Investors in Dublin’s private rented sector more selective as inflation and rising interest rates bite

While the overall spend in Ireland’s commercial property market in the first quarter of this year proved to be relatively subdued at just over €470 million with inflation combining with rising interest rates to dampen demand, investment in the private rented sector (PRS) market continues to account for the biggest share of money being spent, albeit at a much-reduced level to that seen in previous years.

That’s one of the key findings of the latest report on the sector from agent Hooke & MacDonald. According to its analysis, some 51 per cent or €240 million of investment in the first three months of 2023 went into the PRS or multi-family market. To put that figure in perspective, it was more than double the €116 million (24.5 per cent) that was deployed in the industrial and logistics sector; nearly three times the €85 million (18 per cent) spent on office investments, and more than 13 times the amount spent on retail assets.

Looking at the private rented sector specifically, the vast bulk of the expenditure in the first quarter was accounted for by just two transactions: the sale for €101 million by Carysfort Capital and Angelo Gordon of the 120 apartments at Opus on Hanover Quay in Dublin’s Grand Canal Dock to Pontegadea, the family office of Zara founder Amancio Ortega; and the forward sale for €99.5 million of the 148 apartments developed by Richmond Homes at Eglinton Place in Donnybrook, Dublin 4 to UK-headquartered investor M&G.

[ Zara founder in €100m deal for Dublin docklands apartment block ]

[ UK investor snaps up Dublin 4 apartment scheme for €99.5m ]

The two transactions, which equated to net yields of 4.3 per cent and 4 per cent respectively, are, according to Hooke & MacDonald, indicative of what they say is the “continued strong demand from long-term capital for good-quality investments in the Dublin market”. The report’s authors believe the deals should provide “strong price-discovery credentials” to those parties looking to underwrite the Irish market over the coming months, for both stabilised stock and new-build/forward sales.

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While the level and pace of private-sector investment in the PRS market has slowed somewhat from previous years, the report notes that the level of Government funding for housing continues to increase while the social and affordable sector has stepped in to take up a larger portion of the planned forward-purchase opportunities in the build-to-rent (BTR) or multi-family market.

In many cases there are limited options for developers other than to proceed with a sale to a government-supported purchaser

—  Hooke & MacDonald

Referring to this trend, Hooke & MacDonald notes that €285 million in sales, or 72 per cent of the roughly €400 million in transactions recorded in the final quarter of 2022 were related to social or affordable housing, leaving only €115 million in sales (28 per cent) related to private sector investments.

The report’s authors say: “The increased investment in social and affordable housing is going to continue for the foreseeable future. In many cases there are limited options for developers other than to proceed with a sale to a government-supported purchaser. Based on current input costs and a lack of incentives from government to balance out high costs the recent increases in apartment development for the private rented sector, predominantly in the Dublin region, is going to reduce and there will be further increased upward pressure on rents as a result of the scarcity of accommodation.”

Criticising the Government’s approach further, Hooke & MacDonald add that: “The strategy of only focusing on rental stock for the social and affordable sector is marginalising a large portion of the population, who don’t qualify for such supports. While the current focus on social and affordable housing is very much required, without a balanced approach there is a risk of creating a challenging housing system, where there is a heavy burden on the State and taxpayers to provide and maintain housing into the future, especially in 20-30 years’ time, as stock ages and requires more maintenance and capital commitments.”