Over the last number of weeks, a welcome shift in the perception of institutional investment within the Irish PRS market seems to be taking place. No longer are the predatory bird references as front and centre, with welcome and valuable considerations now being given to addressing our housing shortage.
If we are to meet the targets as set out within the government’s Housing For All plan, which is a very welcome initiative, all types of tenure are required. Focusing on the Private Rental Sector (PRS), the government has targeted the provision of approx. 58,500 new private rental homes by 2030 equating to 6,500 units per annum or almost 20% of the overall Housing For All target.
Given recent government changes to stamp duty which effectively applies a 10% rate to housing and duplex units if purchased in bulk, it can be reasonably assumed that new private rental product will largely be in the form of apartments. In January of this year, the Society of Chartered Surveyors Ireland (“SCSI”) reported the average cost of constructing a medium rise suburban apartment unit, to be approx. €415,0000. The SCSI also reported (Oct. 21) that construction price inflation increased by 7% in the first half of 2021, suggesting the cost of providing a medium rise suburban apartment unit is now in the order of €445,000. If we take these figures to be correct and true, approx. €2.9bn of capital will be required annually to meet the stated target of 6,500 new private rental units per annum. So, what’s going to fund the construction of these new rental units, or more importantly, who?
Investment into the PRS market was robust in 2021. In the opening nine months of the year, in the region of €1.5bn transacted nationally despite disruptions in the market due to the COVID-19 pandemic.
Underlining the strength of the current levels of investment, market performance for the opening nine months of 2021 is ahead of the total outturn of both 2020 (€1.2bn) as well the pre-pandemic total recorded in 2018 (€1.2bn). Furthermore, total investment so far this year is ahead of the comparable period in 2019, which was a record year with a total of €2.54bn invested.
Bearing in mind the Irish PRS markets’ performance over the last number of years, Institutional investment in the sector is not only required, but it also needs to increase if targets within the rental sector are to be met (assuming the construction sector as a whole can meet demands).
Despite the travel restrictions that were in place until midway through the year as a result of the COVID-19 pandemic, overseas interest in Irish PRS remains robust. Overseas investors accounted for 40% of spend on PRS assets in the year to date with domestic investors accounting for a further 27% of capital deployed. Forward commit purchases accounted for approximately 67% of PRS spend in the year to date (notably higher than the five-year average of 51%) and play a significant role in the supply of dwelling units to the market which may not have otherwise been built without the commitment of this capital. It is estimated that between 2016 and 2020, 5,000 dwelling units have been added to the market via the forward commit structure, a far cry short of the 6,500 units required annually.
Between 2016 and 2020, RTB registered tenancies declined by 22,000, which highlights the need for institutional investment in the market. There has been an exodus of the small investor from the Irish rental market in recent years, at a rate of almost 2:1, which has had a detrimental impact on the supply of rental properties nationwide. This depletion of rental stock is more evident in rural areas, where institutional investors are not present. This lack of rental stock is playing its part in rental inflation across the country, but particularly outside of the capital.
Looking to 2022 and beyond, the delivery of private rental units should be assisted where possible. Some areas of delay within the housing delivery system are currently being reviewed such as the review of the national planning system (e.g. Large Scale Residential Development (LSRD), Judicial Review, etc.), which are both welcome and needed. Other areas of importance include the retention and growth of our domestic landlord cohort and the implementation of appropriate development plan updates. For example, Dublin City Council are currently considering proposals that would block developers from providing schemes solely comprising rental units with additional restrictions on schemes of 100 units or more having to contain a minimum of 40% build-to-sell units. Dun Laoghaire Rathdown County Council are also proposing that all new apartment developments (excluding “Built up Areas”) contain a minimum of 40% 3+ bedroom units. These measures if adopted will challenge development viability, and ultimately will likely delay completions and delivery.
Development risk and viability will remain key factors in our ability to meet the Housing For All targets with Institutional investors undoubtedly having a fundamental role to play. However, we must also be aware of overly negative PR as well as frequent policy change, if we are to continue attracting Institutional investors to our shores.