No rent rules, no vacancies: It’s social housing investment

There may have been a public outcry when a number of housing estates were snapped up by international investors of late, but it's not just institutional funds that are investing in social housing by buying up estates and apartment blocks to lease back to local authorities.

Individual investors can do it too, by agreeing to a long-term lease with a local authority or approved housing body for between 10 and 25 years. And when you see the advantages of such an approach, the reason institutional funds are finding favour with the Irish market may also be evident.

As a relatively low risk income producing asset, social housing has also become increasingly popular with individual investors, who are looking for a home for their cash, their pension fund, or their approved retirement fund (ARF).

Below we take a look at how the new social housing model compares with being a traditional private landlord.

Pros and cons of locking into a 20-year mortgage

---

Loan notes: Is the risk worth double-digit returns?

---

Why your pension fund suddenly looks a lot worse

---

No rent rules

With a social housing contract, rent rules don’t apply. This means that increases – even in properties situated in rent pressure zones – can be in excess of those prescribed by the rules, which is set at 4 per cent a year.

Typically, rent reviews will take place every three to four years, and are linked to the Harmonised Index of Consumer Prices (HICP) Ireland. This is a measure of inflation in Ireland, and is slightly different to the Consumer Price Index, in that it excludes certain indicators, such as mortgage interest, home insurance, and it allows for comparison with other EU countries.

Landlords will be responsible for structural matters that might arise during the term of the lease, as well as home insurance and property tax

According to Dublin City Council, rent reviews under standard long-term leasing occur on the third anniversary of the commencement date of the lease and every third year thereafter. And the rent "can increase or decrease depending on the percentage change in the index".

There is also typically no break clause in such agreements.

No RTB registration

If you're a private landlord, you must register each tenancy with the Residential Tenancy Board (RTB). This costs €90 per tenancy, with a late fee of €180. It is a legal requirement to do so and, in any case, it is obligatory if you intend offsetting any interest paid on your mortgage on your annual tax bill.

Once a tenancy is registered with the RTB, both tenant and landlord alike can avail of its services. This includes accessing its disputes service, for issues arising over unpaid rent, refusal to repay a deposit or termination of a lease.

With a social housing agreement however, there is no requirement for such a registration.

No calls that the heating is broken

When you become a landlord, the responsibility for the upkeep of that property is on you. This means that, if there is an issue with the property, you will be the first port of call to fix it. While you can employ a management company to take care of this, certain issues will still require your input.

With social housing however, it’s more of a hands-off situation as the local councils will be responsible for general upkeep.

Landlords will be responsible for structural matters that might arise during the term of the lease, as well as home insurance and property tax.

However, the approved housing body or local authority will assume some element of repairing or management of the housing units/scheme, which will translate into a lower rate of rent, or between 5-20 per cent on market rates.

As Dublin City council says, the landlord will be responsible for no maintenance of the interior after the first six months of the lease. Instead the council will do so, and “the home will be returned to the owner in good condition at the end of the lease term”.

If subsequent refurbishing is required, the expense of this will be borne by the landlord.

All relevant management fees associated with the property will continue to be the responsibility of the owner.

No vacancies

With a social housing lease, while the unit may be empty as the local council or approved housing body has not found a tenant to occupy it, this won’t be an issue of yours. The lease agreement ensures that rent is paid regardless of occupancy, which means that there is no risk of vacancy for the landlord over the term of the contract.

As Meath County Council notes: "Your rent is guaranteed, therefore, there is no rent loss due to vacant periods."

This is helpful when you consider that, even in such a tight rental market as that which exists at present, landlords will also face the normal ebbs and flows of tenancies which will likely leave some months where they earn no rent.

Moreover, each time a tenant leaves, the landlord has to find a new tenant, either by themselves or hiring an agent to do so. And with each new tenant, comes the fees to find them, advertising costs, plus the potential risk if the tenant arrangement doesn’t work out.

Potentially no property tax

With some landlords potentially facing increases in local property tax when homes are finally revalued for the first time in eight years later this year, investing in social housing can be a way around this.

This is because who is liable for the tax depends on the length of the lease.

According to Revenue, where a social housing property is rented for less than 20 years, then the property owner, ie the landlord, is responsible for the tax.

With guaranteed rent from a quasi-Government agency and no vacant periods, investors can expect very steady yields with a social housing investment

For properties leased for in excess of 20 years however, it is the local authorities or approved housing body that must pay it. Over 25 years, this can lead to savings of some €15,000 for the landlord, based on an annual bill of €600.

It can buy a visa

Becoming a landlord confers no benefits from a citizenship perspective. With social housing, however, an investment, provided it’s worth at least €1 million, can qualify for residence in Ireland for people from outside the EU under Ireland’s Immigrant Investment Programme, if approved by the Department of Justice.

Steady yields

With guaranteed rent from a quasi-Government agency and no vacant periods, investors can expect very steady yields with a social housing investment. For example, a property acquired for €300,000 might generate rent of €18,000 a year under the scheme. Given an annual management charge of €1,000, and no further expenses, this suggests a net annual yield of about 5.7 per cent.

In 2020, Dún Laoghaire-Rathdown paid an average of €18,698 per lease, while in south Dublin, the figure was €17,751.

The more you have - the more you get

If you’re a private landlord, having more units to rent may boost your overall income; but it won’t automatically result in increased rents. With a social housing lease however, this can be the case.

Rents are typically set at between 80 and 85 per cent of private sector rents, depending on the type of lease, and property, but if you have a certain number of units, you may qualify for a so-called “enhanced lease”.

These leases are negotiated through the Housing Agency and were introduced as part of the Rebuilding Ireland Action in 2018. They target newly built, or yet to be built, houses and apartments for leasing.

The big difference compared to a standard lease is that the owners of the properties must provide day-to-day maintenance of the properties; for this, however, they will get a significant bump in their rent, as up to 95 per cent of market rent is payable under the scheme. This is typically index linked every three years.

To qualify for such a lease, Dublin City Council says you must have a minimum of 20 homes (properties can be located across multiple sites) and the term of the lease must be for 25 years.

Back in 2019, for example, Dún Laoghaire Rathdown County Council agreed to lease 89 apartments at the Herbert Hill development in Dundrum, under an enhanced long-term lease, at an average monthly rent of €2,000 per apartment.

Property can be sold

Agreeing to a long-term lease with a local authority or housing association won’t preclude you from selling the property. But it will depend on you finding a buyer who is willing to take on the lease as the agreement will be transferred to the new owner, with the tenant remaining in situ, until the expiration of the lease.

The lease agreement may also include a clause, giving the local authority or housing association the right of first refusal should the property come on the market.

But acquisitions costs can be higher

If you’re an individual investor, it’s possible you may link up with one of the many financial advisers offering a product to smoothen the process. And this costs.

Arena Capital Partners, for example, puts a cost of €14,736 on acquisition costs of a €189,000 property for a private landlord, encompassing stamp duty and solicitor fees. With a social housing investment, however, it indicates costs of €29,856 on the same property, given the related fees to arrange the investment.

Typically, financial advisers will identify a need for social housing in a certain area, secure the purchase of the property, and agree the lease contract with the local authority.