it. When I met Alan, it really was a “meeting of minds”. Crucially, we both held the same conviction and vision – this was a unique opportunity to start a homebuilder of scale in an industry that had been decimated – and with no sign of any other new entrants of scale. We both agreed that the best way to leverage the Irish residential opportunity was through raising equity on the capital markets. We poured our first foundation in Parkside in January 2015, and soon after we started building houses in Albany. We successfully floated on the London Stock Exchange in June 2015, initially raising €440m equity, and that is when our journey really began.

What are the biggest challenges for the residential sector and how do you see this affecting Cairn?
We are in the middle of a housing crisis and are just about building 50% of current demand levels, which we estimate at 35,000 new homes per annum. The industry response has been poor, and it is difficult for homebuilders to successfully scale at the pace required.

The biggest challenge remains access to funding – both equity and debt. High street funders are very selective and when funding is available, the level of equity required is a constraining factor. A lot of the equity is generally expensive third party equity, meaning that most homebuilders cannot organically grow their business or their balance sheet because of the combined cost of their equity and debt.

The availability of competitively priced land, where you can build and sell at prices where buyers can readily access mortgages, is also a challenge. Land values have increased significantly over the last 3 years. Homebuilders can only build efficiently, generating construction cost economies of scale across their supply chain and delivery platforms, when they are building at scale, on large schemes, across multiple sites. Outside of the top 3 or 4 homebuilders in Ireland, very few, if any, are building on more than two sites delivering over 75 units a year. The top 20 homebuilders in Ireland sold c. 3,500 new homes last year which equates to 10% of national demand. Compare that to the UK, where the top 20 sold in excess of 100,000 new homes or 50% of national demand. Our industry has a very long tail and a complete lack of homebuilders operating at scale.

This is the very reason we are equity led and well capitalised. We have a low cost of capital and very competitively priced debt, a land bank of scale and most importantly, a great team of talented and experienced homebuilders and other professionals. Economies of scale allow us to deliver competitively priced starter homes, which we price to sell at volume and profitably.

How do you see the future for residential property in Ireland?
I’m very optimistic. As an industry and a country, we have a lot to do in order to adequately address the housing crisis and we need to see market conditions persist which encourage more homebuilders to scale.

There will always be demand for traditional suburban houses. We are also seeing high numbers either choosing or being forced to rent, and there are significant opportunities in the private rental sector (PRS). The majority of Irish people are predisposed to owning their own home. I think buying patterns will change with more people looking to live in smaller homes in good locations – duplex units and apartments. We also have a transient workforce in Dublin, and these well paid tech company employees are demanding higher quality apartment accommodation close to work.

We own c. 4,000 apartment sites in some great locations in and close to Dublin City Centre and are currently active on three schemes. We will start construction on five additional sites, including Griffith Avenue and Montrose, in the next 12 months. There are currently only a little over 1,600 apartments under construction in Dublin city, meaning we can accurately predict that this is the maximum level of supply in the CBD to the end of 2020. If you haven’t started an apartment development today, you will not be delivering any completed units until 2021. At the same time, there is enough office space under construction to accommodate 60,000 new employees, so the mismatch is stark – we are forcing over 55k employees to live in the suburbs.

Do you believe market conditions will remain positive in the short to medium term?
The fundamentals of the Irish economy remain very strong, and notwithstanding Brexit, I believe prospects for the new homes market remain positive. Looking at the key ingredients of affordability – wage inflation, growing employment, mortgage rates falling slowly, the end of austerity budgets – it all points to favourable market conditions. Bridging the gap between supply and demand will take longer than 2, 3 or 4 years. The reality is that even if we were building 35,000 units a year, market conditions would still be positive, we have a stronger and more resilient economy now than ever before, and homebuilders who can build at scale and efficiently will be able to run profitable businesses.

Revenue statistics show that there are 265k couples and 69k individuals who can afford to buy a house priced between €275k and €350k. So the market depth is there, at a price point where we will continue to price competitively.

What is your view on house price inflation and value?
There has been a lot of mis-information surrounding HPI. Obviously house prices had to rebound having fallen in value by 60% peak to trough, however the level of HPI witnessed in recent years has principally been driven by an illiquid second hand market. House prices in Dublin are still 20% below peak. The true level of HPI in our starter homes schemes has averaged c. 5%. There is a simple reason for this – if you are buying a starter home, you are mortgage dependent and sensitive to the lending rules. With our low land costs and the economies of scale we deliver, we will continue to price our starter homes competitively and to sell at volume. This market is the very core of our business. The country needs sustainable house price inflation and a sustainable mortgage market. We are starting to see more competition amongst the banks with some positive headline rates on offer.

What is key for Cairn Homes over the next 3 years?
We will continue to increase our annual output in line with guidance, and we will hit our medium term run rate of €550m revenue in 2021 from c. 1,400 – 1,500 unit sales. We are now an established business and are perfectly positioned to meet our medium term objectives. The development of apartment sites, along with potential PRS opportunities, will be exciting for us in the coming years.

We are also going to reward our shareholders handsomely for their investment with capital returns to commence from FY19 realised profits. We are in a period of significant cash generation, which I believe will remain for the long-term. We have a 10-year land bank which we will run down to c. 6 years supply. This means that our cash margins will effectively be double our operating margins and it is highly unlikely that we will be reinvesting the land cost of each house we sell into new land.

Please note this article is for information purposes only. The views expressed are those of the author and not Cantor Fitzgerald Ireland Limited (“CFIL”). CFIL has not contributed to this article in any way. It is not intended to and does not constitute personal recommendations/investment advice.

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