Construction of new buildings may not cut high rents

The construction of new apartment buildings aimed at the rental market will play a “crucial role” in easing the housing crisis but it may not necessarily ease rents.

According to a new report on Dublin’s rental market by Knight Frank, the build-to-rent model, whereby investors fund the construction of new developments and hold for the long-term, offers “real potential” for international investors.

This is driven by a number of factors, including that the sale of developments which have already been built are drying up, while the departure of traditional landlords, who have found the tax burden too great, is another factor.

“Their exit is an opportunity for professional PRS investors to fill,” Knight Frank said.

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Lifetime renters

The shift in tenure is one of the most noted aspects of the period since the crash – and the creation of a cohort of “lifetime renters” makes build to rent even more attractive for investors. About a quarter of people living in Dublin now rent, while some 60 per cent of those aged under 35 now rent in the capital. More significant perhaps, as outlined in the Knight Frank report, is the fact that while only 14 per cent of those over the age of 35 rent in Dublin – in absolute numbers these are of similar sizes. Yes there are almost 60,000 who privately rent aged under 35 and there are almost 55,000 households who privately rent aged over 35 years old.

A European context

With just 4.5 per cent of the Irish population living in apartments, there is also plenty of scope to increase this metric. It is one of the lowest in Europe, far below EU-28 average of about 24 per cent, or the figures of 26 per cent reported in France, almost 40 per cent in Sweden and 60 per cent in Latvia. The UK however, has a similar low figure to Ireland.

Ireland also has a relatively low proportion of people renting, at about 15 per cent compared with a EU average of about 22 per cent, and 40 per cent in Germany, but again this is changing.

And of most interest perhaps to investors looking to build to rent here, is the fact that the proportion of our population paying “overburdened rental levels”, or 40 per cent or more of their disposable income on housing, is actually quite low. Or at least it was low in 2016, which is the most recently available statistics.

Just about one in five of Irish tenants were characterised as “overburdened” in 2016, one of the lowest rates in the EU, and below the EU average of 28 per cent. It is also far below Greece (close to 90 per cent), the UK (about 45 per cent) and Germany (about 30 per cent).

Pricey rents

However, while the construction of new build-to-rent units may ease the housing shortage, it will come at a cost. Earlier this year, for example, Carysfort Capital acquired 120 apartments on Hanover Quay for €101 million from Cairn Homes. At €841,667 a unit, and at a projected yield of 4 per cent cited in the Knight Frank report, these new owners will be looking for rents of at least about €2,800 per unit. In Fernbank, Irish Life made its foray into the residential market when it acquired 261 units for more than €100 million. With a projected yield of 5.32 per cent, it is likely to seek rents of about €2,200 per apartment.