Where are new rental homes going to come from?

If the National Asset Management Agency is correct, now is the time when we find out whether the Government’s encouragement of institutional investment to boost the private rented sector was as bad a move as has been alleged.

Institutional investment in the Irish property market increased in the wake of the financial crash as domestic lenders grew more cautious about development finance, despite the obvious demand for housing.

Large international funds filled the breach, attracted by the rental yields available in the Irish market. While rent pressure zones limited the scope of existing landlords to increase rents in line with a recovering property market and, more recently, rising inflation, the property that institutional funds were bringing to the market was not constrained by the same rules.

It was this new rental accommodation that was driving rent indices, which measure new rental contracts, triggering a series of critical headlines.

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In 2020, the influence of the investment funds had grown so that the €1.2 billion private rental market investment accounted for 39 per cent of all money flowing into the property development sector, according to estate agents Savills, a lot of that going into the construction of apartments.

That tide has turned. Savills said last month that there were only four investment deals in the Irish private rental sector in the first quarter of 2023, down from 13 for the same period in 2021.

Nama, commenting on its annual report this week, went further.

“The private rental sector market has almost disappeared in the rising interest rate environment,” chief executive Brendan McDonagh said as he disclosed that the agency had abandoned plans to deliver 400 apartments before it is wound up at the end of 2025 – more than one-fifth of all homes Nama had planned to deliver between 2022 and 2025.

It’s a part of the business that Nama understands well. Of the 14,000 homes funded by Nama since 2014, close to 20 per cent were sold to private rental sector investors. McDonagh said the agency had always considered apartment development to be at the riskier end of the sector unless there was a presale agreement in place.

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While the State agency blames the rising interest rates for making such projects less attractive for institutional investors, Savils argues that “negative media attention and interventions”, rising construction costs and rental growth caps also played a part.

Either way, Nama is saying clearly that institutions are now shying away from the market. Alongside an exodus of more established smaller-scale landlords, it raises the question of just who is going to fund construction of homes – and especially apartments – for the growing number of people unable to secure a mortgage for a new home.