Institutional investors: villains or heroes of housing woes?

Cantillon: AIB and Davy positive about impact of giant investors in rental market

For the second time in three days, we’ve had a report suggesting institutional investors in the property market far from being the villains of the piece may in fact be the solution to the State’s housing woes.

A Davy report suggested the noticeable slowdown in house price inflation, a product of the Central Bank of Ireland's tough mortgage lending rules, has merely resulted in the transfer of housing demand and therefore price pressure to the rental market, as evidenced by rocketing rents in Dublin and elsewhere.

Institutional investment – led by the likes of Kennedy Wilsons whose Capital Dock development in Dublin’s docklands charges in excess of €3,000 a month per apartment – has grown in response.

The Davy report notes there were €1.1 billion of transactions last year, up from €200 million in 2017.


Inflation driver

While this represents a sizeable jump, it still only account for 30 per cent of investment in the private rented sector here and therefore couldn’t be the prime driver of rental inflation.

In contrast to much of the current commentary about “cuckoo funds” crowding out would-be buyers, the report suggests the arrival of these funds are a natural response to several years of chronic undersupply and that ultimately they’re the only guys in town capable of funding the large-scale development required.

The report's central thesis echoes an AIB report, published on Friday, suggesting that the presence of institutional buyers was the primary reason why large-scale standalone apartment blocks are being built.

Apartment schemes

The AIB report says that, currently, the construction of large-scale apartment schemes outside of Dublin is not viable. “Without the presence of institutional buyers of apartment blocks in the private rental sector, the viability issue would be even more pronounced and the supply of new apartments would be even lower,” it says.

While it's correct to say institutional investors only command a minority stake in the market – holding less than 5 per cent of all tenancies according to official Department of Finance statistics – they are, however, buying up much of new stock, suggesting their influence is bigger than the data suggests.

It could also be argued that the bigger investors have a greater propensity to set market rents, as many of the new developments they fund and acquire are exempt from the Government’s rent controls.