Large-scale funds ‘critical’ to fixing housing crisis, AIB says

Rising investor interest among big funds and pension schemes in large Irish apartment schemes is "critical" to solving the State's housing supply crisis and easing rent growth, as they provide much-needed funds to support construction in the sector, according to a new report from AIB.

The report, by AIB real estate economists, said that although rental accommodation now accounts for 19 per cent of Irish households, having grown threefold since 2000, it falls short of European levels. In Switzerland, more than 50 per cent of households rent privately, while in Germany and Denmark the figures are almost 40 per cent and 38 per cent, respectively.

The Irish private rental sector “is an institutional asset class that has only emerged in the last five years, as heretofore the sector was dominated by private, individual landlords,” said the economists Pat O’Sullivan and Rory McGuckin. “Increasingly, new apartment supply is being designed and built to meet the needs of the institutional PSP sector as the demand for rental accommodation remains very high.”

Cushman & Wakefield, a commercial real-estate services company, estimates the private rental sector invested €386.8 million in 24 deals last year, up more than 40 per cent on 2016. Deals this year include Irish Life's purchase of 262 apartments under construction in Churchtown in south Dublin for €138.5 million, and US group Kennedy Wilson's acquisition of 274 apartments and a site at The Grange in Stillorgan, Co Dublin, for €160 million.

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House builder Glenveagh Properties, which floated on the stock market last October, has based part of its business plan on building rental properties for investors prepared to pre-fund construction. AIB is among Irish lenders that are actively targeting the private rental sector market with financing.

Vacuuming up supply

The surge in activity among large-scale investors in the market has prompted criticism that they are vacuuming up supply that might ordinarily go to would-be owner-occupiers, and that they are contributing to the homeless crisis given the power imbalance between landlords and tenants. Irish residential rents have surged almost 58 per cent since 2012 and are currently above their 2007 peak.

However, the AIB economists said that the increasing investor demand is helping to bring development projects over the line and boost supply at a time when European Union research last year found that Dublin rents are the sixth-highest in a survey of global cities, after Tokyo, New York, London, Singapore and Geneva.

“The pressure on the rental sector requires a sharp increase in rental supply,” the economists said. “We believe that the private rental sector is a critical part of the solution to the residential supply problems facing the Irish economy. The key urban areas, in particular Dublin and Cork, require high-density apartment developments. Institutional investors require high-quality, large-scale apartment blocks, and this source of equity capital is key in supporting the development of the private rental sector.”

“In the short term, given underlying economic conditions and the constraints on supply, rents are unlikely to fall. However, once residential supply starts to approach underlying demand, residential rents should moderate,” they said.

Capital spending

The AIB report comes as analysis of the State’s overall property market by Cushman & Wakefield predicted that capital spending on residential property will rise again in 2018. It found spending on residential property rose 24 per cent to €14.4 billion last year while investment on commercial property fell.

The breakdown of residential versus commercial investment bucks the trend between 2014 and 2016, where capital spend on residential was about 67 per cent of the total property spend.

The overall spend across both property types increased only 1 per cent to €17.9 billion, the real estate agency’s report states. The relatively small percentage increase comes after the volume of capital deployed on commercial transactions dipped almost 43 per cent. The report flagged 2016 as an “exceptional year” and noted that Dublin absorbed 67 per cent of the investment.